NetApp To Miss Its Revenue Growth Projection, Says CEO. Slowdown Is "Like A Nuclear Chain Reaction"

Posted by: Peter Burrows on October 03, 2008

NetApp Inc. CEO Daniel J. Warmenhoven tells BusinessWeek that he thinks the corporate data storage maker’s sales for the year “won’t be anywhere near our [projected] growth rate.” The company, which has not previously disclosed news of the slowdown to investors or in government filings, told analysts last March that it expected to grow top-line sales 15% in the year that ends next May 31.

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The news reflects a dramatic change in market conditions. During an interview at his office just nineteeen days ago, on Sept. 15, Warmenhoven was confident that the turmoil hitting Wall Street would not spread to the rest of the economy, as many financial analyst reports were suggesting. “My feeling is that the analysts on Wall Street are all woe-is-me, because their industry happens to be getting hammered. Well, go cry in your own beer. Don’t ruin mine.”

But on Sept. 29, as I reported out this story on the impact of the downturn on companies such as Sun Microsystems, Warmenhoven told me via e-mail that his optimism was waning. Then, in a conversation on Oct. 2, he said that sales were definitely being impacted. He says many customers from many different market segments—he signaled out automotive—have suddenly put spending on hold. “Everyone has just put a freeze on everything. It’s like a nuclear chain reaction,” he says.

Warmenhoven still thinks NetApp will grow and gain share, but is moving into a more “defensive” position from the aggressive plan announced last March to gain share. Exhibit A: yesterday he nixed plans to hire 550 new staffers to support the market share offensive. He thinks the company will ultimately make 150 of the hires—mostly for quota-carrying salespeople, rather than administrative or techie jobs that don’t directly increase sales. As for lay-offs, he’s hopeful it won’t come to that. Warmenhoven says he’s intent on not having to repeat that experience, as occurred in 2001 when the company laid off 200 people.

The fact that this is happening to NetApp is a scary indicator of how steep this slowdown might be. That’s because storage was supposed to be relatively slow-down proof. While companies can put off buying more servers or starting new software projects, the world continues to create terabytes of new e-mails and photos and other such each day. It has to go somewhere.

And the psychological aspects to this slowdown are scary, as well. Back when NetApp and other tech firms got hammered in the Net Bust earlier this decade, the reasons were far simpler. Many of the customers, from dot-coms to telecoms, were simply going out of business. Now, Warmenhoven suggests that many customers are racing to the sidelines not because they can’t buy, but because they want to see how the current crisis plays out. “If everybody is playing wait and see, that causes a downturn in itself.”

In fact, back on Sept. 15, Warmenhoven said “The truth is that business is not that bad.” While the problems at Lehman, AIG and other financial operations would certainly hurt, he felt the tech sector had already absorbed much of the slowdown in the finance sector. NetApp’s sales to Wall Street, for example, had already fallen from 17% of total sales in July 2007 to 12%. He noted that Countrywide had planned on doing a $25 million project, but that had evaporated amid the mortgatge crisis.

Now, he says sales to finance have fallen even more, to a run rate below 10% of NetApp’s sales. He even notes that Lehman owes NetApp money (“We’ll see if Barclays makes good or not,” says Warmenhoven.)

And whether rightly or wrongly, Wall Street’s woes are affecting other IT buyers. “The collapse of Lehman, the virtual collapse of AIG, the final failure of WAMU (after months of a death watch), and the buyout of Merrill Lynch have collectively had a pronounced impact on the mood of the business community.” (Warmenhoven was hopeful that the $700 billion bail out, which had yet to be passed when we spoke, would inject some much-needed confidence.)

And here’s more bad news. It comes from Michael Dell, who may be the tech sector’s best-positioned early warning system. As the world’s largest direct seller of tech gear (Dell.com does about $17 billion a year), he’s in position to see changing buying patterns far more quickly than companies that sell through resellers, retailers and other channel partners. In a Sept. 30 e-mail, he told me that “I would not be surprised to see effects across many industries given the current situation in the financial sector. Now we see consumers being clearly impacted in the two areas where their money is concentrated most – their home and bank accounts. Given this, no business should consider itself immune to the current environment. Short-term focus for consumers is likely to shift to conserving and protecting capital.”

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Reader Comments

Storage Admin

October 6, 2008 12:48 PM

Is it the economy, or is it competition from ZFS and open source storage?

Open Source Fanatic

October 7, 2008 01:07 AM

HA!! if only it would stay running without out corrupting data.

Enterprise user

October 7, 2008 07:28 PM

erm....Data corruption? Yes, I done that my clarion.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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