NetApp Reports Strong Earnings Growth, Slight Revenue Dip

Stability in the Americas and growth in indirect channel sales contributed to one of the better quarterly financial results the IT industry has seen since the start of the economic downturn.

NetApp on Wednesday reported revenue for its first fiscal quarter, which ended July 31, of $838 million, down about 4 percent compared to the $869 million it reported during the same quarter last year.

However, company profits were significantly up, hitting $52 million, or 15 cents per share, compared to $35 million, or 10 cents per share, last year.

The longtime CEO of NetApp, Dan Warmenhoven, used the earnings conference call to introduce Tom Georgens as NetApp's new president and CEO. With the move, Warmenhoven will continue his role as chairman of the Board of Directors, and is assuming the role of executive chairman, a newly created position.

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Steve Gomo, executive vice president of finance and CFO at NetApp, said that systems revenue fell 10 percent, compared to last year, to $343 million, accounting for about 41 percent of total revenue. Software and maintenance revenue, however, grew 14 percent to $165 million, while services grew 10 percent to $194 million, Gomo said.

The services business, however, is feeling the impact from the channel as NetApp moves more of its services business to its partners, Georgens said.

NetApp's sales in the Americas rose 1 percent compared to last year, while sales to EMEA (Europe, Middle East, and Africa) fell 7 percent and sales to Asia fell 16 percent, meaning that the Americas now account for 58 percent of total revenue.

Part of that stability in the Americas business comes from sales to the U.S. Federal government , which accounted for 13 percent of total sales, Georgens said.

NetApp's indirect sales channel accounted for 69 percent of total sales, up from 60 percent last year, Georgens said. Sales through Arrow accounted for 11 percent of total revenue, and Avnet accounted for another 11 percent, he said.

IBM accounted for about 5 percent of total NetApp revenue, despite a drop in sales through IBM of 7 percent compared to last year, Georgens said.

About 51 percent of NetApp's revenue came from sales of NAS-only products, compared to 15 percent from SAN-only products and 35 percent from unified NAS-SAN products, Georgens said.

About 60 percent of business came from midrange customers.

Total units shipped fell 7 percent from last year, with the bulk of the drop coming from high-end systems, which Georgens said was in line with other vendors. However, he said, maintenance revenue for NetApp is up, which indicates growing opportunities for refresh business with its newer products.

Unit shipments of NetApp's V-series of unified storage gateways, which sit in front of NetApp and non-NetApp storage, rose 135 percent compared to last year. Georgens said that about 20 percent of those V-series appliances were installed in front of legacy arrays from arch-rival EMC.

Georgens also took the opportunity to reassure investors and partners that his company's losing of the bidding war for Data Domain to EMC to EMC is not anything to worry about.

While Data Domain would have brought a complementary disk-based backup product line, NetApp already has a high attach rate of disk-based backup sales with its storage appliances.

"The absence of Data Domain will not diminish or otherwise make vulnerable our core business," he said.

Georgens declined to be specific about future possible acquisitions. He did say that NetApp is open to making acquisitions of companies similar to Data Domain, and that there are opportunities in the software and management market. "I don't think we're gun-shy," he said.

NetApp is gearing up to get ready as the IT industry starts to increasingly adopt cloud computing over the next couple of years, including a soon-to-be-released new version of its Data ONTAP operating system, Georgens said.

"Customers everywhere are looking for budget relief. As a result, customers are looking to systems integrators or service providers for help (via cloud computing)," he said.

NetApp declined to provide revenue guidance for the next quarter due to economic uncertainty, and Georgens declined to guess when the company might be able to do so. "We'll know it when we see it," he said.

However, NetApp did predict non-GAAP gross margin in the 62.5 percent to 63.0 percent range during the current quarter.