NetApp CEO sees growth in software, services

Maintenance and consulting services for customers who buy Network Appliance storage hardware account for about 12 percent of revenue and are "the fastest growing part of our business," Warmenhoven said in an interview on Friday at the company's headquarters in Sunnyvale, California.

In software used to manage Network Appliance's hardware, "we think we can outgrow" the industry average of about five percent to six percent annual growth, Warmenhoven added.

The CEO said NetApp, as the company is commonly known, is focusing on services and software partly because profit margins in those businesses are much greater than in data-storage hardware. NetApp's profit margins on software sales are about 100 percent, he said.

The company competes with market leader EMC, Hewlett-Packard, International Business Machines and Hitachi Data Systems, the storage business of Japan's Hitachi.

Software now accounts for about 40 percent of NetApp's revenue, up from about 30 percent three to four years ago, Warmenhoven said. Technology services make up 12 percent of revenue, up from about 8 percent.

ORDER SLUMP

Warmenhoven declined to comment on whether orders from customers had recovered to normal levels after an abrupt decline in April led NetApp to forecast a six percent to seven percent drop in revenue from the fiscal fourth quarter to the current first quarter.

NetApp stock is down about 22 percent since the 23 May announcement, which surprised investors accustomed to better-than-expected earnings reports from NetApp.

Before 23 May, the shares had been up almost 50 percent since August, 2005.

Warmenhoven said in the interview that NetApp traced the drop-off in orders to 22 of its largest customers, mainly big US-based companies that failed to sign contracts before the quarter ended.

Orders from government customers and large companies headquartered outside the United States remained strong in the fourth quarter, he added.

"It's the top accounts," Warmenhoven said. "It's across a lot of different verticals," or industries, including financial services and energy. "It doesn't make a lot of sense. I've never seen anything like this."

The company has cut back on hiring following the order decline, said Warmenhoven, adding about 200 employees in the current quarter compared with 400 in the fourth fiscal quarter. Still, Warmenhoven said he is optimistic about the NetApp's prospects.

"We don't think the macro trends will change," he said. "Those trends are absolutely immutable. We believe we have enormous opportunity."

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