Feb 11 2014, 7:22pm CST | by Forbes
A recurring theme for me is the headwinds that traditional vendors are facing as a move to new techniques and approaches to delivering IT take hold. Amazon Web Services was perhaps the first indication of this move, commoditizing infrastructure and offering it up “as a service” had major ramifications for the traditional server vendors. Similarly software defined networking and software defined storage provide significant challenges to traditional vendors – a fact I’ve covered before in my “burning platform” series.
Now it’s important to not overstate the timescale for these challenges. The reality is that companies like Cisco, Juniper, NetApp and EMC will continue to exist and prosper for a long time to come. They have customers who have committed massive CapEx to products that they need to leverage as much as they can – that won’t change things radically any time soon. But it’s also important to remember that the success of individual players in the IT industry is largely fuelled by what the stock markets think, and how investors react to their perception of future opportunities. The very reason M&A activity happens so much is to deliver to shareholders the growth that they demand.
So it’s interesting, on the eve of NetApp’s earnings call, to reflect on their business and this broader trend towards services-based offerings disrupting the traditional business of vendors who deliver heavy CapEx-intensive kit. Interestingly this is a topic that isn’t often discussed by industry analysts and commentators, but is increasingly being reflected upon by the financial community.
Indeed Macquarie wrote an interesting report in advance of the NetApp earnings call that I was shown by a source. The report, written by senior tech analyst Rajesh Ghai and entitled NetApp (Neutral) – Expect Weak Revenue, inline-to-better EPS in Mixed Quarter, pulls no punches. In the report Ghai says that they:
continue to believe Information Storage is no longer a secular growth market and is being negatively impacted by the Public Cloud, the shift to NAND Flash from disk and potentially in the future by the growth of server-based shared storage. We believe NTAP despite its share gain potential is not immune to the secular headwinds it faces.
Secular is an interesting term and relates to time frames – in the financial industry trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames – essentially Ghai is saying that the long term trend in the storage industry is downwards.
Secular is also an appropriate term to use to describe the headwinds that traditional proprietary storage vendors face. Rather than the orthodox view of proprietary storage software closely coupled with proprietary hardware, the emerging trend is towards open (or, one could say, secular) software solutions that can sit on top of any hardware and deliver greater flexibility at reduced cost. It’s hard to see how that’s in any way positive for companies like NetApp – at best they react the right way and see their revenue and profitability greatly disrupted, at worst they don’t react and see the wind knocked entirely out of their sales.
The interesting thing to watch in tomorrow’s earnings, and over the next few quarters, is how much investors look at short term vagaries and how much they take into account the mid and long term difficulties these companies will face. interesting times indeed…
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