NetApp Loses IBM as FQ4 Sales Slide, Earnings Spike

NetApp (NTAP) has lost IBM (IBM) as an OEM customer, according to a Bloomberg report. IBM will stop reselling NetApp’s storage technology in a move to shift customers to its own branded products and blunt its hardware losses, the report said.

IBM reportedly will backpedal from NetApp’s new N series on May 27 and shutter all development on the product line, based on information Bloomberg reviewed in an internal IBM memo. The move is a substantial blow to NetApp, inasmuch as IBM is one of its largest OEM customers, accounting for an estimated 2 percent of the storage vendor’s overall sales.

The companies’ OEM deal dates to 2005 in an agreement that allowed IBM to brand NetApp-manufactured storage products.

In its recently concluded FQ4, NetApp’s OEM sales plunged some 34 percent amid expectations for another 40 percent slide next year. NetApp chief executive Thomas Georgens said on an analysts’ conference call last week that the storage vendor’s eroding OEM business “was a bit of a surprise.”

An IBM spokesperson declined to comment specifically on the NetApp news. “IBM is focused on strengthening its software defined storage portfolio to provide greater scalability to clients,” the spokesperson wrote in an e-mail to Bloomberg.

Separately, NetApp reported a 6 percent sales slide to $1.6 billion for its FQ4 2014 but a substantial 13 percent uptick in earnings to $197 million, or 59 cents per share for the period.

For FY 2014, NetApp earned $638 million, or $1.83 a share, for a 26 percent increase over last year on flat revenue of $6.3 billion. NetApp finished the year with $5 billion in cash, equivalents and investments. The company said it generated $1.4 billion in cash from operations. During the year, NetApp returned $2 billion to shareholders through share repurchases and cash dividends. The vendor said it increased its July 22, 2014, dividend to 16 cents per share.

NetApp also said revenue from its branded systems grew 4 percent for the FY when compared to last year. The company said it shipped about 18PBs of flash in Q4, as it continues to balloon its flash sales.

“NetApp saw market share gains and delivered a solid operational performance in fiscal year 2014, highlighted by margin expansion and strong cash generation,” said Georgens.

NetApp officials said on an analysts’ conference call last week that the vendor’s OEM revenue slid 26 percent for the fiscal year. The company previously has said that more than 80 percent of its overall revenue is generated from channels, including OEMs. As its OEM sales have slipped, NetApp has compensated with stronger revenue through distributors Arrow (ARW) and Avnet (AVT), which together accounted for about 40 percent of the vendor’s sales in FQ4.

In March, NetApp said it intended to chop 600 jobs, or 5 percent of its employee rolls, blaming a “constrained IT spending environment” for the layoffs. The move is part of what NetApp called its “business realignment plan” to focus on key strategic initiatives. NetApp, which employs about 13,000 people, said the layoffs will cost it $35 million to $45 million in cash for employee terminations and other associated costs, the majority of which it recorded in FQ4 2014.

Last year, NetApp laid off 900 employees, smaller than the expected 1,300 but still a significant number, under pressure from activist investor Elliott Management to deliver more shareholder value. Those layoffs mostly involved NetApp’s OEM efforts.

Similar to other hardware-dominant companies, NetApp’s challenges are clear, starting with adjusting to the new technology realities of the cloud, software-defined storage and virtualization. Whether it can reposition itself as a significant software competitor or make hay on hybrid cloud deployments without harming its on premises sales is open to question.

Update: 5/29/14: Thomas Stanley, NetApp Global Partner Sales and Alliances senior vice president, emailed the following clarification: “NetApp expects change and evolution with its strategic partnerships to maximize both joint and individual opportunities in the market. NetApp and IBM will work to maintain a high level of customer service. IBM remains an OEM partner for a portion of our E-Series enterprise storage systems, and we remain aligned with IBM Global Technology Services (GTS).”