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Analysts: Storage is on the move

The storage industry is gathering strength, driven by factors such as growing amounts of data and lower prices for networked storage products, according to a new report.

The storage industry is gathering strength, analysts at RBC Capital Markets said Wednesday.

The investment firm said in a report that better-than-expected summer trends appear to be in the works for the industry.

"We continue to believe several main factors are driving this strength," analysts Robert Montague, Steve Denegri, Thomas Curlin and Brian Freed said in the report. Those factors include "the overall growth in the generation of stored data, the maturing and cost reductions of network storage offerings, and the strong drive to reduce total data center costs through server and storage consolidation."

In keeping with this bullish assessment, RBC upgraded shares of storage device companies EMC and Network Appliance Wednesday. RBC lifted ratings on both from "sector perform" to "outperform."

Network Appliance reported surprisingly strong earnings on Tuesday. For the quarter ended Aug. 1, the company's net income rose 67 percent to $27.1 million, or 8 cents per share, compared with net income of $16.2 million, or 5 cents per share, for the same period in 2002. Analysts polled by research firm First Call expected, on average, for Network Appliance to pull in earnings of 7 cents per share.

"The company reported another excellent quarter and offered accelerating guidance for the forward quarter," RBC said of Network Appliance.

Network Appliance also got an approving nod Wednesday from investment firm Lazard Freres & Co., which upped its rating on the company's shares from "sell" to "hold."

Network Appliance sells network-attached storage (NAS) devices, which are projected to do well in coming years. Spending on NAS equipment, which is hard-disk storage attached to a network, slipped last year to $1.54 billion but should bounce back to $1.77 billion this year and jump to $3.17 billion in 2007, according to research firm IDC.

In the first quarter of 2003, the overall disk storage system market saw a year-over-year decline to $4.8 billion, according to IDC. IDC said that in the first quarter, for the first time, networked storage accounted for more revenue than storage directly attached to servers.

EMC makes NAS products as well as equipment used in storage area networks (SANs), which are systems of linked storage devices typically used by larger companies.

In the total networked storage market, which includes both NAS and SANs, EMC had the lead in the first quarter of 2003, with a 26.3 percent market share, according to IDC.

In upgrading EMC, RBC based its move partly on an expectation that the company's planned acquisition of Legato Systems would lead to higher software revenue. "Legato's backup business should improve with EMC's backing," RBC analysts wrote.