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John Tan

NTAP AT A GLANCE

P/E ► 78.9 HIGH EV/EBITDA ► 39.6 HIGH ROA ► 2.8% AVG ROE ► 5.9% AVG Debt to Equity ► 1.73 AVG Current Ratio ► 2.28 AVG Interest Coverage Ratio ► 2.42 AVG

 

 

 

 

 

 

Network Appliance, Inc. (NASDAQ: NTAP) sells hardware and computer software and services used to store and manage large amounts of data. Its customers range from small and medium businesses to Fortune 10 companies. Network Appliance's flagship product is a piece of hardware that can store hundreds of terabytes of data (1 terabyte = 1000 gigabytes). The company's hardware is technologically more advanced than traditional storage devices (such as local hard drives) because it automatically optimizes storage space with its internal operating system and uses networks to connect to a company's computers that are far away. Corporations and government agencies are demanding large data storage capacities because of an explosion of electronic information from scientific and population growth.^[1] In addition to high storage capacities, these institutions also demand products that keep their data safe, especially in a world where more and more confidential information is transferred through computer networks. NetApp sells software packages, such as data reduction services and disk-to-disk backup software, along with its core hardware product, to address this demand.^[2]

Business and Financials

Products

NetApp's product line can be divided into hardware and software, sold to both small and medium enterprises (SMEs) and large corporations. The company's core business is its network-based data storage hardware.^[3]

Hardware (74.4% net revenues)^[4]

*FAS family: NetApp's flagship Fabric-Attached Storage device is a piece of hardware, used to store a company's data, that has its own operating system, disk arrays and built-in data management software. The device is used to keep all of a company's data together in one location, while making sure the data is accessible and stored efficiently. This lets a company avoid spending money on buying expensive memory disks and wasting time tracking down scattered pieces of information.^[5]

*V-Series: A V-Series device is a piece of hardware that centralizes the data located on storage devices purchased from other data management vendors. This also makes sure the company's data is accessible and stored efficiently, and is especially valuable when the company's data is dispersed on storage devices purchased from many different companies.^[6]

Software (12.2% net revenues)^[7]

*Data protection: NetApp sells software that protects confidential data from being lost, destroyed, or stolen. It does so through encryption, disk-to-disk back up, and data reduction. The security of a company's data has become critical because all kinds of confidential information is stored electronically.^[8] See Trends and Forces.

*Storage management: NetApp also sells software designed to make enterprise data management less complex, for example, by letting a company migrate large amounts of data to a centralized server and accounting for duplications. As a result, the company saves money by hiring less IT personnel and avoiding costly situations in which data is lost or mishandled.^[9]

Consulting/Services (13.4% net revenues)^[10]

In addition to its products, NetApp also provides consulting services, such as helping a company use its IT software to maximize storage space, as well as technical support.

Segmentation and Geography

NetApp's customer base includes businesses/offices in energy, financial services, government, Internet, life sciences and health care services, manufacturing, media, entertainment, animation and video productions and telecommunications.

While the company's absolute international revenues grew 23% from FY2005 to FY2006 and 33% from FY2006 to FY2007, its international revenues, as a percentage of total revenues, have decreased in the past three years. This is the result of strong domestic revenues growth. The company largely operates in the United Kingdom, Germany, Japan, France, the Netherlands, Switzerland, Canada, and Australia. Its foreign operations are evenly distributed, because not one of these countries account for more than 1/10 of the company's international revenues.^[11]

Financials

NetApp's net revenues grew by 35.7% in 2007, and 29.3% in 2006. The speed of its revenues growth is caused by strong demand for its data storage hardware/software. The company's hardware products account for approximately 75% of its net revenues, although this number has declined because its software and consulting services businesses have become larger. While gross margins have stayed relatively flat, NetApp's net income has decreased, mainly because the company has spent more on sales/marketing and research/development.

As of April, 2007, NetApp employed 2,500 personnel in sales and marketing, 1698 in research and development, 759 in finance/administraiton, and 1678 in manufacturing.^[14]

Note: NetApp's fiscal year ends in April.

Key Trends and Forces

As companies and government agencies produce more and more data, they demand high-capacity data storage hardware

The growth of information that is transferred electronically creates high demand for hardware and software like those sold by NetApp: by some estimates, the growth rate of data needed to be stored has reached 100% a year.^[15] Sources of this growth include scientific advancements (such as genomic data in the field of bioengineering), higher standards for products/services (such as new categories of financial data kept by banks), and population growth (such as social security data).^[16] NetApp's products store hundreds of terrabytes of data efficiently using its built-in data mangement software. At optimum levels, a NetApp NAS system reduces the required raw data storage space by 80% in comparison to standard storage devices.^[17] Furthermore, since NetApp systems centralize all of a company's data, they make information more accessible in comparison to traditional hardware. For example, an employee in New York would be able to access changes to a document made by an employee in Hong Kong. Effective data management lets a company spend less time/money on IT and increases the productivity of the company's employees.

Increased physical risks to devices storing confidential data lead to greater demand for data protection hardware

More and more pieces of sensitive information, ranging from social security numbers to credit card numbers, are being stored electronically. In light of this trend, geopolitical events such as terrorist attacks, natural disasters such as hurricane season (both of which threaten to damage servers where data is physically stored), and laptop theft pose a challenge to the security of sensitive data. For example, from 2005 to 2006 there was an 81% increase in the number of companies reporting stolen laptops containing sensitive information.^[18] NetApp sells hardware devices and software packages that help companies minimize the cost of recovering from such calamaties. Therefore, as the value of a company's data increases, so does the company's demand for data protection products.^[19]

IT software vendors such as NetApp are especially vulnerable to the market volatility that affects their group of customers

While high-end data storage products improve the handling of a company's data, they are not an essential component of the company's business. Many companies see no need to purchase expensive, high-end data storage devices or spend money upgrading their preexisting data management systems. This is especially manifest during times of recession, since IT is an easy place for companies to save money. As a result of the credit crunch that began in summer 2007, banks that have suffered write-downs, such as France's Société Générale, tend to opt out of spending money on inessential IT improvements.^[20] Likewise, NetApp is also vulnerable to slow-downs in consumer spending in the media/entertainment and telecommunications industries. InWhile NetApp's revenues in the fourth quarter of fiscal year 2008 increased by 17% from the same quarter last year and 6% from the previous quarter, the revenue increase is explained by the company's introduction of a new, built-in operating system for its data storage hardware, a revenue-generating event that cannot happen continuously.^[21] In FY2008 Q3, the company's revenues grew 12% over the previous quarter, while the same growth was only 6% for Q4. Similarly, the growth from the same quarter a year before was 17% for Q3, while only 12% for Q4, indicating that NetApp's revenues growth is slowing down as the economic downturn continues.

Competitors

NetApp competes in the high-performance networked storage market. It competes against several large corporations, such as Hewlett-Packard Company (HPQ), International Business Machines (IBM), and Sun Microsystems (JAVA), that have business units in the data storage market. In addition, Dell (DELL) is a competitor through its reseller partnership with EMC (EMC) (see below).^[22] In comparison to these corporations, NetApp is more focused on data storage technology, letting it develop hardware that uses raw storage space more efficiently, and complementing the hardware with more software packages.^[23] To compete with larger corporations, NetApp offers discounts to attract retailers.^[24] Smaller competitors in the high-performance market segment follows. In addition to the following companies, NetApp competes against venture capital-backed companies that also focus on developing advanced data storage technology.^[25]

• EMC (EMC) - EMC is one of NetApp's most serious competitors, with business segments in information storage, content management and archiving, and RSA information security. While it far outpaces NetApp with 2007 net revenues at $13B, NetApp has the technological advantage of offering hardware that unifies many methods of inputting data for storage, while customers of EMC must buy different pieces of hardware.^[26]

• Brocade Communications Systems (BRCD) - Brocade sells data storage products that focus on storage area networks, a specific method of inputting data for storage that is subsumed by NetApp's hardware. Brocade's 2007 net revenues were $1.2B.^[27]

• Data Domain Inc. (DDUP) - Data Domain specializes in data management technology, such as dedupliation and archiving services, as well as recovering data from disasters. Its 2007 net revenues were $132M.^[28]

• QLogic (QLGC) - QLogic sells data storage devices mainly to original equipment manufacturers. Its 2007 net revenues were $599M.^[29]

Marketshare

The data storage market can be broken up by how the storage device is linked with the data (by "environments"). NetApp's core hardware product is a unified device that is compatible with most environments. It leads the NAS market segment because the company pioneered the development of that technology.

References

1. ↑ NTAP 10-K 2007, Item 1
2. ↑ NTAP 10-K 2007, Item 6
3. ↑ NTAP 10-K 2007, Item 1
4. ↑ NTAP 10-K 2007, Item 6
5. ↑ NTAP 10-K 2007, Item 1
6. ↑ NTAP 10-K 2007, Item 1
7. ↑ NTAP 10-K 2007, Item 6
8. ↑ NTAP 10-K 2007, Item 1
9. ↑ NTAP 10-K 2007, Item 1
10. ↑ NTAP 10-K 2007, Item 6
11. ↑ NTAP 10-K 2007, Item 6
12. ↑ NTAP 10-K 2007, Item 6
13. ↑ NTAP 10-K 2007, Item 6
14. ↑ NTAP 10-K 2007, Item 6
15. ↑ NTAP 10-K 2007, Item 1
16. ↑ Network Computing "Low-Cost Network Area Storage Devices" April 23 2004
17. ↑ LionBridge "Features and Functionality Study Comparing File Services Solutions from NetApp and EMC (2/08)"
18. ↑ Absolute Software "Computer Theft and Recovery Statistics"
19. ↑ NTAP 10-K 2007, Item 1
20. ↑ "NetApp blames tightwad bankers for lower forecast" The Register February 14th 2008
21. ↑ NTAP 10-K 2007, Item 1
22. ↑ NTAP 8-K June 3 2008
23. ↑ "Strategic Vendor Series: Network Appliance" DataDomain January 25 2005
24. ↑ "Commodity crunch is here" StorageMojo January 17 2008
25. ↑ NTAP 10-K 2007, Item 1
26. ↑ EMC 10-K 2007, Item 6
27. ↑ BRCD 10-K 2007, Item 6
28. ↑ DDUP 10-K 2008, Item 6
29. ↑ QLGC 10-K 2007, Item 6
30. ↑ Computer World "Gartner rolls out storage market share" June 14th 2006