Wednesday, March 9, 2011

NetApp to buy LSI’s Engenio for $480 million

March 9, 2011 – Following Monday’s announcement of Western Digital’s plan to acquire Hitachi GST for $4.3 billion, consolidation in the storage industry continued today with NetApp’s surprise announcement that it will buy LSI’s Engenio business for $480 million in cash – the largest transaction in NetApp’s history. The deal is expected to close within 60 days.

NetApp officials expect the acquisition to add $750 million to its revenue stream in fiscal 2012, and to add $5 billion to its total addressable market (TAM) by 2014.

LSI’s Engenio division had revenues of $705 million in 2010. (LSI’s entire storage portfolio generated revenues of $954 million in 2010.)

The new unit will be run by Manish Goel, executive vice president of NetApp’s product operations.

It’s important to note that NetApp is buying only the Engenio product line (external disk arrays), not LSI’s other storage lines (e.g., the ONStor and MegaRAID and 3ware controller/adapter families).

In acquisitions such as this, it’s customary to examine product overlap between the two companies’ product lines. However, NetApp officials didn’t really address that during their conference call. Instead, they focused on new workloads (vertical markets) that the company can penetrate better with Engenio’s technology than with NetApp's FAS technology. NetApp officials cited video (including full-motion and surveillance) and high performance computing (HPC), as well as multimedia, oil and gas, semiconductor simulation, weather simulation, medical imaging, and content distribution.

In addition to those new fast-growth verticals, NetApp officials noted that the Engenio acquisition will significantly expand NetApp’s channel strategy.

Fine, but the interesting question is what will happen to Engenio’s OEMs partnerships. Engenio’s OEMs include IBM (Engenio’s largest customer, and already a NetApp partner), Oracle/Sun, Dell, SGI and Teradata.

In today’s conference call, NetApp CEO Tom Georgens (who was formerly with Engenio) subtly danced around this issue, and downplayed the OEM side of the deal. Here are some clips from Georgens:

“Clearly, we have to have dialogue [with Engenio’s OEMs ]. . . Our objective is not to undermine the OEM business; our objective is work hand-in-hand with them . . . [but] if things change and a relationship becomes less friendly, I think we have the tools to compete that the previous owner of this business did not.”

More clips: “We expect [the OEM business] to roll off a bit. It’s certainly not going to be a growth element. The growth will come from the new business . . . and expanded TAM . . . At the price we’re paying . . . and the potential return, I think we would have justified this transaction with no OEM business.”

And in response to a question about whether NetApp would be able to keep all of Engenio’s OEMs: “I think that we’ll keep a number of them, or a large portion of the OEMs, but I don’t think we’ll keep every dollar of OEM revenue . . . I’m not saying that OEMs don’t matter, but the growth is elsewhere [in the new vertical markets].”

I’d guess that the OEM relationships with Oracle/Sun and Dell will be on shaky ground, but if the storage opportunities in areas such as video and HPC grow as rapidly as expected, and NetApp can gain significant market share in those verticals with the Engenio technology, then the OEM side of this equation may not matter.

As for LSI: The company’s press release said that “The strategic decision to divest the external storage systems business was based on the company’s expectation that long-term shareholder value can be maximized by becoming a pure-play semiconductor company.” In conjunction with the acquisition announcement, LSI said that its board of directors has authorized a new stock repurchase program of up to $750 million.

Monday, March 7, 2011

EMC lengthens its lead in disk array fray

March 7, 2011 – Despite impressive growth from some its arch rivals (most notably, NetApp) EMC appears to be widening the gap between itself and its collective competitors, according to a report on the disk systems market by IDC. The market research company recently issued statistics for the fourth quarter and full-year 2010, including market size, vendor shares and revenues.

EMC capped 2010 with a 25.6% market share on revenue of $5.44 billion in the external disk systems market. That compares to a 2009 market share of 22.9% on revenue of $4.1 billion.

Rounding out the top 5 in 2010 were IBM (13.8% share, down slightly from a 14.3% slice the previous year), NetApp and HP (tied with 11.1% market shares) and Dell (9.1% share on 2010 revenue of almost $2 billion).

EMC posted impressive 2009—2010 revenue growth of 32.5%, but that was overshadowed by NetApp’s whopping 49.5% revenue growth. NetApp raked in $2.35 billion in 2010, vs. $1.57 billion in 2009.

Going forward, it will be interesting to see how HP’s acquisition of 3PAR, EMC's acquisition of Isilon, and Dell’s acquisition of Compellent will alter the market share dynamics and revenues.

Conspicuously absent from the top 5 in 2010 was Hitachi Data Systems. However, HDS did claw its way into the top 5 in the fourth quarter of 2010, ending the quarter in a virtual tie with Dell for the last spot. HDS garnered an 8.7% share in 4Q10 on revenue of $533 million vs. Dell’s 7.9% share on revenue of $483 million.

In the fourth quarter, EMC pulled in $1.58 billion for a 26% market share. That compares to a share of 23.9% in 4Q 2009 ($1.25 billion in revenue).

However, NetApp’s surge was again apparent in the fourth quarter of 2010. The company posted year-over-year revenue growth of 43.7% (vs. 26.3% for EMC), and closed the gap with HP on revenue of $630 million vs. HP’s $704 million.

Last year was a good one for the external disk systems market, which grew by 18.3% to top $21 billion.

Breaking down 4Q10 by market segments: the NAS market grew 41.3% year over year. EMC was #1 in NAS, followed by NetApp at 23.7%.

The iSCSI market posted equally impressive gains, growing 42.1% in 4Q10 vs. 4Q09. Dell was #1 in the iSCSI space with a 32.6% share, followed by HP (14.7%) and EMC (13.4%).

One more fun fact: EMC has been #1 in the external disk systems market for 14 consecutive years.

For more details, see IDC’s press release: “Worldwide Disk Storage Systems Finishes 2010 with Double-Digit Growth on Strong Fourth Quarter Results.”

Friday, March 4, 2011

What are your post-lease options?

March 4, 2011 – When your lease or warranty runs out (or even when you’re on lease or warranty), you have a number of options. You can undergo a total technology refresh and buy new systems from your primary storage supplier – an expensive option, and it’s likely that you don’t really need the latest and greatest gear. Or, you can re-up and sign an extended service-and-support agreement with your primary vendor – another expensive option.

Alternatively, you can contract with a third party that provides support for all kinds of IT hardware. But let’s say you’re a NetApp shop: What level of expertise does a general-purpose third party really have on NetApp systems?

A third alternative is to sign a services-and-support contract with a third party that specializes specifically in the type of hardware you have. In the case of NetApp systems, a good example is Zerowait.

I recently chatted with Mike Linett, Zerowait’s president and CEO, and Rob Robinson, the company’s vice president of sales.

Zerowait specializes in service and support of NetApp equipment – and only NetApp. Prior to 2002, Zerowait was a NetApp reseller, but when NetApp nixed that deal Zerowait moved into the service and support business, competing with NetApp.

Linett claims that Zerowait typically charges about half of what NetApp charges for service and support. But according to one of Zerowait’s customers, the savings could actually be much higher.

“Zerowait is 50% to 90% less expensive than NetApp, depending how old your hardware is,” says Balazs Nagy, manager and chief architect at NewPush, an application and data warehousing hosting company. “The older the equipment, the more prohibitive NetApp makes it for service and support, and if the equipment is very old NetApp won’t even support it.”

NewPush has a services and support agreement with Zerowait that covers four NetApp systems.

Besides the basic support you would expect from a third party, what can a company such as Zerowait provide?

“Zerowait allows us to have spare parts onsite at a very low cost,” says Nagy, “but they also provide much more in-depth phone support than NetApp does, as well as remote or onsite engineering, architecting and education services.”

In a time of tight IT budgets, Zerowait seems to have a good business model. The company grew 45% last year, according to Linett. And Zerowait is expanding worldwide (Europe in 2008 and Australia near the end of last year).

“The typical lease is three years, but these days a lot of people want to extend that to five or six years before they do a refresh,” says Zerowait’s Robinson.

In addition to third-party support services, Zerowait also offers off-lease transferable license systems. More recently, the company began selling its SimplStor system for secondary storage. SimplStor is based on commodity hardware (SuperMicro chassis and drives from Seagate or Hitachi) and open-source operating systems.

NewPush, for example, recently began offering private remotely-managed storage services based on Zerowait’s SimplStor. The service, which starts at $75 per TB per month, is positioned as an alternative to public cloud storage services.