NetApp CEO: Security The Next Business Driver

Thanks to last year's acquisition of Decru, a developer of technology to encrypt data before it is sent to tape or to off-site storage archives, security currently accounts for about 1 percent of NetApp's overall revenue today, said CEO Dan Warmenhoven.

However, he said that bookings are currently twice those of last quarter, and that he expects data security sales to double or triple next year. "The pipeline and bookings are very strong," he said. "But they are very lumpy deals. They are very large, a half-million or a million dollars at a time. So they may bob up and down a bit."

Over half of NetApp's overall business comes from indirect sales channels, and Warmenhoven said that holds true more-or-less for the company's data security sales. However, a big part of its data security sales also comes from competitors, especially EMC, who resell the company's DataFort security appliances, he said.

Warmenhoven said that NetApp's relationship with storage competitors that sell the DataPort appliances is modeled on EMC's acquisition of VMware. EMC acquired VMware, the developer of server virtualization software, but counts on companies like IBM and Hewlett-Packard and their channels for a big chunk of VMware's revenue.

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"After we acquired Decru, I called [EMC CEO Joe] Tucci," Warmenhoven said. "There's a high degree of recognition on both sides that we have been competitors for a very long time. But there's a lot of areas where we can work together. We compete in storage systems, but cooperate in data security."

NetApp Wednesday posted revenue for its third fiscal quarter of $537 million, up 30 percent from $412.7 million in the same quarter a year ago. Earnings for the quarter hit $76.4 million, or 20 cents per share, up from $60.1 million, or 16 cents per share, last year. The quarter ended Jan. 27.

Warmenhoven said NetApp's sales through the channel dipped this quarter, thanks to a seasonally weak quarter of sales to the federal government, 80 percent of which typically goes through the channel. Federal sales accounted for 7 percent of revenue this quarter, compared to 12 percent the previous quarter.

But aside from federal government sales, the channel is doing well at NetApp, said Warmenhoven. This year, not counting OEM, the channel accounted for just over 54 percent of NetApp's overall revenue, compared to about 48 percent last year, he said. "The channel in general outperforms the company," he said. "Our sales are up 30 percent from last year this quarter, but channel sales are up maybe 40 percent."

Going forward, Warmenhoven said NetApp expects fourth quarter sales to be up 28 percent to 30 percent compared to the same quarter last year. Revenue for fiscal year 2006 is expected to be up 28 percent to 29 percent over fiscal year 2005, with earnings to be between 73 cents and 74 cents for the year.