Analysts: NetApp's earnings growth back on track

Network Appliance reported its first quarter-to-quarter growth in a year this week, a milestone that analysts say points to the storage appliance company's solid install base and advances in software that will lead to more sales at the enterprise level. The sign of resurgence also seems to have heated up NetApp's rivalry with storage leader EMC.

NetApp said revenue for its third fiscal quarter, which ended January 25, were US$198.3 million. That's compared with revenue of $288.4 million for the same period a year ago, and $194.7 million in the prior quarter, according to a company statement.

Shebly Seyrafi, an analyst at A.G. Edwards & Sons Inc. in St. Louis, said NetApp has bottomed out and is on its way back up.

"What investors are watching is not year to year. [NetApp was] up sequentially in earnings," he said. "The sequential growth rate [overall] was 1.9 percent. On the filer side, they were up 5 percent sequentially."

Tony Prigmore, an analyst at Enterprise Storage Group in Milford, Mass., said NetApp has a "solid install base," which is enabling them to now focus on follow-on products and gaining market share in high-end, enterprise-class devices that combine network-attached storage (NAS) and storage-area network (SAN) technology.

"From a strategy standpoint, we like what they're doing. None of us have anywhere the amount of demand we had for products a year ago at this time," Prigmore said. "But at same time, they are developing products that are starting to take them into the new customer space."

Meanwhile, EMC used the NetApp announcement to point out its lead in the NAS market with about 42 percent of sales, a number backed by research firm IDC in Framingham, Mass. In January, EMC reported NAS revenue of $271 million for the last quarter of 2001.

"Network Appliance enjoyed a free ride in the low-end and midrange NAS markets when they were effectively the only game in town," EMC spokesman Dave Farmer said in an e-mail.

Last fall, NetApp began to ship a software product called SnapManager for Exchange 2000, which allows NetApp's file servers to operate as block-level access devices. In January, NetApp announced a similar product for SQL servers: SnapDrive for SQL 2000.

"Clearly, we want to address a larger share of the total available storage market," said a NetApp spokesman.

EMC, which gained its leading position in the NAS market mostly through the success of its high-end Celerra line, last year made its first foray into the midrange NAS file server market with its Clariion IP4700, a RAID device that holds up to 3.5TB of data with a base price of $82,000.

The IP4700, however, has yet to make a significant dent on NetApp sales, according to Brad Nisbet, an analyst at IDC.

"I think that NetApp mostly sees their competition as being the IP4700, and to date the IP4700 has not been doing that well," Nisbet said. "Therefore, I think NetApp's true competition lies in the Celerra space, which is where NetApp is trying to go."

EMC's Celerra Dart file server, a high-end NAS device that uses the Symmetrix Enterprise Storage System for disk data storage, can combine with the company's HighRoad software to offer either file-level or block-level data to end users.

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