IBM Stops Selling NetApp Units in Favor of Own Storage Devices

International Business Machines Corp. (IBM) will stop buying and reselling storage technology from NetApp Inc. (NTAP) as part of a plan to move customers to its own products.

IBM plans to formally withdraw from selling NetApp’s new N series systems on May 27 and shut down development on the product line, according to an internal memo reviewed by Bloomberg. Instead, the company will encourage clients to buy IBM-made offerings, the memo said.

IBM, seeking to reinvigorate slumping hardware sales, has shifted its focus to newer technologies and product upgrades. The move is poised to be a setback for NetApp, which gets about 2 percent of its revenue from IBM, according to data compiled by Bloomberg. While NetApp has said that its IBM relationship has presented challenges, it hasn’t disclosed the reselling shutdown.

“IBM is the largest OEM customer of NetApp, and IBM is focusing more on homegrown products,” Kaushik Roy, an analyst at Wunderlich Securities Inc., wrote in a May 22 note. “IBM is also losing significant market share in storage, which, in turn, is hurting NetApp’s revenues from IBM.”

Shares of NetApp fell 1.1 percent to $35.76 yesterday in New York. They had declined as much as 2.8 percent earlier, when Bloomberg News reported on the IBM decision. IBM’s stock rose less than 1 percent to $185.94.

The companies entered an original-equipment manufacturing pact in 2005, letting IBM put its brand on storage products made by Sunnyvale, California-based NetApp. The agreement was meant to help both companies better compete with EMC Corp. (EMC)

“IBM is focused on strengthening its Software Defined Storage portfolio to provide greater scalability to clients,” Sean Tetpon, a spokesman for IBM, said in an e-mail.

Amy Wall, a spokeswoman for NetApp, didn’t respond to a request for comment on the move.

‘Step Down’

As Armonk, New York-based IBM has since shifted its focus to its own storage products, NetApp’s OEM sales, including those from IBM, have plummeted, falling 34 percent from a year earlier in the quarter that ended in April.

“This latest step down was a bit of a surprise,” Thomas Georgens, NetApp’s chief executive officer, said on a conference call this week.

NetApp expects its OEM business to decline as much as 40 percent in the next year, NetApp Chief Financial Officer Nicholas Noviello said on the call.

To contact the reporter on this story: Alex Barinka in New York at abarinka2@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Crayton Harrison, John Lear

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