NetApp Mum on Data Domain; CEO's History of Integrity Lends Credence to "Not for Sale" Comments; 2009 NetApp Analyst Days Recap

In the face of its public tussle with EMC over Data Domain, NetApp forged ahead with its annual Analyst Days at its Sunnyvale, CA, headquarters. Well attended by many NetApp executives and 80+ analysts from the US and around the world, it was both informative and well run. However it was the kickoff keynote by NetApp's CEO Dave Warmenhoven that I first wanted to summarize and comment on as he did a pretty good job of encapsulating the major themes of the presentations and one-on-one meetings that were to follow.

During his opening keynote, Warmenhoven commented on a number of topics ranging from the economy to how NetApp's new branding was affecting its ability to get into enterprise accounts to NetApp's culture and how it fosters innovations from within. However, these were the four main items I gleaned from his opening keynote presentation:

• NetApp's positioning and growth in the current economic environment
• The current state of its outstanding offer for Data Domain
• His thoughts on why NetApp will not be acquired
• NetApp's enterprise cloud storage offering

In regards to NetApp's growth in this economic environment, it is being affected like everyone else. Overall storage growth is flat after many years of double digit growth but not all is as bad as it sounds for the following reasons.
 

• He pointed to a number of significant wins (many of which appear to be coming at the expense of EMC) as well as an increased presence by NetApp in Fortune 5000 companies.
• Organizations want more flexibility and lower costs in their storage infrastructures and they are finding that their current infrastructures do not meet these new needs. This is creating new sales opportunities for NetApp as these organizations are willing to look at alternative ways to manage their storage infrastructure.
• He so far has not seen this downturn hitting NetApp as hard as the 2000-2001 tech crash. It is still maintaining margins of 9 - 12% whereas during the tech crash profits were at or close to 0%.

In other side conversations I had with NetApp executives after Warmenhoven's presentation, apparently there is also some debate occurring internally as to how exactly the economy is impacting NetApp. It was notable that while there was a leveling off from FY2008 to FY2009 in terms of storage sales, there was no drop-off. Some NetApp insiders speculate that NetApp's customers are starting to make better use of new technologies like deduplication (which it now gives away for free) which is contributing to the flattening in storage sales while others are attributing it to the economy.

He then took a few minutes to talk about NetApp's bid for Data Domain. There was very little that he (or anyone) at the conference would publicly or privately disclose about the acquisition that was new information. One of the tidbits that I did pick up from his comments is that approximately 1/3 of Data Domain's employees are former NetApp employees. This certainly lends support to those who allege that the cultures of NetApp and Data Domain should mesh nicely should the two companies eventually merge.

Warmenhoven then stated emphatically why NetApp is not for sale and went on to explain why no other major technology company wants NetApp nor does it not make sense for any of them to acquire NetApp. The five companies that he mentioned that most often come up as possible acquirers of NetApp include Cisco, Dell, EMC, HP and IBM and he gave specific reasons as to why none of these companies are likely to act.

• Cisco benefits from an alliance with both EMC and NetApp and if Cisco were to buy EMC or NetApp, he surmised it would be EMC. EMC would provide Cisco a greater footprint in enterprise accounts and EMC has a larger market share in storage than NetApp.
• Dell already owns EqualLogic and is doing well with it. It also has an existing relationship with EMC for FC storage and Dell's cash position is not as strong as it was a few years ago.
• EMC is almost out of the question as the anti-trust issues are too great.
• HP's Mark Hurd has stated in previous earnings calls that he is happy with HP's current storage offerings and prefers to grow organically.
• IBM is already selling NetApp and has seen its sales of the N-Series grow dramatically. The relationship is good so why buy NetApp?

These comments sparked some follow-on discussion after the presentation. Another analyst that I spoke to wondered if Warmenhoven was just making these comments so as to set the stage to fetch a higher price for NetApp. As for myself, I'm not so sure. Warmenhoven and the entire NetApp team strike me as pretty straight-up and, from my perspective, the synergies don't really feel right for NetApp to be acquired by any of these companies.

I can't point to any specifics but I get the sense that everyone (except EMC) seems to enjoy (too strong a word in this day and age?) working with NetApp. While I view Cisco and IBM as the most likely acquirers, my general feeling is that if an acquisition was in the works or even in the discussion stages, Warmenhoven simply would have avoided this subject entirely.

I came to this conclusion after reading NetApp's founder and EVP Dave Hitz's book, How to Castrate a Bull, on my flight home last night. In it, there is a section where Hitz talks about Warmenhoven's prior involvement in Network Equipment Technologies that was involved in all sorts of unethical behavior. Once it was uncovered, Warmenhoven was made the CEO and tasked with the job of cleaning up the mess. That lack of integrity on the parts of his predecessors at N.E.T. left such a bad taste in his mouth that I just can't see him standing in front of all these analysts and saying what he did if he didn't mean it.
 
Call me naïve, but based on the culture I observed while in attendance at NetApp's Analyst Days and the people I met, if one of these aforementioned five companies (or some other company) is getting ready to acquire NetApp, I don't think he knows anything about it.

Warmenhoven then concluded his presentation with some thoughts around NetApp's plans for future growth which include a growing emphasis on data protection and recovery, storage efficiency and simplified data management, of which delivering an enterprise storage cloud is a big part of realizing these ambitions. To its credit, during the two-day event NetApp provided a substantial amount of evidence to support its enterprise cloud storage story and is one of the better stories I have heard in this vein. In a subsequent blog, I plan to cover more about how NetApp is executing on delivering a storage cloud that meets the specific needs of the enterprise.