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Network Appliance benefits from data storage demand

In the past five months, investors have been seduced by the maker of high-speed data storage server computers, sending its stock up from about $31 in November to its Friday closing price of $238.66.

Who says storage isn't sexy?

In the past five months, investors have been seduced by Network Appliance, a maker of high-speed data storage server computers, sending its stock up from about $31 in November to its Friday closing price of $238.66. Analysts point to the rise of the Internet as one of the key features that have brought the company to its current $36 billion market capitalization.

In midday trading today, Network Appliance dropped $7, or 3 percent, to $229.88.

Network Appliance chart
"We believe that NetApp's products address some of the most relevant issues in technology today--the explosive growth of data, the relentless increase in Internet usage, and the constant demand for higher bandwidth," Goldman Sachs analyst Laura Conigliaro wrote in a research report.

Data storage once was a drab, although necessary, feature of a server. Now buyers often consider purchasing storage hardware independently as corporations separate where information is stored from the servers that tap into that information. The approach allows more servers to share the same data--and allows companies making specialized storage devices to win a higher profile.

The future for Network Appliance looks rosy. Hardware from the once-obscure company competes against file server hardware from powerhouse Sun Microsystems, but Sun "has an extremely full plate and should not pose a large problem," Conigliaro said. Network Appliance's nearest competitor, Auspex, has less than half the market share. And Yahoo last week tapped Network Appliance products to house several services it offers to the public, including email, calendars, My Yahoo personalized portals and GeoCities home pages.

The company's Achilles' heel is one most companies would kill for: being able to meet demand, develop new products and expand quickly enough.

"They're moving quickly, but there are a lot of challenges," said Aberdeen Group analyst David Hill. "That's a good problem to suffer from."

Indeed, in the past five quarters, the company's revenue growth has been 70 percent, 80 percent, 80 percent, 90 percent and 100 percent. And Network Appliance has some ambitious new products in the pipeline that will quadruple storage capacity in high-end models and reintroduce Intel chips to the company's portfolio.

This situation has given Network Appliance chief executive Dan Warmenhoven the chutzpah to dismiss EMC, a high-end storage company that Network Appliance once courted. In Network Appliance's early days, the company was barely known, and it believed an alliance with EMC could be mutually beneficial.

"They were so arrogant; I stopped those discussions about three years ago," Warmenhoven said. "They could not believe any NetApp solution would be meaningful."

Network Appliance
at a glance

HQ: Sunnyvale, CA  
CEO: Daniel Warmenhoven  
Chairman: Donald Valentine  
Employees: 816  
Annual sales: $289.4 Million  
Annual income: $35.6 Million  
Market cap: $35.2 Billion  
Date of IPO: Nov 1995  
Ticker: NTAP  
Exchange: Nasdaq

Network Appliance quotes
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Bloomberg (3/13/2000)
Now EMC has its own competing product, Celerra, and Warmenhoven said EMC is a contender in about 30 percent of the accounts for which Network Appliance bids.

"Network Appliance is moving upstream to higher-capacity points and competing with EMC on the low end of their target market, which is corporate database applications," BancBoston Robertson Stephens analyst Dane Lewis said in a recent report.

Chances are, however, that there's room for both with the burgeoning data storage demands imposed by the Internet, e-commerce and the spread of computers in general. Though Network Appliance is encroaching on some of EMC's core market, EMC products do much better housing databases, analysts say. Network Appliance products do best storing lots of individual files, also in demand for Web pages, email attachments, MP3 files and other documents.

Network Appliance filers are essentially a high-speed front end to large numbers of disk drives. Today's filers can hold as much as 1.5 terabytes of storage; by the end of the year, 168-drive machines will be able to hold 6 terabytes, Warmenhoven said. NetApp uses primarily Seagate but also IBM hard drives, he added. The high-end products--the sweet spot of the product line, according to Aberdeen's Hill--cost more than $100,000.

Network Appliance's use of Intel chips again won't be welcome news at Alpha Processor, which sells Network Appliance its current Alpha chips. The Alphas, designed by Compaq and manufactured by Samsung, were selected not so much because of their good internal performance but because data can be transferred into and out of the chips more quickly than with Intel chips, Warmenhoven said.

"Alpha is a screaming machine. But I have a bias toward Intel, as long as you can hit the performance points," he said. With new supporting chips from ServerWorks, Intel-based systems will have sufficient performance.

One advantage of Network Appliance filers is that they can talk to both Unix and Windows machines. About 40 percent of the company's products are used in a mixed computer environment that requires that bilingual ability, Warmenhoven said.

Network Appliance also is selling more of its "caching" servers, which speed Net access by strategically stashing information closer to the people who need it. Caching servers account for about 10 percent of the company's revenue. It is rejiggering those systems to deliver streams of audio and video information.

Though caching servers initially were purchased by Internet service providers, corporate customers are now buying them as well, he said. Merrill Lynch has 40 or 50 such servers in use around the world, and other customers include Ford Motor, General Motors, DaimlerChrysler, Nokia, Motorola and Texas Instruments.

"Network Appliance happens to be in the right place at the right time with the right product set," Hill said.

For Warmenhoven, watching the stock climb has been gratifying. "I wouldn't say we felt we've been overlooked, but I think we've always felt we were a curiosity to a degree," he said.