NetApp Revenue Declines, But Channel Business Rises

The company's total indirect channel business was up, and it accounted for a bigger part of NetApp's revenue than in the past, without impacting earnings, said Dan Warmenhoven, chairman and CEO of the storage vendor.

NetApp on Wednesday reported revenue for the third fiscal quarter, which ended Jan. 23, of $874.3 million, down about 1 percent from the $884.0 million it reported in the same period last year.

The company's product revenue dropped 13 percent to $528.2 million, which more than offset the 25 percent growth in software and 26 percent growth in service revenues. Product sales accounted for just over 60 percent of the company's total revenue.

The last three weeks of the quarter, which happened to be the first three weeks of January, were dismal in terms of product sales, resulting in lower revenue of about $50 million compared to the same period last year, Warmenhoven told

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"When people came back to work after the holidays, they might as well have stayed on vacation," he said.

NetApp lost $75 million, or 23 cents per share, during the quarter. This compares to a profit of $102 million, or 29 cents per share, it reported for the same period last year.

NetApp's total indirect business rose 8 percent during the quarter compared to the same period last year, and now accounts for 69 percent of the company's total revenue, Warmenhoven told The company's primary distributors, Arrow and Avnet, both accounted for about 10 percent of revenue, while IBM accounted for 6 percent, he said.

NetApp and IBM signed an OEM deal in April of 2005 under which IBM is reselling nearly all of NetApp's products.

However, unlike last quarter when Warmenhoven said that indirect channels had a negative impact on earnings, he said on Wednesday that the impact is minimal.

"The channel was really pumping for us," he said. "Margins through the channel were not that different from direct. The discounts are nearly the same. It's only the larger customers who work with us direct."

Because channel partners tend to deal with smaller customers than NetApp's direct sales reps do, the gross margins are similar. "With most of our channel business, our people are still involved," he said. "Ours is a high-touch model, even it the sale is indirect."

While the percentage of sales going through the channel is growing, it is mainly due to decreased storage business with NetApp's 50 largest direct accounts, said Tom Georgens, president and CEO of NetApp.

While NetApp had few losses to competitors in its top accounts, those accounts are down in terms of sales by an average of 24 percent, and in some cases by more than 60 percent, due to customer uncertainty in terms of the economic environment, Georgens said.

As a result, he said, NetApp's total revenue was skewed higher toward its indirect channels.

Despite the decrease in total product revenue, NetApp's total product shipments actually rose 42 percent in the quarter compared to last year, Georgens said.

This includes a 43 percent increase in sales of its FAS2000 product line and an increase in FAS3000 shipments, but a drop in its high-end FAS6000 family shipments as customers focused on lower incremental storage purchased and lower priced products, he said.

NetApp's total third-quarter revenue figure does not include a contingency related to a dispute with the General Services Administration (GSA) of $128 million.

Warmenhoven said the dispute stemmed from when the company held its own GSA schedule from 1995 to 2005. The GSA argued that it was not getting "most favored nation" pricing. "But now we finally have a number," he said. "And it goes under revenue. That's the most outstanding part of it."

NetApp earlier this week said it planned to lay off about 6 percent of its workforce.

Steve Gomo, executive vice president and CFO at NetApp, said the company is cutting 540 permanent jobs in addition to a "dramatic" cut in contract workers.

The biggest cuts came from finance and IT, with fewer cuts done on the sales and product-development sides, he said. There were few if any cuts on the indirect sales part of the business.

NetApp declined to offer revenue guidance for the current quarter because of the economic uncertainty.