Channel Leads NetApp To Strong Revenue, Earnings Growth

A big part of that success is sales of NetApp products through its channel partners and distributors, which accounted for about 70 percent of total sales.

NetApp reported revenue of just over $1 billion for its third fiscal quarter, which ended January 29. This represented a 35 percent growth in revenue over the third quarter of 2009.

The company also reported income in the third quarter of $108 million, or 30 cents per share, up sharply from the loss of $82 million, or 25 cents per share, it reported in the same period of last year.

Tom Georgens, NetApp president and CEO, told Channelweb.com that it is a good feeling to do better financially than its primary competitors after the economic downturn as the company reported record quarterly revenue, earnings, and product shipments.

"It's exciting," Georgens said. "I don't know how many companies are setting records, especially in this economy."

About 70 percent of NetApp's sales went through indirect channel partners, which is higher than normal, Georgens said. Distributors Arrow and Avnet together accounted for 28 percent of sales, much higher than the 21 percent of 22 percent they accounted for in the past couple years, he said.

Total shipments of entry-level products were double those of the second fiscal quarter, and up 60 percent compared to the third quarter of 2009, growth in which the channel played a major role, Georgens said. At the same time, he said NetApp has been offering more bundles and decreased the number of SKUs it sells, which helps channel partners.

"We've invested a lot of time and money in simplifying our products and offerings, and in optimizing our ordering systems," he said. "We're seeing the payback now. We've talked a lot about diversifying our channels, and now we're seeing this moving along."

Channel sales should continue to see strength going forward, Georgens said. "We have not completely tapped that market," he said. "It certainly has not tapered off."

Sales of NetApp products through the OEM relationship the company has with IBM also hit an all-time record, and accounted for 6 percent of NetApp's sales, Georgens said.

"IBM is a big company, but storage for them is a small business," he said. "If they focused on storage, we could to ten times as much through them."

NetApp is also continuing to transfer much of its professional services business to its channel partners, Georgens said.

"Our partners integrate with customers in a broad range of business," he said. "The last thing we want to do is compete with our partners in professional services."

In response to the lingering concerns of some channel partners over NetApp's 2009 failed attempt to acquire data deduplication vendor Data Domain and how it might impact the company's virtual tape library and disk-to-disk backup business, Georgens said that NetApp continues to be the only vendor to dedupe data on both primary and secondary storage.

The virtual tape library business will continue to decrease over time for the storage industry as a whole, which is fine for NetApp, Georgens said.

"Most backup systems now understand how to talk directly to disk, so the market is moving to a disk-to-disk backup target," he said. "And that targets our strengths."

During NetApp's quarterly conference call, Steve Gomo, executive vice president and CFO, said that NetApp experienced 64 percent gross margins across its entire product line.

Margins for the company's low-end and high-end storage products are similar, meaning that an increase in entry-level products as part of the company's overall product mix is not impacting the company's total margins, Gomo said.

Looking forward, NetApp expects revenue in its fourth fiscal quarter to reach between $1.07 billion and $1.10 billion, up significantly from the $880 million it reported in the fourth fiscal quarter of 2009.

The company also expects earnings per share to reach between 31 cents and 33 cents in its fourth quarter, up from the 23 cents per share it reported last year.

During the conference call, Georgens added a lighthearted note about the large number of analysts who joined for the question-and-answer portion given that Hewlett-Packard also reported earnings on Wednesday.

"I'd like to reiterate my thanks to HP for not overlapping our conference calls," he said.