CRN Exclusive: NetApp's Dave Hitz Talks Software-Defined Storage, Outlines How Challenging It Would Be To Acquire The 'New NetApp'

Frank Talk From NetApp Co-founder On NetApp's Surprising Recovery, Bright Future

Forget about calling NetApp a storage vendor. Sure, it is a storage vendor -- indeed, the only top five storage vendor to show any growth -- but that description limits how customers and investors view the company, Dave Hitz told CRN.

Hitz, co-founder and executive vice president in charge of future strategy and direction, met with CRN during last week's NetApp Insight 2017 conference in the wake of news that Microsoft has adopted NetApp's NFS technology for its Azure cloud while NetApp has expanded its hybrid on-premises and cloud management capabilities with Amazon Web Services.

NetApp is unique among storage vendors in that it is not part of a larger server vendor and in its commitment to managing data across on-premises and cloud environments, Hitz said. That would make it very hard for a larger company to attempt an acquisition because such a move would likely destroy the very thing that makes NetApp so valuable, he said.

Hitz also became one of the few executives of a top storage vendor to say his company could indeed get rid of its hardware and be more successful than as a hardware company, although he admitted investors might have trouble understanding that.

Here's a very frank discussion of NetApp's true value in the storage and cloud businesses.

At NetApp Insight, there was almost no mention of NetApp hardware. I know NetApp says it is a software company, but there was always some mention of hardware. What's going on?

From the very beginning, we described ourselves as shrink-wrapped, or tin-wrapped, software. We modeled ourselves after Cisco. Cisco also described themselves that way. ... When you look at all of the stuff that we have, to spend time talking about hardware is sometimes missing the point. Yeah, we've got small, medium, large Ontap hardware or FAS hardware that runs on Ontap, but Ontap runs in so many places. It runs on that hardware, it runs in Microsoft [Azure], it runs in Amazon, it runs in [Ontap] Select on anybody's VM [virtual machine]. The hardware's not really the point these days.

You look at the specs, and you figure out what you want. It's important to have hardware, but it's not what customers derive value from.

So we're learning that. I think in the past sometimes we've talked too much about it. Maybe we over-corrected. You're right. We didn't mention it at all.

With all the talk about software-defined storage, and NetApp's focus on software, could you see a day when NetApp no longer provides hardware?

Let me answer two different questions. One is the philosophical question, one is the predictive question. Philosophically, I would be completely fine with being an all-software company. Certainly, trying to do it all in one day would be complicated financially. So that would be bad. But the software is way more profitable. The gross margins. You look at a bunch of stuff, especially the transition to the cloud. If people were looking [at it] from a financial perspective, you could probably generate about the same amount of total profit with way, way less total revenue as a software company. [But] you'd need to explain that whole thing to the analysts.

From the predictive point of view?

I don't predict that any time soon at all. Part of the reason is that the Gartner and IDC numbers are showing the on-prem compute stuff will be flat. They're saying maybe down. A lot of people are disagreeing with that. But roughly speaking, within a percentage or two of flat. And I think, even when you see the old-style market, if you look historically, people predicted for ages that the mainframe would die. And it kept growing. Decades. And now, finally, maybe it's not growing any more. But IBM still has their mainframe business. And some people ask, 'Well, gee, why do they still keep it?' Because it's a great cash cow. Because customers want to pay the money. Why would they kill that? So, I will tell you, in some ways it would be kind of cool to be an all-software company. But I just don't predict that any time soon.

Why not?

We've got this mental model of, there's a traditional, configured-up data center where people are designing Fibre Channel, and here's my database stuff. There's the new style next-gen data center that's just racks of equipment, all Ethernet to the top, very uniform. And then there's the public cloud. We foresee all three of those being very big, active markets for the foreseeable future. Clearly, [the latter] two are the ones that are growing. …

I think we have an opportunity to gain share because of all the work we're doing in cloud. People will say, 'Wow, I'm going in the cloud, I want to work with a vendor whose goal is to make that easier for me, not one who's fighting it.' And so we might gain share. And even if we don't, if that part of our business is roughly flat and we're layering in Microsoft-style revenue and cloud service-style revenue, that'll be fine.

How so?

[Some] simple, back-of-the-envelope numbers. For pure cloud, what we compute per dollar of revenue, it's worth about 5X in terms of dropping profit to the bottom line because there's no hardware, no disk drives, no nothing. Amazon just sends us a check. Microsoft just sends us a check. So if you think about us, call us roughly a $5 billion company, if we added $100 million of cloud revenue, that would be equivalent to adding half-a-billion [in revenue]. That's 10 percent growth. That would be great. And that's just getting started, $100 million. If we added $1 billion of cloudy-style revenue, that would be equivalent profitwise to our entire existing business. I'm not telling you that's going to happen overnight. What I'm saying is, you could well see NetApp a few years down the road, and say, "Wow, they went from $5 billion to $6 billion, but their stock price doubled. What's up with that?'

Do you think investors understand that yet?


I remember when Dell went private, it was because investors thought it was a PC company. It wasn't a PC company. It didn't want to be known as a PC company.

Here's my assessment of the stages of NetApp. We had a two-year period where we just needed to clean up operational issues. We had expense issues. If you looked at our profitability, we were suffering internally. George [Kurian, NetApp CEO] has been pretty open. We had a lot of operational things to clean up. We did layoffs. It was just a lot of stuff. And I think part one of the story of NetApp's transformation was just cleaning up the operational execution. We didn't improve the top line much. The bottom line improved a lot because we got things working the way they should. So that's step one.

Step two?

Step two, we started to show growth in our traditional business. And so never mind this future crazy cloud stuff. People were saying, 'So you guys are actually gaining share?' And we said, 'Yeah, our share in all-flash is way higher than our share in disk. And has the market becomes increasingly all-flash, we are in a great condition to gain share.' …

I would say for the most part what investors are thinking right now is, 'Whoa, they did do a good job of cleaning up, and we're not sure we believe yet that they can actually generate growth over time. They've had a few good quarters, but they've disappointed us so much for so long that we'll just wait and see.' I don't know how long it'll take. The idea that there's this whole new branch of opportunities outside the zone of what they had been predicting, I think the Microsoft stuff will wake 'em up.

When it comes to traditional storage, NetApp appears to be the only large vendor gaining market share. ...

Isn't that cool?

Back around 2010, people were thinking NetApp could catch EMC because it was growing faster. Now NetApp is chasing the leadership role again. How did that happen?

I think a few things coincided. One of them was, we had the transition from Ontap to Clustered Ontap. And that was a long, hard transition for us. But we got past 50 percent of the new systems being sold with Clustered Ontap quite some time ago. ... But we don't live on the installed base. We live on this year's revenues. So getting over that hump was a really important thing to our velocity because that just slowed down a lot of people. 'Oh my God, this is hard, do I have to wait? Am I ready for Clustered Ontap?' So that was a big issue two, three years back.

What else?

We were very slow off-the-block with all-flash. I don't know what to say. We were very early with flash as an add-in, first with the flash card, and then with the hybrid flash. But for some reason, we just didn't go all-flash. We thought hybrid was good enough. We just missed the boat. Clearly, we were wrong. And I would say, even before he was CEO, when George [Kurian, pictured] was in engineering, he started pushing about three years ago really hard on all-flash. And when he became CEO and had all the levers, he yanked them all as hard towards all-flash as he could. And when he hired a VP of sales [Henri Richard] from a flash company, he just was all in on flash.

Are sales based on spinning disk technology growing? Stable?

I don't happen to know that. My hunch would be that [revenue is] not. Maybe by petabytes it is. But if you look at our overall blend or mix, our top line hasn't changed all that much. And our flash is growing enormously fast. ... When you do the math, it's only 100 percent, and that's stayed -- finance guys are really proud because it grew a little bit -- roughly speaking, it's not that different. Whereas flash has gone from nothing to enormous.

I don't know what kind of details we break out. We've certainly been bragging about our position in the flash market, so you can do some math.

Do you and your team have to evangelize NetApp any more?

Yes. The evangelization of NetApp. I don't think we need to evangelize NetApp so much as a NAS company, or NetApp as a SAN company. We're pretty well established in the market. Look at our growth rate: We're the number-one fastest-growing SAN company of scale, the way George puts this, if you look at the top five, if you find some teeny startup that can grow from $1 to $10, they can go whoa! They grew 10X!

If you look in the top five companies, we're the fastest-growing SAN , we're fastest-growing flash. I don't think we need to evangelize that.

So what do you need to evangelize?

I think that people just think of us as an on-prem gear company, and they don't understand that we can help them in the cloud. And that's the piece we need to evangelize because we've got customers who've known us for so many years, they're off doing their cloud plans, they're won't want to include some vendor that's just going to try and talk them out of it. That's the last thing. 'We like those guys. It's a shame they're an on-prem gear company because all the on-prem gear companies are doomed and they're gonna die, and the last thing we want to do is have an unhappy conversation about how we think they're dead and dying.'

How are you doing that?

I'm doing my best to get in the door of those top companies and say, I want to know how you're doing in the cloud, and I'm very interested in helping. We're now the cloud for Microsoft. We can run Ontap in Amazon or Azure. We've got tools to do cloud migrations. …

We now have services that can operate in the cloud without any NetApp gear anywhere around. That's a fundamentally different spot. So the evangelization now is, you've gotta crack out of the storage team. You still want to be good friends with them. We can do a lot of interesting things with them. But you've got to get to whole other parts of the organization and say, you've got to think of NetApp as a whole different style of company. If you're going all-cloud, we can still help you. That's crazy evangelization, absolutely.

Do you think your top storage peers will be able to embrace the cloud in the same way?

Suppose you are Microsoft. Who would you rather do business with on the storage data management front, NetApp or Dell, in terms of the potential conflicts of interest? … Our partners like Amazon and Azure and IBM, they can look at us and say, 'Yeah, OK, there's always this co-opetition thing in the future, like, what are you doing? But we know what NetApp is about. These guys are a data management company. That's how they'll come at this. What we want is data management. We can partner with them without a whole bunch of other stuff getting confusing in the relationship' Whereas Dell is out telling people, 'Cloud's the wrong way to do things, and I really think you should bring this stuff back on-prem, or we're going to build you a whole new environment so you don't need to go to the cloud.'

So …

That's not the message you want if you're Amazon, right? We're doing our best to put together a model that says, 'We do great work in the cloud. We do great work out of the cloud. We get paid either way. You decide what you want. We can advise you.'

Doesn't that sound like a good partner for a cloud vendor? And I think the customers see it that way, too. They see us guys are trying to help them figure out where to go.

How about from a technical standpoint?

We have a big head start. [We] were early with Amazon, and then Azure, doing this kind of work. They changed their environments for us. We told them what made it hard for us to do these kind of things. And their goal was to have more people doing more software in their clouds, right? … We were trying to help people have enterprise-class storage in the cloud to make it more confident for them to move in. We've built a lot of petabytes under management in Amazon and Azure at this point.

So we've had a chance over a lot of years to evolve our product in parallel with them evolving their product to work better together. Certainly, other people technically can follow. But I do think that we've got a real head start.

The decade-old rumor that NetApp will be acquired has popped up again.

Oh, no, it's not a decade-old rumor. It's two decades old. Every six months or so.

OK, how can NetApp survive as an independent company when its peers have not been able to go the independent route?

We had a CEO, once upon a time, who liked to say there's two main ways a company avoids getting acquired. One is by being so sucky that no one wants to buy you, and the other is by being so awesome that people can't afford you.

Can we survive? Again, you always have to divide this into pieces. We don't get to choose, if we're public. If some big company decides they want to spend enough money, we don't get to decide. Our shareholders get to decide, right? Then they can choose to buy us.

Acquisitions of this size are rare and often fail, and so people do it with some trepidation.

How hard would it be to acquire NetApp?

One of the challenges of acquiring the new NetApp is, I think, increasingly our value as a broker between multiple different entities. We're helping people get from on-prem to the cloud, get between Azure and Amazon and Google and IBM.

And I think that if an on-prem primary vendor were to buy us, I think a lot of people would say, 'Whoa, I'm not sure I'd trust them so much for all that other stuff.' Or if one of the big cloud providers were to buy us, people would go, 'Whoa, do I still trust them to get my data back and forth with the other one?'

That doesn't mean that nobody can buy us. But that does mean that they'd have to ask the question, 'Gee, am I destroying a lot value simply as a result of the acquisition?'

So, can NetApp survive as an independent company?

To me, a different interesting question is, could NetApp maintain the value it has if someone big bought us? In other words, the thing we're becoming, could that survive an acquisition?

You asked the opposite question: Could we survive being independent?

I think we have a very viable independent business. I think the way the world is evolving, data is so important, and focusing like Cisco did for so many year on networking, having a real, clear focus can be very useful to your customer base and to your relationship with partners. We have to prove it. But I don't see any inherent reason in the market why we can't. I think our competitors got bought up for different reasons. The teeny ones because the big old guys wanted to stay in the game and they weren't successful innovating. Dell EMC is more complicated.