Storage VARs Profit, Even As Vendors Struggle

The economy is down, IT spending is uncertain, and businesses are looking for efficiency from every IT dollar they spend.

Yet those companies -- profitable or not -- continue to collect, store, and archive data.

In contrast to the gloom and doom of much of the IT world, storage solution providers say that all indications point to a good if not great 2009, even as the vendors they represent are struggling with job cuts and slumping financial results.

The major divider between optimism and pessimism in the storage market for now seems to be whether a company focuses on hardware or software and services.

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Bolstered by software-based offerings such as deduplication and storage virtualization, some storage VARs are finding ways to help customers do more with less, while still making sales in the process.

"If you are just selling hardware, no matter what it is, you tend to be commoditized," said Mike Adams, storage practice leader at Lighthouse Computer Services, a Lincoln, RI-based solution provider. "But if you add services and software, you get solutions, and you are seeing growth in your storage business."

Solution providers having the most success are those combining storage with virtualization. "The prospects and pipeline this year look great for both storage and for virtualization," said Vic Verola, vice president of sales for Vicom Computer Services, a Farmingdale, N.Y.-based solution provider and long-time IBM partner. "I'm not sure I can say as much for our other practices."

"We are helping customers get more efficiencies out of their computing and storage infrastructures," he said. "We're helping them do more with less. That is what's bringing customers to Vicom."

Verola said 2008 was a banner year for storage for Vicom, and expectations are the same for 2009. For Vicom, the key has been to combine server virtualization and storage into solutions, something that Verola said not a lot of solution providers have been able to do. "Those that do are hitting the ball out of the park," he said. "Those who aren't, they don't know what they're missing."

Another solution provider that has success with the storage/virtualization combo platter is The I.T. Pros. George Vahle, vice president of the San Diego-based solution provider, said his company is meeting all its sales goals and looking forward to a strong first quarter by building initiatives around storage and virtualization, especially for disaster recovery and business continuity solutions that tie storage in multiple locations together.

"If you sell a primary storage array at one node today, six months or 18 months later, when the customer gets the budget for disaster recovery, what array are they going to buy?" Vahle said. "They don't want to change."

The I.T. Pros has also done well with storage hardware. One reason? Manufacturers are getting aggressive on their pricing, and customers know it, said Vahle.

Now is a good time to work with manufacturers and be frank about customer requirements and budgets, Vahle said. "All the manufacturers are willing to be very aggressive on new business," he said. "They realize that if they can get real estate in an account, the customer will buy follow-on support and software."

NEXT: Storage Hardware Road Proves Rockier

Storage hardware sales are also holding up -- for now -- for Alliance Technology Group, a Hanover, Md.-based solution provider.

"Right now, everything looks all terrific," said Hope Hayes, president of Alliance. "But every time I pick up the paper, someone's closing or laying people off. We've had some clients buy less, some buy more, but we've picked up new clients because a couple of our competitors are dying on the vine."

Hayes said that Alliance's business is still expanding, and that it is currently looking to fill several open positions. And, because of the difficulties many solution providers are having with their business, there are a lot of sales reps with good client bases looking for work, she said.

Minneapolis-based Datalink, one of the few publically-listed regional solution providers, in early February reported that tight customer spending, especially on new products, caused its sales and earnings to drop during the fourth quarter compared to last year.

Yet while product revenue dropped 14 percent year-over-year, services revenue rose 10 percent as customers looked to do more with existing storage infrastructure, the company reported.

Scott Robinson, Datalink CTO, said fourth-quarter results reflected tight budgets among customers even as they collected and stored more data. They are adopting specific technologies such as data deduplication and server virtualization to increase storage efficiency, he said. "Customers are hunkering down," Robinson said. "But they are looking at efficiencies."

In 2009, Datalink expects services revenue to continue to grow faster than product revenue, and software sales to grow faster than hardware sales. And whether hardware sales even grow this year is an open question, Robinson said.

Even though services-oriented storage solution providers are doing well, storage hardware vendors have painted a bleak view of their business.

On the storage systems side, IBM reported a 20 percent drop in its storage business, while Hewlett-Packard recently reported a 1 percent drop in its enterprise storage and server business. NetApp reported a drop in hardware sales, which more than offset its growth in software and services sales. Meanwhile, EMC reported a 4 percent increase in storage systems revenue and a 3 percent drop in storage software revenue.

As a result, many hardware vendors, including IBM, EMC and Seagate, are restructuring and laying off personnel.

NEXT: Smaller Vendors Find Harbor From Financial Storm

This turmoil has actually helped smaller vendors like Nexsan Technologies, said Bob Woolery, senior vice president of marketing for the Thousand Oaks, Calif.-based company.

Nexsan has not had any layoffs, and is in fact hiring sales people to help push arrays that compete with products costing much more from larger vendors, Woolery said. "We're not just dropping prices," he said. "Anyone can drop prices. We're focused on the financial value of the products."

Hitachi Data Systems is seeing a slowdown in storage hardware and some delays in purchases, especially given the turmoil in the financial market, said Claus Mikkelsen, chief scientist at HDS.

"Software and services are the growth areas," Mikkelsen said. "It's not that hardware is being marginalized. But if you are doing thin provisioning, and the server thinks it has 100 Tbytes when the array only has 20 Tbytes, how much capacity do you really have? Customers are saving money and buying less hardware, but it's a net gain for us because of the thin provisioning and related technologies."

Storage software vendors, on the other hand, have proven to be more resilient to the economic downturn as customers turn to software to improve the efficiency of their existing hardware.

Worldwide disk storage systems revenue rose 1.1 percent in the third quarter compared to the same period one year earlier, IDC reported in December. However, worldwide storage software revenue rose 11.6 percent during the same period, IDC said.

CommVault, the Oceanport, N.J.-based developer of data protection software, reported in early February that revenue for its most recent quarter rose 19 percent over the same period a year ago, with software revenue up 16 percent and services revenue up 23 percent.

Users want to cut storage hardware equipment and delay purchases, something they can do using software features such as deduplication, said Dave West, vice president of marketing and business development at CommVault. "We look at ways to help customers control costs and extend the life of their infrastructures," he said.

Symantec does not break its revenue into separate product lines, but it saw a 7-percent year-over-year increase in storage software sales in its most recent quarter, said Bill Robbins, executive vice president of worldwide sales.

"I'm very optimistic about sales of our storage products as we go into the first quarter and first half of the new year," Robbins said. "Given all the economic conditions, we're seeing very good demand."

Compellent, which sells a storage platform closely tied to its management software, is seeing its business grow thanks to a channel-only sales model, said Brian Bell, vice president of worldwide sales.

For Compellent, the economic downturn is an opportunity. The company has not had to lay people off, and is still hiring in certain geographies, Bell said. "The stronger companies get stronger in a downtime," he said.

Storage virtualization software vendor FalconStor is also hiring, and added nearly 15 people in North America in the fourth quarter of 2008, said Reijane Huai, chairman and CEO.

FalconStor's replication software is cutting the cost of protecting data and preparing for disasters by helping customers move data between data centers regardless of which storage hardware is used, Huai said.

"We help position IT as a profit center, not a cost center," he said. "A lot of IT organizations consume a lot of storage. If we can help them optimize their resources from a hardware and management point of view, and can help them improve the disaster recovery and business continuity, IT will be seen in a different light."