Software, Services Drive NetApp's Q3 Revenue


Warmenhoven Advises Solution Providers To Get On Board


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Network Appliance on Wednesday reported a strong third fiscal quarter based heavily on the strength of its software and services business, and publicly reinforced many of the commitments it made to its solution providers at last week's NetApp partner summit.

For the quarter ended Jan. 26, the Sunnyvale, Calif.-based storage vendor reported revenue of $729 million, up 36 percent compared to the $537 million reported during the same quarter a year ago. Income for the quarter was $66.5 million, or 17 cents per share, down from the $76.4 million, or 20 cents per share, reported last year.

Software subscriptions accounted for $85 million, or 12 percent, of the total revenue during the third quarter, up 39 percent from last year. Services revenue grew stronger, up 48 percent to hit $93 million, or 13 percent for the quarter.

Dan Warmenhoven, CEO of NetApp, on Wednesday told CRN that software was becoming an ever-large part of his company's business and that solution providers who want to succeed with NetApp need to make sure they are including more software with their sales.

This echoed his calls to solution providers at last week's NetApp channel summit in which he told them they should be looking for ways to leverage the vendor's relationships with companies such as Oracle, SAN, Symantec and even Microsoft.

Solution providers who do not take advantage of NetApp run the risk of being left behind as that company continues to grow rapidly, Warmenhoven said. "If that doesn't happen, you will be a less significant partner of ours," he said last week. "Let's scale together."

On Wednesday, he clarified his comments by saying that a lot of channel partners have the tendency to sell less value-added products. "There's quite a bit of disparity as to which partners take advantage of the opportunities and which do not," Warmenhoven said. "We want our channel partners to be representatives of NetApp. It's up to them to take the whole product line. Some, however, want to just flip the hardware, just take the P.O."

As NetApp's software sales continue to grow, solution providers who do not make software a part of their sales will lose out on many of the incentives NetApp offers, including training and rebate credits, Warmenhoven said. "We'll see more and more of our programs tilted that way," he said.

NetApp has no plans to punish or drop solution providers who don't focus more on storage sales. "They'll stay in the program because they do have a certain value to us," Warmenhoven said.

Merrill Likes, president of UpTime, an Edmond, Okla.-based solution provider and NetApp partner, said Warmenhoven's message is important because solution providers who are not doing software will not be growing their business.

"NetApp said it is becoming more application-centric," Likes said. "If you just sell storage, you won't be able to compete."

NetApp has put together a great software and appliance offering that brings it into the heterogeneous storage space, Likes said. For instance, he cited heterogeneous data replication software from Topio, which NetApp acquired in November in a $160 million deal, and data encryption vendor Decru, which NetApp acquired in 2005 for $272 million.

"Topio has heterogeneous replication, so you can replicate from non-NetApp to NetApp hardware, or from NetApp to non-NetApp, or from non-NetApp to non-NetApp," he said. "Same with Decru. They can be added without the customer needing to throw away existing storage."

During the earnings conference call, Warmenhoven said that overall channel sales were up 13 percent over the second quarter of 2007, accounting for a total of 60 percent of the company's worldwide revenue.

He also said sales through Arrow and Avnet fell 11 percent from last quarter, but that sales through NetApp's OEM agreement with IBM made up for the drop.

Tom Mendoza, president of NetApp, said that improving sales through IBM is not affecting NetApp's solution providers. "IBM is very focused on what I call white space, which is where we are not covered," Mendoza said. "For example, state and local government, and retail. So it's largely incremental for us. They've done an excellent job of minimizing conflicts by focusing on where we are not."

Ron Salmon, executive vice president of field operations for NetApp, last week at the company's channel summit was more direct in his response to solution provider concerns over IBM's sales of NetApp products, saying that NetApp will take care of them.

"I don't like it when IBM walks into a deal you have been working on and takes it," Salmon said. "I told IBM I don't condone that behavior. I don't like it when our direct sales do the same. There are places in the world where IBM does business where you or I don't do business. This is not something that will get fixed overnight."

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