NetApp's Purchase of Engenio: One Year On

Part One: Scorecard & Logic

As NetApp's 'Array Product Group' (or APG, the artist formerly mainly known as Engenio!) made its first major program release today since the purchase of the division, I thought it would be interesting to take a look at the experience to date, since it's about a year since this happened. For the anally retentive, the announcement that NetApp was to buy the Engenio external storage systems business of LSI was made on 3/9/11, and the purchase was completed on 5/9/12. Since then the business unit seems to have been doing well for NetApp. In earnings calls it is referred to as 'our E-Series OEM' business and in August of last year (after its first full quarter at NetApp) the company declared it "well above plan at $157 million"; the following quarter was "stellar....well ahead of plan, with 11% sequential growth"; and just this February NetApp said that the "business remains very robust, and after three quarters, we are now at $509 million in revenue, against the $600 million full year target we communicated at the time of the acquisition." So, revenue has accelerated somewhat since the first quarter of ownership; more significant perhaps is that the all-cash deal went down for $480M, meaning that - even guessing conservatively - NetApp is likely to clear $200M more revenue in its first full year than it spent on the business.

This doesn't read like most current-day acquisitions. So, what went right? I had a conversation last week with Joel Reich, the Vice President of APG, to try to get a few clues.* Since this is a blog and not a book - and since Joel is an entertaining interviewee - I'm splitting this into two parts; one today as APG makes its announcements that focus on the story so far, and part two on May 9th (the actual one year anniversary) that has more on lessons learned and a look forwards.

I first asked Joel about whether what NetApp had purchased last year was what 'due diligence' had indicated. "I wouldn't say there were any really bad surprises. Honestly, though, when you consider that we acquired the company for such an attractive price - about 60-70% of a full year sales - you won't be surprised to know that we expected to find not just one closet full of skeletons, but a whole mini warehouse full of skeletons! These could be things like road maps that were in turmoil or key technical people who had left. You often can expect some dirty little secrets that you could never find in due diligence. But we didn't find any of those. For sure, there were some things that, if we had owned the business, we would have invested in more aggressively.... long term things like test automation and investing in infrastructure, things I call deferred maintenance. But, equally there was a lot of value in terms of the road map and the skill sets of the employees and the loyalty of the customer base. So, we, if anything, had a lot of positive surprises."

Despite the seemingly attractive purchase price there were plenty of commentators at the time that wondered about the motivation for the purchase and whether NetApp had overpaid. Although the OEM model has some natural 'stickiness,' business is not guaranteed. On that front, NetApp has so far retained all its customers, and even added a couple; there are over two dozen active OEMs. As to the logic of the purchase, Joel was straightforward: "I think that the issue behind the valuation was that people couldn't see how this business could grow. It's not what the value is on the day you buy it, it's what it could turn into. So, for example, we have very little opportunity to play as NetApp branded in a server-led sale...we don't see those customers, they don't think of us. There's no way to succeed unless you are a part of the selling motion of the server or application appliance; you might as well just take that investment and throw it into the fireplace, because sales of just a few thousand dollars at a time don't fit our regular model. So with Engenio we saw two things: first, we saw that we could get our technology into the market in volume to a fast-growing space - the entry level - where we couldn't otherwise do it ourselves. And, second, we saw the big data bandwidth applications, and frankly - although our traditional business can go there to some degree- there are all sorts of interesting dynamics in trying to sell the value of that into spaces where the data management is coming from someplace else. So, the difference in our view of the value of the Engenio business was around the fact that we were looking for a way to supplement the sweet-spot product that we have with ONTAP and the purchase represented a technology that was, and is, completely complementary both in terms of the way we wanted to take it forward, and in terms of being able to address incremental business opportunities."

Before closing out this blog entry, it's worth pointing out that the software extensions that APG is announcing today to its SANtricity product, show how 'entry level' is a term that no longer means 'feature-poor,' as it used to a few years ago. The E-Series itself was already no slouch in terms of performance and modular capacity/density; but now it is getting some functional pizzazz as well - there's thin provisioning, enhanced snapshots and VAAI, while the new acronym that's likely to get the lion's share of attention is DDP. It stands for Dynamic Disk Pools and is a patent-pending tool that dynamically spreads data, sparing, and parity across an entire pool of drives. The two main benefits of this are more consistent performance, plus less impact/faster recovery after a drive failure. In the second part of my interview with Joel, we'll cover some thoughts on how APG interacts with NetApp and the market going forward. After all, 'completely complementary' also means that there is a balancing act to be managed within NetApp and across its divisions: the way this has played out so far make for an interesting read: coming - as they say - to a screen near you, on May 9th!

*I spoke to Joel on 4/16/12; the transcribed comments have been edited for flow, but are otherwise unaltered. You can read Mark's other blog entries at The Business of Storage.

Topics: Storage IT Infrastructure