Updated:

Shareholders in data storage company NetApp Inc. were left reeling today after the company reported revenue and guidance that fell short of Wall Street’s expectations.

The company, which sells data storage systems and software for hybrid cloud information technology environments, reported a third-quarter profit before certain costs such as stock compensation of $1.20 per share. Analysts were expecting $1.15 per share.

But NetApp failed to meet expectations on revenue. Sales came in at $1.56 billion, which was below the consensus $1.6 billion estimate. Furthermore, its guidance for the fourth quarter offered little encouragement. The company said it expects to see revenue of between $1.59 billion and $1.69 billion over the next three months, again lower than Wall Street’s estimate of $1.7 billion.

NetApp’s stock promptly tumbled by more than 6 percent in the after-hours trading session as some shareholders bailed out. Update: Shares closed down about 5.5 percent Thursday.

The main concern for NetApp’s investors is that the company seems to be drifting in the wrong direction in a storage market that grew by more than 19 percent overall in the last quarter, said analyst Steve McDowell of Moor Insights & Strategy.

“NetApp’s product revenue growth is down to about 9 percent year-over-year for the quarter, with guidance drifting toward 5 percent,” McDowell said. “It is growing at less than the market.”

NetApp’s problems have nothing to do with its technology, which McDowell said was “very impressive.” Rather, the company is being outsold by its more broadly focused competitors, which include giants such as Dell Technologies Inc., Hewlett-Packard Enterprise Co. and IBM Corp.

“Dell EMC, HPE and even IBM are leveraging total solution sales to bring storage into a deal, and that’s working well for them,” McDowell explained. “NetApp doesn’t have a server business to leverage, which naturally limits its reach.”

NetApp has tried to address this issue by partnering with Lenovo Group Ltd., which is one of the biggest server makers around, especially in China. But that relationship is still embryonic, so it probably won’t bear much fruit for several quarters to come, McDowell said.

In a conference call, NetApp Chief Executive Officer George Kurian said the disappointing revenue growth was the result of “macroeconomic uncertainty” thanks in part to the federal government shutdown last month.

“We saw a slowdown in purchases by our largest customers in January,” Kurian said. “We saw economic uncertainty. [But] we executed well on the variables we control.”

NetApp has been trying to transition from its dependence on hardware sales to newer, software-defined network and storage products. Its Data Fabric offering, for instance, is designed to simplify and integrate data management across cloud and on-premises environments.

In that respect, at least, NetApp is performing well, Kurian said. During the call, he highlighted what he said were strong sales of the company’s hybrid and cloud storage software products, as well as its all-flash memory arrays. He said the company’s decision to extend its storage software to the public cloud, notably with Google LLC and Microsoft Corp., was a key selling point for its customers.

Analyst Holger Mueller of Constellation Research Inc. said he was encouraged by NetApp’s portfolio of software-defined storage products but said it needs to revitalize these offerings and demonstrate higher growth rates than what its showed so far. “NetApp is able to do that as its products are strong, but it comes down to execution on the go-to-market side,” Mueller said.

Unfortunately for NetApp, that’s not the only challenge it faces. It also needs to step up sales in the all-flash department, but that won’t be an easy task either.

“I suspect that much of NetApp’s growth in the all-flash array market is simply selling to their existing base, who are long overdue a refresh,” said McDowell.

McDowell wasn’t the only analyst to raise concerns over NetApp’s prospects. Rob Enderle of the Enderle Group told SiliconANGLE that he’s pessimistic because the entire storage segment has become a bit of a loss leader, and that Dell, HPE and IBM have all managed to lock NetApp out of their accounts. Further, he said VMware Inc.’s vSAN, a hyperconverged software-defined storage product, was having an adverse impact on the need for storage systems in general because of its promise of eliminating storage administrators.

“NetApp isn’t able to change this dynamic and, I’m afraid, things are likely to continue to get worse for them as a result,” Enderle said. “They aren’t big or powerful enough, nor do I think they fully recognize the risk, to get that done.”

Photo: Stephen Foskett/Flickr