IT Budgets Prioritize Data Storage Spending - Andrew Nowinski - Piper Jaffray

Wall Street Transcript

67 WALL STREET, New York - February 21, 2012 - The Wall Street Transcript has just published its Data Hosting Centers & Data Storage Report offering a timely review of the sector to serious investors and industry executives. This Data Hosting Centers & Data Storage Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Data Storage Spending Trends - Data Center REITs - Infrastructure Upgrades and Consolidation Activity - Big Data, PCIe Storage, Cloud Computing and the Virtual Desktop

Companies include: Fusion-io (FIO); Brocade (BRCD); Cisco (CSCO); CoreSite (COR); Dell (DELL); Digital (DLR); DuPont (DFT); EMC (EMC); Emulex (ELX); Equinix (EQIX); Google (GOOG); HP (HPQ); IBM (IBM); Intel (INTC); Juniper (JNPR); Microsoft (MSFT); NetApp (NTAP); OCZ (OCZ); Rackspace (RAX); Seagate (STX); VMware (VMW); Western Digital (WDC) and many more.

In the following brief excerpt from the Data Hosting Centers & Data Storage Report, expert analysts discuss the outlook for the sector and for investors.

Andrew Nowinski rejoined the technology research team at Piper Jaffray & Co. as a Research Analyst in August 2011, after spending 12 months at Raymond James. Mr. Nowinski had joined Raymond James to launch coverage of the storage sector, having spent the previous three years at Piper Jaffray co-covering the storage and networking sectors. Before his sell-side experience, Mr. Nowinski spent 10 years in the IT industry doing software development for various companies, including Accenture and IBM, formerly PricewaterhouseCoopers. Mr. Nowinski earned an MBA from the University of Minnesota in 2006.

TWST: Please start by giving us a brief overview of your coverage universe.

Mr. Nowinski: I focus specifically on the storage sector at Piper Jaffray. Currently, I cover EMC (EMC) and NetApp (NTAP) on the external storage side, Fusion-io (FIO); and OCZ (OCZ) in the SSD/flash storage market, and then Brocade (BRCD) in the storage networking market.

TWST: What's your overall sentiment and outlook for the storage space?

Mr. Nowinski: I have a very bullish outlook for storage spending in 2012. My opinion is supported by the results of our recent CIO survey, which we conducted in December. The results of that survey indicated that 68% of CIOs plan to increase spending on storage in 2012. Storage was actually the highest category of all the areas of IT spending that we sampled; security was number two at 65%, and then servers were number three at 51%. In addition, I think the key underlying growth driver of the storage market, which is data growth, has not changed. And then the emergence of Hadoop and the big data market, I think, will further accelerate demand for storage equipment. So I definitely have a bullish outlook on storage versus the other areas of IT.

TWST: It seems as if the amount of data has been the key driver for the industry. Is that level of growth expected to continue, if not increase?

Mr. Nowinski: Yes. If you look at IDC, they've forecasted total available storage capacity to increase by a factor of 12 times through 2020, up to about 15 zettabytes. But the digital universe is actually expected to grow by a factor of 29 times during that same period. So that disparity creates an obvious shortage of capacity, which begs the question, "Why can't storage capacity keep pace with the growth of data?" I think the answer is that it certainly could if additional storage capacity was free. So CIOs need to invest a lot in new storage architectures that offer storage efficiency technologies like deduplication, compression and thin provisioning in order to keep pace with the growth of data - and lack of capacity, for that matter.

TWST: Are there other trends that stick out in your mind that are shaping these companies and the broader industry?

Mr. Nowinski: In the storage industry, I think there are a number of key trends driving growth in the storage market in 2012. First and foremost is, in my opinion, the big data market. EMC has been the most outspoken about this opportunity. They arguably have the most comprehensive portfolio of all storage vendors, and I think there are really three unique segments of the big data market that are worth looking at: one being the scale-out NAS market; two, the data warehouse/Hadoop database market; and then three, the high-bandwidth video-streaming market, all of which are new and represent significant growth opportunities in the storage market this year.

The second key trend is cloud computing, but more specifically the private cloud computing market, which I believe will see strong growth in 2012. We just heard from IBM (IBM) that their revenue from cloud computing tripled in 2011, and I think the adoption will continue accelerating in this coming year. Public cloud computing, conversely, is likely a little further down the road. But near term, I think the focus will be on private cloud computing.

Third, and I would say the area that I am most excited about, is the PCIe flash storage market. The upcoming launch of the Romley processor this quarter will dramatically improve server performance, which in turn will exacerbate the need for high-performance storage. Storage performance just really hasn't kept pace with server performance over the last five years, which means servers sit idle, and are essentially underutilized while they wait for data from the external storage array. So to eliminate that bottleneck, vendors like Fusion-io and OCZ have developed solutions based on PCIe flash storage.

Those solutions effectively moved the storage closer to the application, which removes the latency aspect of the bottleneck, and they also support the mobility of virtual machines in a virtualized world. So I think that opportunity is really almost equivalent to the size of the high-end storage market, which IDC estimates will reach $20 billion in 2012. And with only two vendors in that space, it's a big opportunity for both companies - and quite honestly, the new architecture really could create some serious headwinds for some of the traditional high-end storage vendors.

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