NetApp Q3: Channel Business Continues To Grow, CEO Georgens Tells CRN

NetApp on Wednesday reported a fall in fiscal third-quarter 2014 storage revenue caused in large part to a drop in sales to the U.S. government, which is a large customer for the company, while earnings grew moderately to beat analysts' expectations.

However, that drop in federal sales, combined with a conservative outlook, turned off investors to the storage company, causing its share prices to slide by over 6 percent in the couple of hours after the close of the market.

For the third fiscal quarter of 2014, ended Jan. 24, NetApp reported revenue of $1.61 billion, which was down about 1 percent from the $1.63 billion the company reported for the same period last year.

[Related: NetApp Takes Build-It, Not Buy-It, Approach To FlashRay Flash Storage Strategy]

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That included $1.02 billion in product revenue, down from last year's $1.06 billion. That led to a slight drop in software entitlements and maintenance revenue, while services revenue hit $368 million, up from last year's $340.8 million.

On a GAAP basis, NetApp reported fiscal third-quarter earnings of $192 million, or 55 cents per share, compared to $158 million, or 43 cents per share, for the year-ago quarter.

On a non-GAAP basis, NetApp's earnings hit $261 million, or 75 cents per share, up from last year's $243 million, or 67 cents per share. Analysts had been expecting non-GAAP earnings of 71 cents per share.

NetApp President and CEO Tom Georgens on Wednesday told CRN that 83 percent of NetApp's revenue comes from indirect channel sales, which is consistent with last year and up from last quarter.

NetApp's branded revenue rose nearly 2 percent over last year, while the company's OEM revenue fell about 23 percent. Given that OEM revenue counts as indirect revenue, this means a significantly larger part of NetApp's branded revenue comes from channel partners than in the past, Georgens said.

"New customer acquisition did better this quarter than last year, and the bulk of that is coming from the channel," he said.

During the question-and-answer period of NetApp's Wednesday financial analyst call, Georgens said that his company is not looking to significantly grow the number of its channel partners, but will instead focus on making those partners more profitable over time.

"We're focused on fewer better partners. ... Overall, the channel for us remains robust, remains strong," he said.

NEXT: OEM, Flash, And Why NetApp Is Not Looking To Be Acquired

The fall in OEM revenue stems primarily from a continuing -- and expected -- downturn in sales through IBM, which is currently in the process of selling its x86 server business to Lenovo, NetApp's Georgens told CRN.

The impact from the sale of IBM's x86 server business to Lenovo, as well as other reported plans by IBM to sell other parts of its business, on NetApp is not yet clear, he said.

"We'll see how it ultimately transpires," he said. "IBM is evaluating a lot of things. Some would work for us, some against us. But if it's interested in further partnerships with NetApp, we are, too."

Georgens also told CRN that NetApp had record sales of its E-series storage appliances, including the new all-flash version, the EF550.

"All-flash storage is doing well for us," he said. "The EF-series are doing well where performance counts, especially in database applications. We're also seeing a fair amount of all-flash FAS-series of appliances. We don't have a specific part number for them, but their sales are not insignificant. They're strong in the VDI [virtual desktop infrastructure] market."

Georgens told CRN that NetApp's upcoming new FlashRay all-flash storage line is not expected to cannibalize the company's existing all-flash EF- and FAS-series sales.

"FlashRay will be focused on data management," he said. "There's nothing else mature in the market with this focus."

Georgens said during the analyst conference that FlexPod, the joint converged infrastructure reference architecture offering from NetApp and Cisco, is continuing to do well.

The FlexPod customer base in the third quarter grew about 75 percent over the past year, and NetApp during the past quarter added a Microsoft option to go with what had been a VMware-centric offering.

NetApp is looking to be a part of the cloud management market, Georgens said.

While cloud computing is not yet mainstream, NetApp is focusing on how to help customers manage data as they move to the cloud.

"The company who can best manage data in the cloud will be the winner," he said.

When asked about the possibility that NetApp might be acquired, a possibility that regularly makes headlines, Georgens said everything depends on the will of the shareholders.

However, he said, shareholders have been doing pretty well with NetApp so far.

"Our ability to compete well and win, if it continues, will generate shareholder value," he said. "An acquisition is not something we need to do to generate shareholder value."

Looking forward, NetApp expects fiscal fourth-quarter revenue to be between $1.62 billion and $1.72 billion, or slightly down from the $1.72 billion the company reported last year.