The debt ceiling crisis and market uncertainty have impacted storage sales – particularly in the government and financial services markets – leaving storage executives wondering if the buying decline is temporary or will be long-lasting.
Two of the largest storage vendors — NetApp and Brocade — this week reported disappointing financial results for the quarter that ended July 29. Their executives used terms like “IT headwinds” and “macroeconomic factors” that suggest the problems were beyond their control and part of a larger financial picture.
NetApp’s revenue of $1.46 billion and forecast of $1.61 billion were both below analysts’ expectations, fueled by a recently optimistic analyst day held by the vendor. At least NetApp’s revenue grew year over year — Brocade reported storage switch sales fell six percent from last year.
Unlike most storage vendors, NetApp and Brocade’s quarter ended in July instead of June, so they got hit by the chaos around the debt ceiling debate in Congress that led to a roller-coaster stock market.
“Headwinds in the IT market, federal spending and the overall global economy made for a challenging quarter for the company,” Brocade CEO Mike Klayko said on his company’s earnings call. “The storage business is not immune to macro IT factors. Fluctuation in demand levels is normal and to be expected, particularly in this period of heightened economic uncertainty.”
NetApp said sales were strong last quarter until falling off a cliff in July. Executives blamed the debt ceiling crisis and “macroeconomic uncertainty,” saying federal government agencies and financial services were hit particularly hard.
NetApp CEO Tom Georgens said six of its 23 largest accounts are financial services companies, and all six had booking declines from the same quarter last year. He said that led him to believe NetApp’s sales decline was caused by overall economic factors rather than gains by competitors.
“We exploded out of April, we closed last quarter exceptionally strong,” Georgens said. “May was very strong, so there was no evidence that we had drained the swamp. And June was strong, so we were rolling. We were ahead of our forecast, and we felt really, really good about where we were. What we didn’t expect is the U.S. side of the house weakened as the quarter wore on. And financial services … the fact that all six of them in our major accounts program was down is an indicator that something’s going on there that I don’t think is specific to NetApp.”
Georgens said he doesn’t think the downturn will last as long as the one that began in late 2008, but he’s not sure of that.
“I don’t feel like we’re on the trajectory that we were in a couple years back,” he said. “I may feel that way 90 days from now, but it doesn’t yet feel that way today. This government thing — I don’t know how much the political overhang is a factor here, and we’ll just see what happens. But right now, we’re just going to assume that the current environment is going to stay roughly at this level going forward, and we’ll see where it goes from there.”
Brocade executives said they expect storage – particularly Fibre Channel SANs – to rebound because demand remains strong. Klayko said Brocade’s annual customer survey this year found that 80% of its storage customers said they expected to grow or maintain their FC switch spending over the next three years.
The vendor is starting to push its 16 Gbps technology, claiming there is demand for more bandwidth for applications such as virtual desktop infrastructure (VDI) and analytics. Klayko said Hewlett-Packard, IBM, EMC, Hitachi Data Systems and Fujitsu Technology Systems are already selling Brocade’s 16-gig switches.
“The buying dynamic continues to be very strong for Fibre Channel,” Brocade CTO Dave Stevens said. “It continues to be the dominant technology in the data center for pooled storage environments.”
Of course, demand doesn’t always turn into implementation – as NetApp and Brocade discovered last quarter.