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Data storage hardware spending declines, CIOs show caution

As CIOs decrease data storage hardware spending and vendors curb IT spending forecasts, the outlook for enterprise storage changes.

Enterprise data storage hardware spending saw an unusually sharp first calendar quarter decline. This, along with a Citigroup report that shows chief information officers' reluctance to spend on high-end storage systems suggests a larger downturn in IT spending may lie ahead.

Analysts are mixed on the verdict, saying the first calendar quarter of the year typically yields lower earnings results, but others say this could be the beginning of an IT spending shift within storage as customers spend more of their budgets on software, services and cheaper storage hardware.

In an era when customers are seeing an explosion of data growth, and new rules have forced them to spend money on systems to store data for decades to come, several vendors are smarting from their slower sales results and some have muted their forecasts.

  • Network Appliance Inc., in its May 23 conference call lowered its forecast for the first quarter of 2008 and expects revenue to decline sequentially by 6% to 7% from the fourth quarter.
  • Hitachi Ltd., the parent company of Hitachi Data Systems, has guided for only 1% growth in its storage business in the year ending March 2008.
  • IBM reported a decline of 2% year over year or more than 45% sequentially, according to estimates from financial services firm A.G. Edwards.
  • EMC reported a sequential revenue decline of 9% in its storage revenue during the first calendar quarter of 2007. EMC also reported a 2% year-over-year decline in its Symmetrix revenue.
  • Citigroup report reflects decline in data storage hardware spending

    Further evidence of data storage spending sluggishness came in a Citigroup research report released last month, which confirmed the slowdown, and projects a more permanent decline in major sub-sectors within storage including disk, tape and storage networking gear.

    Citigroup interviewed 200 CIOs at Fortune 1000 corporations, and among the findings were:

    In disk-based storage, 32% said they planned to increase spending plans while 17% expect declines and 52% view spending as flat. This compares to 35% up, 3% down and 63% flat in the prior quarter and 40%, 20% and 44% respectively in the year-ago period, the report said.

    The growth is in software followed by services followed by hardware, in that order.
    Joe Tucci

    In the tape market 29% of those surveyed said they had increased spending plans (vs. 32% Q/Q and 34% Y/Y). This marks the first time tape has fallen below 30%, the report said.

    In storage networking gear (adapters and switches) similar sentiments were expressed with 33% of respondents expecting increases in spending (vs. 42% Q/Q and 38% Y/Y) compared to 17% expecting declines (vs. 3% Q/Q and 15% Y/Y) and 51% expecting flat spending (vs. 54% Q/Q and 47% Y/Y).

    The report concluded that: "The percentage of respondents anticipating declines in spending increased while those expecting increases in spending were down across all categories versus the CQ406 survey. Storage decision makers are "coming off the fence" and "landing on the more cautionary side."

    Analysts see data storage hardware spending shifts

    Brad Nisbet, an analyst at IDC, has been watching the trend carefully and hopes there will be a revival of IT spending on high-end storage systems in the second half of the year.

    "What we've seen vendors indicate is that there seems to be a slowdown in bookings for the first half of the year. The question for me is whether this is a statement of the overall storage market or is this confined to spending on disk storage systems hardware only," said Nisbet. "I'm confident that there will be a pick up in spending in hardware, but what we might be seeing is a lull in that spending as end users invest in software and services to enable them to better manages their data," Nisbet added.

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    A few weeks ago at EMC World in Orlando, Fla., EMC's CEO Joe Tucci said hardware would see the least growth moving forward.

    "The growth is in software followed by services followed by hardware in that order," Tucci said.

    John Webster, analyst at Nashua, N.H. Illuminata Inc. said he has seen survey data that supports evidence of a storage hardware spending slowdown, and believes the trend is a much more fundamental shift in spending.

    "Users will continue to spend, but there is a shift. While customers are still spending on high-end, I don't think they are spending on the high-end primary disk products as much as they have been historically," Webster said.

    According to Webster, there is reduced spending over historic levels on primary disk because users have discovered ways to more efficiently use primary disk and are using tiered storage to take advantage of the technology they have.

    "What customers can do is use tiered storage to move less active data sets to higher capacity, higher density lower overall cost storage platforms," Webster said. "So the second tier winds up actually absorbing the growth, not the primary tier," he added.

    IDC's Dave Reinsel, said a shift in IT spending on expensive storage systems means customers are looking at cheaper storage alternatives as they realize that much of their data does not need to be stored on costly storage hardware.

    According to Reinsel, storage capacity is growing at corporations, year over year anywhere from 55% to 60% in aggregate; that's terabyte shipments of enterprise storage, Reinsel said. However, dollar per gigabyte is decreasing around 35% per year. Reinsel said many companies are looking at what data they want to store on, for example, a high-performance EMC Symmetrix with its Fibre Channel drive as opposed to moving more users over to lower dollar-per-gigabyte products like the CLARiiON that uses ATA disks, and such a shift can have a negative impact on spending.

    "I think what you're finding within the industry is that, as customers look to manage a 50% to 60% growth per year, they have no choice but to try to find lower cost storage options because they do realize that much of their data they are saving does not need to sit on performance disk," Reinsel said. "Customers have to look at how they can shift their mix of terabytes from higher dollar-per-gig performance systems to lower dollar-per-gig capacity-based systems," he added.

    In the meantime, Shebly Seyrafi, an analyst with investment firm Caris & Company said we'll have to wait and see how customers spend their dollars for the rest of the year.

    "Storage system sales were down more than seasonal. My sense is that U.S. enterprise storage spending, which was definitely weak in the first quarter, has picked up and the question is whether it can continue. This is a very tenuous question. We'll just have to wait and see," Seyrafi said.

    Let us know what you think about this story; email: Nicole Lewis, Senior News Writer

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