It’s happening again – data storage specialist NetApp is cutting staff. First in 2013, then mid-2014, and now again in Summer 2015. Following a dismal showing in the fourth quarter, the company will lay off 500 workers, which represents 4% of the company’s global workforce. These changes will be instated by the third quarter (July 2015).
It was a fall of the mighty, a Fortune “100 Best Companies to Work For” List winner for 13 consecutive years that seemed like a smart investment as it reaped the benefits of the data boom as storage gained steam. At the start, IT organizations were making a transition to adopting new technology and delivery models, which lended itself to NetApp’s strategy of delivering innovative, flash-accelerated solutions, bringing many customers into the fold. NetApp provided versatility and efficiency, as well as ubiquity through its solution (i.e., Data ONTAP), allowing customers to build solutions specific to their needs.
So what’s happening to this tech giant, which was once a premier tech company during the .com era, and now a mere shadow of itself?
Financial results
In Q4, the Sunnyvale-based company experienced a 32% drop in profits to $134.9 million, translated to 43 cents a share. This is a plummet from $197 million and 59 cents a share, recorded the same time last year. In addition, the company’s net revenue fell nearly 7% to $1.54 billion, resulting in a stock drop of 9% in after-hours trading.
This has come as somewhat of a surprise, following a relatively successful 2014 (fiscal year 2015), with stock price rising more than 25% since end of fiscal 2014. They drove hard with the new product line-up, looking like a hail Mary to revive the strength in the storage software market, as well as NetApp’s presence in the fast-growing converged infrastructure and flash array market.
The last time NetApp announced layoffs was March 2014, sharing that they would be cutting 600 jobs, about 5% of their workforce (sounds like deja vu, right?). Last time, the company was grappling with slowing sales growth, caused in part by a decrease in demand from US federal agencies. This followed a revenue growth slowdown to 1.6% in fiscal 2013, compared with an average 22% gain the previous three years.
The company blames the shortfall on a decrease in federal information technology spending, weighing down total revenue. The hope was to cut jobs to refocus on strategic initiatives and streamline in order to become leaner in a constrained IT environment. In other words, it has to retool amid a slowing market and tech shifts. We’ve seen this with IBM shedding workers in its hardware unit, unloading its x86 server business to Lenovo.
It's happened before
Wish we could say this was the only other time they cut the fat, but in 2013, NetApp cut 900 jobs after it came under pressure from activist investor Elliott Management Corp., the hedge fund led by billionaire Paul Singer, which has a significant stake in the company.
The data-storage company was pressured by the activist investor to boost shareholder value, aiming to cut jobs in order to return cash through stock buybacks and dividends. This increased the stock-repurchase program by $1.6 billion, bringing the total to $3 billion over three years. Elliott Management Corp. took a significant stake in NetApp and pressed the company to change its board and increase shareholder value. Results during this time (Q2, 2013), were indicative of the company’s challenges with sales between $1.48 billion to $1.58 billion, just shy of the $1.60 billion analysts were predicting. Profit also fell 3 cents below the average estimates of analysts.
One of the most recent changes for NetApp has been their major product-line overhaul, resulting in a major halt of service upgrades from some of their biggest clients, waiting for NetApp to introduce the features they’ve been demanding. Perhaps this decision factored in rivals, who may be more agile and speedy to adopt the features and products their clients needed. For example, rival EMC Corp, and newer and cheaper flash-based storage tech vendors such as Nimble Storage and Pure Storage.
The cloud revolution
Cloud-based storage can be blamed, according to the company, claiming sales of all data storage companies have been adversely affected as customers make the move toward cloud storage, away from buying and operating their own hardware. And it’s true, in recent years, the storage hardware business has slowed, as evidenced by an industry wide decline in external storage systems revenues (as reported by IDC).
Although, NetApp was one of the few large storage system vendors in 2014 to have maintained its market share through the first three quarters at 13.7%. NetApp even released some of their own cloud-related products to combat the ominous growth of cloud storage, such as NetApp Private Storage for Amazon Web Services and for Microsoft Azure. While NetApp is positioned to benefit as businesses store and manage more data on the Web, the company’s technology just hasn’t kept up with that of larger rivals.
While NetApp executives believe the company should be back on track next year following the staff cuts and uptake on its new product line in the second half of the fiscal year, we’re not as optimistic. After several unsteady years of growth and a seemingly, slow-as-molasses moving product pipeline, NetApp may just not be agile enough to keep up in the age of cloud-based storage.
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