Updated:

Data storage company NetApp Inc. gave investors a fright today after saying its first-quarter and fiscal 2020 revenue will fall well short of what it had originally forecast.

The company, which sells data storage systems and software for hybrid cloud information technology environments, said in its revised outlook that its first-quarter revenue is likely to come in at just $1.22 billion to $1.24 billion. That’s way below its earlier forecast of revenue in the range of $1.31 billion to $1.46 billion.

The revised figures would represent a 17% decline in NetApp’s first-quarter revenue from a year ago. That number includes enterprise software license agreements that didn’t repeat. Without those agreements, sales would be down 12%, NetApp said.

The company also said it expects its first-quarter earnings before certain costs such as stock compensation to come in at 55 to 60 cents per share. Previously, it had forecast earnings of between 78 and 86 cents per share. Wall Street had originally forecast 83 cents per share on revenue of $1.39 billion.

As for its full-year fiscal 2020 forecast, NetApp revised it down by 5% to 10% from the previous year. Three months ago, it had forecast single-digit revenue growth for the full year.

Shellshocked investors fell over themselves scrambling for an exit, with a huge selloff, causing its stock to plummet 17% in the after-hours trading session. Update: On Friday, shares fell more than 20%.

NetApp didn’t actually give any specific reason for the revised guidance, but the company has notably struggled in recent months with successive bad quarters that came in below expectations. In its fourth-quarter 2019 earnings report in May for example, it posted earnings of $1.22 per share on revenue of $1.59 billion, some way below the earnings per share of $1.26 on revenue of $1.65 billion that Wall Street had forecast.

Moor Insights & Strategy analyst Steve McDowell told SiliconANGLE that one of NetApp’s problems is that it’s struggling to find new customers for its products. He said its success in the past was largely driven by its customer base transitioning to all-flash storage systems.

“That transition is now largely complete, which finds NetApp now struggling to expand its market beyond its existing legacy customer base,” McDowell said. “That base now appears to be shrinking, indicated by NetApp’s statement about lost license renewals year-over-year, coupled with its flat market share growth in the latest reported quarter.”

NetApp is also struggling to compete with larger players such as Dell EMC and Hewlett-Packard Enterprise Co. in the mainstream storage business, McDowell said. He explained that the storage market is fast becoming all about “full solution stacks and software-defined capabilities” rather than discrete components.

“Dell EMC and HPE are both executing very well in selling storage coupled with servers, software, and services. It’s a solution sell, which is what IT is buying,” he said. “NetApp simply hasn’t figured out how to compete in this paradigm.”

In a statement today, NetApp Chief Executive Officer George Kurian (pictured) failed to mention that side of the company’s business, instead talking up its ongoing transition to a hybrid and multicloud play as its future saving grace.

“Our customer conversations indicate that our hybrid multicloud portfolio of solutions is the right one,” Kurian said. “We believe we can return to growth over time by prudently reallocating investments to expand sales coverage and accelerate our participation in the growing private cloud and cloud data services markets.”

McDowell said Kurian’s comments were telling, as hybrid and multicloud are a good bet for the company since the market is without any dominant players at this point. That means there’s an opportunity for NetApp to trade on its legacy installed base to gain some traction, he said.

“NetApp is in no danger of fading away,” he said. “They generate $4 billion a year, have a compelling software deal with Microsoft Azure, and indications are that its joint-venture with Lenovo in China is starting to bear fruit. But the company is in a tough spot, and Kurian is making the only moves he can really make.”

Analyst Holger Mueller of Constellation Research Inc. said the main problem with NetApp was not its technology, but rather its ability to manage expectations during this transitional period.

“NetApp got caught here, not being able to grow its new business faster than its existing business has shrunk, hence the warning,” Mueller said. “Of particular interest is the disappearance of the enterprise on-premises storage deals that were driven by partner and resale agreements, which are responsible for the bulk of the miss. Going forward, now it is all about NetApp managing expectations better.”

Photo: Stephen Foskett/Flickr