NetApp Gives Channel Credit For Increased Sales, Blame For Falling Profits

NetApp reported increased revenue and lower profit in its second fiscal quarter, and said the channel was responsible for both.

The storage company reported revenue of $912 million in its second quarter, which ended October 24, up 15 percent over the $792 million it reported during the second quarter of last year.

However, earnings in the quarter of $49 million, or 15 cents per share, were down compared to last year's earnings of $84 million, or 23 cents per share.

Dan Warmenhoven, chairman and CEO of NetApp, told Everything Channel that the drop in earnings stemmed from two moves the company made during the quarter.

The first was the company writing-down of costs related to its first-ever NetApp Accelerate user conference, which was originally scheduled for February 23 to 26 in San Francisco and which late last month was canceled, Warmenhoven said.

More significant, Warmenhoven said, were the increased costs due to the company's building out of its indirect sales capacity.

The investment in indirect sales seems to have paid off for NetApp, which now gets 67 percent of its total revenue through the channel, which Warmenhoven said is an all-time record for the company.

He said that the revenue sources are spread out, with 11 percent coming from its relationship with Arrow and 10 percent through Avnet, its two top distributors. IBM, through its OEM deal with NetApp, accounted for 4 percent of revenue, he said.

Midsize and small business sales are almost 100 percent through the channel, if for no other reason than the cost-effectiveness the channel brings, he said.

"If our sales reps find an opportunity below a certain threshold, we say, 'Give it to the channel,' " he said. "For a direct sale, it has to be in the largest enterprises. A direct rep, to be effective, has to book $4 million in sales. And they can't do that unless they focus on the largest accounts."

Going forward, Warmenhoven said that the outlook is cloudy, with gross margins and expenses flat and revenue uncertain.

"I think we'll continue to take market share and grab new accounts," he said. "This quarter, we had over 600 net-new customers, most of which were midsize enterprises. For midsize customers, almost 100 percent of them were opened through the channel."

For all the cloudiness of the future, Warmenhoven said NetApp is optimistic about the opportunities made possible by a move by customers to virtualize their server and storage infrastructures, a move that can actually mean fewer purchases of new storage capacity and more utilization of existing capacity, he said.

"Customer buying patterns are shifting focus from new, new, new, to cost, cost, cost," he said. "The focus is on ROI projects like virtualization. NetApp has, from a storage efficiency story, the best offering we ever had. That's why we're so full of optimism."

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