Enterprise storage companies are looking interesting again, as
strong first-quarter performance gave the sector a much-needed lift.
But the giants of storage are doing more than riding Texas coattails.
are set to unleash a barrage of new products, and in the process take aim at
$4 billion-plus storage business.
The stakes are enormous.
In 2004, worldwide revenue for disk storage was $22.2 billion, and software to manage storage functions added another $7.8 billion to the pie, according to market researcher IDC. And those numbers don't include substantial revenue generated by services, tape backup and optical storage devices.
Disk revenue will increase to $22.9 billion this year, just 3.2%. But that doesn't mean demand is slowing, says IDC analyst Brad Nisbet. "Aggressive pricing and the spread of new and cheaper high-capacity technologies are holding down revenue growth," he notes.
The math is stark: According to IDC, storage revenue will grow at a compounded annual rate of 3.1% over the next five years, while the demand for capacity grows by a compounded 45.6%. That means the brawl to grab slow-growing storage dollars will get even more intense than it already is.
Dell's quarter, though, proved that storage dollars are flowing, despite a noticeable slowdown in technology spending in the early part of the year. The company's storage revenue rose 49% to $400 million, while total revenue increased 16.5% to $13.4 billion.
An immediate beneficiary was EMC, which supplies many of the storage products that Dell then resells. Dell/EMC sales grew by 80% in the quarter, a jump that was not lost on Wall Street.
"The strong quarter in Dell/EMC sales gives us early confidence in EMC's second quarter," writes Daniel Renouard, an analyst with Robert W. Baird & Co., a firm that has an investment banking relationship with EMC.
Shortly before Dell's announcement last week, Goldman Sachs analyst Laura Conigliaro and Bank of America Securities analyst Keith Bachman made bullish comments about EMC and the storage market. "We believe that storage spending remains strong, despite a weaker economy," Bachman wrote. "EMC remains our top pick and we urge investors to revisit this story." Bank of America Securities has a recent investment banking relationship with EMC and IBM.
Conigliaro too called EMC "a top pick," saying the Hopkinton, Mass.-based company "continues to gain share through a well-defined channel program and competitors' missteps." Goldman has an investment banking relationship with IBM and EMC.
Renouard noted that pure-play storage vendors such as
also should benefit from the apparent uptick in storage.
It's about time, too. Shares of nearly all the major enterprise storage companies have taken an unmerciful drubbing this year. The best performer, Emulex, is even, while
are off 45% and 44%, respectively, and EMC is down 7%.
On Monday, H-P and EMC competed for attention with a series of new product announcements. If quantity is the criteria, H-P won hands down -- it launched a refresh of much of its storage product line.
Nancy Hurley, who follows storage for the Enterprise Strategy Group, a Milford, Mass.-based consultancy, said H-P's raft of announcements is designed to restore confidence in the company's storage business, whose poor performance helped end the reign of former CEO Carly Fiorina.
"It's their way of saying 'We're back,'" says Hurley. But are they back? "In terms of products, they are," Hurley says. "But they have to execute much better." Hurley says the company's sales force has, at least in the past, seemed unmotivated and untrained to sell storage products.
Merrill Lynch analyst Shebly Seyrafi says he expect the products to give H-P a much more competitive offering against EMC and
. He said that Emulex, Brocade and QLogic all sell significant amounts of storage products to H-P and are likely to gain strength as H-P regains momentum in the storage market.
EMC, meanwhile, announced a product called a storage router that makes it cheaper and easier to move stored data from one server to another. It also allows customers to pull data from storage arrays built by various vendors.
Virtualization, as the technology is called, has been far from pervasive: IBM, the acknowledged leader in the space, has won just 1,000 customers in two years but is expected to grow more strongly in the future.
Ron Riffe, strategist for IBM's storage group, said Big Blue is adding two customers a day. That may sound trivial but virtualization doesn't come cheap -- installations cost $100,000 or more, depending on how much related equipment is needed.
EMC, which is roughly two years behind IBM in virtualization, entered the fray with a "heavy duty product and certainly will give IBM and others a run for the money in very large enterprises," says Michael Kahn, a technology analyst with the Clipper Group.
Kahn says IBM's product is entrenched in the midtier market, while EMC appears to be aiming at the very high end. How the competition will play out is far from clear.
But it does appear that the storage market may be ready to leave its first-half doldrums behind.