Network Appliance, Inc.
Network Appliance, Inc.
Public Company Incorporated: 1992
Sales: $892.1 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: NTAP
NAIC: 334112 Computer Storage Device Manufacturing; 511210 Software Publishers
Network Appliance, Inc. (NetApp) is one of the largest producers and marketers of data storage systems. NetApp’s storage filers attach to networks, enabling the company’s corporate clientele to store and share data among employees. The company operates roughly 100 direct sales offices, which sell NetApp’s storage devices throughout the world. NetApp’s customers include Citicorp Securities, Lockheed, Merrill Lynch, Oracle, Yahoo!, and Texas Instruments.
NetApp was founded in April 1992, its organization the work of Michael Malcolm, David Hitz, and James Lau. Both Lau and Hitz were working for a file server manufacturer named Auspex Corporation before they founded NetApp. Lau, who received a bachelor’s degree in computer science and mathematics from the University of California, Berkeley, and a master’s degree in computer engineering from Stanford University, served as Auspex’ director of software development. Hitz held the position of senior engineer at Auspex, taking responsibility for file systems and microkernel design. Before earning a bachelor’s degree in computer science from Princeton University, Hitz labored in a field distinctly removed from the computer industry. Hitz worked as a cowboy, an occupation that gave him, according to NetApp’s web site, “valuable management experience by herding, branding, and castrating cattle.”
The business objective pursued by the three cofounders cast NetApp as an industry pioneer. Malcolm, Hitz, and Lau started with the goal of simplifying the data storage industry. Supported by $12.8 million in private and venture capital funding, the trio separated the storage and management components from the traditional computer server and developed a separate, non-programmable server. Daniel Warmenhoven, who led the company during its years of frenetic growth during the late 1990s, explained the achievement, framing NetApp’s approach with a simple analogy. In an August 2001 interview with Communications News, Warmenhoven stated, “We built a data refrigerator. Open the door. Take something out. Close the door. It’s a simple, dedicated, data appliance.”
NetApp’s first network appliance product line, shipped in June 1993, set the company apart from industry competitors. The product line consisted of network data storage appliances or “filers,” devices that were developed to contend with specific market requirements of data-intensive network environments. Unlike other file servers on the market, NetApp’s devices were not burdened by general purpose operating systems or file system overhead. The devices performed one task, and they executed the task well. NetApp’s proprietary software architecture enabled the company to use industry standard hardware rather than specialized hardware, providing its customers—a corporate clientele—with a universal and versatile solution to storing and retrieving their data. Said Hitz, in an August 22, 1998 interview with the San Francisco Chronicle, “We built a box to do just one thing, and it goes a hell of a lot faster than a general purpose server.”
NetApp’s first years in business were fraught with the typical problems experienced by a start-up company. NetApp met with a certain amount of skepticism during its formative years in the corporate storage business—often the reaction to an industry pioneer. The approach was novel, and corporate customers, particularly the largest, “blue-chip” companies, were wary of entrusting their all-important data to a new type of storage device developed and marketed by a new company. Sales were slow initially and overhead expenses were high, resulting in several years of hefty losses. Further, the company’s growth was held in check by the nascence of corporate networking and the Internet. Toward the end of the 1990s, the use of the Internet and networking as means to share information mushroomed, fueling the growth of the corporate storage industry, but as NetApp set out in 1992, the use of the Internet and corporate networking was far from widespread.
Considering the obstacles NetApp faced during its formative years, it was not surprising that its annual financial totals were weak. At the end of 1993, six months after NetApp shipped its first products, the company recorded an $836,000 loss. NetApp’s fiscal year ended in April, which meant no revenues were collected for the year because the company did not ship its first products until June 1993. In fiscal 1994, the company registered $2.2 million in sales, but posted a loss of $1.8 million. NetApp’s net loss increased to $4.7 million in 1995, despite a substantial increase in revenues to $14.7 million. From there, the company’s financial health decidedly improved, as NetApp quickly became one of the fastest growing companies in the United States.
Arrival of Warmenhoven: 1994
NetApp’s dramatic turnaround was presided over by a new leader who arrived in 1994. Daniel Warmenhoven, like David Hitz, was a graduate of Princeton University, where he earned a bachelor’s of science degree in electrical engineering in 1972. Warmenhoven spent 13 years working for IBM in the company’s communications products division. He left IBM to work for Hewlett-Packard Co., where he held several senior management positions, eventually earning promotion to the post of general manager of the information networks group. After spending four years at Hewlett-Packard, Warmenhoven was appointed president of Network Equipment Technologies (NET), a telecommunications manufacturer. He joined NET in 1989 and resigned as the company’s president, chief executive officer, and chairman on the first day of the year in 1994, citing a “disagreement of strategies” as the reason for his departure, according to an August 2001 interview he gave to Communications News. Meanwhile, at NetApp, there was a need for a new leader. The company was attempting to complete a second round of financing, but one stipulation of the financing was that the company replace Michael Malcolm as chief executive officer. Malcolm stepped down and Warmenhoven took his place, joining NetApp in October 1994.
Under Warmenhoven’s guidance, the NetApp enterprise began to flower. He took the company public in November 1995, raising $36 million in the initial public offering (IPO). Shortly before the IPO, the company adopted a new marketing strategy, one that was credited with contributing to the company’s dizzying rise during the latter half of the 1990s. Initially, NetApp marketed its products almost exclusively through indirect sales channels. In fiscal 1995, at roughly the same time Warmenhoven arrived at the company, NetApp began developing a direct sales network. The company rapidly built up a direct sales force and began opening selling locations, which frequently were one- or two-person sales outlets. By 1996, the company had established a presence stretching from coast to coast, operating sales offices in California, Colorado, Massachusetts, Maryland, Michigan, Minnesota, New Jersey, New York, Oregon, Texas, Virginia, and in the District of Columbia. Internationally, the company continued to rely primarily on indirect sales, operating offices in London and Paris.
Rapid Growth During the Late 1990s
Armed with a new marketing strategy and supported by a growing corporate storage industry in which networking and the Internet were playing increasingly important roles, NetApp enjoyed robust growth. In 1996, the company posted its first annual profit, recording $6.6 million in net income. Sales shot upward as well, jumping from the $14.7 million generated in 1995 to $46.6 million. The financial growth recorded in 1996 was the beginning of NetApp’s impressive transformation into one of the most successful computer companies in the nation. Following the IPO, the company racked up 20 consecutive fiscal quarters of revenue growth in excess of 70 percent. Between 1995 and 1998, NetApp’s annual revenue growth eclipsed 90 percent, while the value of its stock nearly quadrupled between 1996 and 1998.
As the company’s financial growth suggested, its file servers were becoming fixtures in the corporate workplace. NetApp’s storage devices, which were connected directly to a network on the Internet, provided fast, easy access to computerized information in a variety of applications. Co workers were able to share a word-processing document saved to a server. Oil companies used large NetApp servers to store seismic data. Internet service providers and web sites such as Yahoo used NetApp systems to store e-mail messages generated by their customers. A NetApp server was used to store all the special effects for the film Titanic. As the initial skepticism of NetApp’s novel approach to storage waned, with wariness giving way to confidence, NetApp’s roster of customers began to include some of the most well known names in the corporate world. By 1998, NetApp’s clientele included more than 100 large corporations, distinguished, “blue-chip” concerns such as Boeing, DuPont, Procter & Gamble, Citicorp, NationsBank, and Walt Disney. The company ended the year with revenue above $166 million.
A decade ago, Network Appliance revolutionized information storage by pioneering storage appliances: flexible, scalable systems focused on storing and serving information. This unique approach has established Network Appliance as the market-leading innovator defining the evolution of storage.
By the end of the 1990s, the corporate storage industry was recording explosive growth, providing fertile ground for NetApp’s meteoric rise. Corporate storage needs were increasing by at least 70 percent annually, providing NetApp with a wealth of new business opportunities. To take advantage of the new opportunities, the company completed a second stock offering in April 1999, raising $123 million. In mid-1999, NetApp announced it was moving out of its headquarters in Santa Clara, California, opting for larger quarters to accommodate its growth. In June 1999, the company moved into the first of three buildings in Sunnyvale, California. Once all three buildings were occupied, the NetApp complex was expected to encompass 360,000 square feet. The latter half of the 1990s also included the company’s concerted expansion overseas. After opening offices in Europe between 1996 and 1997, NetApp entered the Far East in 1998. Between 1999 and 2000, the company began establishing a presence in Latin America.
As NetApp entered the 21st century, there were numerous signs that its future in the data storage industry would include years of impressive growth. One promising development was the changing composition of the company’s customers. Although NetApp could count scores of large, “blue-chip” corporations as customers during the late 1990s, the business they gave to NetApp accounted for less than a third of the company’s sales volume. By 2002, a discernible shift in the source of the company’s business had occurred, with 60 percent of annual sales coming from customers in financial services, the federal government, telecommunications, energy, and manufacturing. NetApp’s customers included ExxonMobil, General Electric, Merrill Lynch, General Motors, and Ford.
Further optimism for the future was justified by growth projections for the corporate storage industry and by the increasing validity of NetApp’s technological approach within the industry. Several of the company’s larger rivals, such as EMC Corporation, offered large, complex storage boxes that sold for as much as $1 million. In contrast, NetApp’s smaller filers sold for as little as $15,000, which could be cobbled together to form a system comprising as many as thousands of the company’s devices. Based on the financial well-being of NetApp and EMC, NetApp’s strategy appeared to enjoy greater market acceptance. According to estimates made by Merrill Lynch, NetApp was expected to exceed $80 million in net income in 2002 on 11 percent growth in revenue to nearly $900 million. EMC, on the other hand, was expected to report a net loss of $188 million for the year, along with a 32 percent drop in sales to $5.2 billion.
Looking ahead from 2002, prognostications were sanguine, an attitude projected by Warmenhoven. By 2006, according to one research firm, the overall storage market was expected to represent $24 billion worth of business, roughly the same level that existed in 2001. During the intervening five years, however, the networked storage facet of the industry was expected to increase from one-third to two-thirds of the market. Such growth translated into annual sales increases of 17 percent within the networked storage niche. Based on these projections, Warmenhoven foresaw NetApp wresting market share away from larger competitors during the five-year period. His declaration, as quoted in the November 25, 2002 issue of Forbes, conveyed the confidence permeating NetApp’s Sunnyvale headquarters. In reference to rivals such as EMC, Warmenhoven vowed, “We will push them back in a corner.”
Network Appliance Ltd.; (U.K.); Network Appliance SARL (France); Network Appliance Sri. (Italy); Network Appliance GmbH (Germany); Network Appliance FSC Incorporated; Network Appliance KK (Japan); Network Appliance Ltd. (Ireland); Network Appliance GmbH (Switzerland); Network Appliance BV (Netherlands); Network Appliance GesmbH (Austria); Network Appliance SL (Spain); Network Appliance Global Ltd. (Bermuda); Network Appliance Denmark ApS; Network Appliance (Australia) Pty Ltd.; Network Appliance Mexico S de RL de CV; Network Appliance Singapore Private Ltd.; Network Appliance (Malaysia) Sdn Bhd; Network Appliance Systems (India) Private Ltd.; Network Appliance Argentina; Network Appliance (Brasil) Ltda.; Network Appliance Canada Ltd.; Network Appliance (Belgium) BVBA; Network Appliance Israel Ltd.; Network Appliance Poland Sp. z.o.o.; Network Appliance Federal Systems, Inc.; Network Appliance South Africa (Pty); Limited Network Appliance Sweden AB.
EMC Corporation; Hewlett-Packard Company; International Business Machines Corporation; Hitachi Data Systems Corporation.
- Network Appliance is founded.
- The company ships its first products in June.
- Daniel Warmenhoven is appointed chief executive officer.
- Network Appliance completes its initial public offering of stock.
- Network Appliance relocates from Santa Clara to Sunnyvale, California.
Bruzzese, Stephanie, “The Storage Wars Heat Up,” PC World, March 2001, p. 162.
“Daniel J. Warmenhoven,” Business Week, January 8, 2001, p. 77.
Einstein, David, “Doing One Thing Well,” San Francisco Chronicle, August 22, 1998, p. D1.
Graebner, Lynn, “Network Appliance Will Move to New Base,” Business Journal, May 7, 1999, p. 7.
Lashinsky, Adam, “Gimme Storage: Three Ways to Play the Data Hardware Sector,” Fortune, July 10, 2000, p. 246.
Lyons, Daniel, “Bang for the Buck,” Forbes, November 25, 2002, p. 221.
Mitchell, Robert L., “Storage Appliances: Not All Plug and Play,” Computerworld, March 4, 2002, p. 41.
“NetApp Reports a Profit,” Client Server News, November 18, 2002, P.3.
Rogoski, Richard R., “Serving Up Storage Solutions,” Communications News, August 2001, p. 22.
—Jeffrey L. Covell