Why NetApp's Growth Slowed

Is the bloom off the Network Appliance rose? That's the question that came to mind as I watched NetApp's stock plummet more than 15 percent, or nearly $6 a share, the day after it disappointed investors with news of a revenue downturn. So the darling of Wall Street, the company whose hand had grown so hot in storage management that its CEO should have changed his name from Warmenhoven to Hotenhoven, is seemingly cooling down.

To recap, NetApp said it expects fiscal first quarter revenue to decline by as much as 7 percent from the fourth quarter because large U.S. corporations are cutting tech spending. The company made that statement after wrapping up a stellar fiscal year in which fourth-quarter sales jumped 34 percent over the year-ago quarter and rose 10 percent vs. the third quarter. That resulted in revenue of some $2.8 billion and net income of $298 million. That's an enviable performance from anyone's standpoint, but it represents what was, not what's to come. What's coming is a sequential revenue downturn for the first quarter, even though year-over-year growth will still be nearly 20 percent. The funny thing about NetApp's predicament is that everyone in this business knows that easy gains are over and done with. Blame it on large corporations tightening budgets or whatever you want, but there's something else at play here, and it's the ability of NetApp to appeal to growth markets that are the mainstay of the channel.

Let's face it. If growth slows, so will NetApp's appeal to solution providers that have HP, Hitachi, IBM and EMC to choose from in the SAN space along with a gaggle of smaller vendors. But the strange thing about NetApp is that it waited way too long to leverage its hot growth to attract a broad following of solution providers. In the meantime, IBM gained channel momentum with indirect sales that account for 50 percent of it storage revenue.

The man in charge of NetApp's channel, Leonard Iventosch, had a decidedly unconventional view of how to populate a partner base to sustain the company's growth. Whether driven by Iventosch, his superiors or the NetApp culture, which all clearly struggled with the channel, what the company wound up with is a small, loyal cadre of VARs rather than the army it now needs to drive its growth forward. All of its competitors are much further along in their channel development, having realized long ago that they needed to diversify sales efforts, drive down cost of sales and reach new markets.

I think the following story characterizes NetApp's plight. After NetApp won in the 2006 VARBusiness Annual Report Card, a NetApp channel exec appeared on a panel before hundreds of solution providers. Only a few VARs admitted that they had forged a partnership with the company. Yet, after hearing the company's pitch, dozens of hands shot up when asked: How many of you would like to sell the company's goods? Oddly, NetApp never capitalized on that pent-up demand. The great elixir for a VAR is to find a company growing fast in one of two markets: storage or security. But NetApp has thus far let that opportunity slip through its fingers. Meanwhile, IBM's storage guru, Andy Monshaw, is talking about record performance, HP is racking up solid gains, and EMC is showing signs that it can play nice with the channel. So why hasn't NetApp used the channel to compete against larger, more diversified players? No one can say--even company insiders who would like to see a stronger indirect channel.

We all know what happens next. With revenue slowing and Wall Street applying pressure, management will wake up and suddenly see that it needs a bigger, better channel to compete. The sad part is that it will now take months for NetApp to build out a channel that should have already been in place.

Let's hope this "revenue blip" wakes up NetApp to the real opportunity in the channel today and that it finally embraces the broader solution provider community.