NetApp Gains Market Share

The storage industry recently witnessed another bidding war between the top vendor EMC and the No.4 vendor, NetApp (NASDAQ:NTAP), over data de-duplication specialist Data Domain. NetApp had in May announced its plans to acquire Data Domain for $1.5 billion. EMC won the bidding warwith a $2.3 billion offer that is more than seven times Data Domain’s TTM sales. Let’s take a closer look at how it will affect NetApp.

NetApp was incorporated in 1992, and from an eight-employee startup it has today grown into a leading provider of storage and data management solutions with annual revenue of $3.4 billion and more than 8,000 employees in 130 offices around the world. According to the latest IDC report, NetApp is the No.4 vendor in the storage software market with an 8.5% share and the only company among the top 5 to achieve growth in revenue and market share. NetApp is at No.5 in the disk storage systems marketwith 6.5% share, while IBM is at the top followed by HP, EMC, and Dell.

Even in the economic downturn, server virtualization and storage efficiency were growth drivers as these lead to savings for customers. The tough economic conditions and restricted budgets have also led to increasing demand for cloud computing services. And such service providers in turn are fuelling the demand for data management solutions.

Revenue from these new customers, however, could not offset the decline in revenue from larger customers, and NetApp’s first quarter revenue declined 4% to $838 million. Net income was $52 million or $0.15 per share up 49% from $35 million or $0.10 per share last year. Non-GAAP net income was $76 million or $0.22 per share. Analysts expected earnings of $0.20 on revenue of $828 million. The company also announced a change in top management. Daniel Warmenhoven ended his 15-years tenure as CEO of the company and handed over the reins to COO Thomas Georgens.

By region, the Americas accounted for 58% of total revenue, Europe 32%, and Asia Pacific 11%.

NetApp has started shifting some of its professional service business to partners so that it can focus its investments on higher-leverage areas of its business. Its non-GAAP gross margin was 63.6% in the quarter, up 1.8% over Q4 due to an increase in software entitlements and maintenance in the revenue mix as well as better-than-expected margins on products. NetApp did not provide revenue guidance for the second quarter of fiscal year 2010. It expects non-GAAP gross margin for the second quarter to be between 62.5% and 63.0%.

NetApp ended the first quarter with cash and short-term investments of about $2.7 billion, up $59 million over Q4. In the bidding war for Data Domain, NetApp had increased its initial offer to about $2 billion. If the deal had gone through, it would have been overpriced but it would also have accelerated NetApp’s entry in the data de-duplication market. CommVault and ExaGrid Systems are some other prospects in this space, but they are not as good a fit as Data Domain.

The stock is currently trading around $26.68 with market cap of about $9 billion. It hit a 52-week high of $27.03 on September 30.