NetApp Fiscal Q3: Disappointing, But Services, Software Show Path Forward

Tom Georgens

NetApp's year-over-year fall in fiscal third-quarter 2015 revenue and profits and its flat guidance for the next quarter rattled investors Monday despite encouraging signs from the storage vendor's software and services businesses.

NetApp attributed the weak quarter to foreign exchange issues and an acquisition, but investors pummeled the company with a 5 percent drop in share prices in after-market trading.

For its third fiscal quarter of 2015, which ended Jan. 23, NetApp reported revenue of $1.55 billion, down nearly 4 percent from the $1.61 billion the company reported for the third fiscal quarter of 2014.

[Related: NetApp Expects Riverbed's SteelStore To Bring Improved Data Protection]

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The drop was led by a fall in product revenue of about 8 percent to $929.5 million, along with flat sales of software and maintenance at $226.6 million, NetApp reported. However, the drop in product revenue was due mainly to a continuing fall in NetApp's OEM sales, with NetApp-branded storage revenue actually rising 2 percent over last year.

Professional services revenue did well during the quarter, rising more than 7 percent year over year to reach $395.2 million.

NetApp also reported GAAP income of $177 million, or 56 cents per share, down from the $192 million, or 55 cents per share, it reported a year ago. The earnings per share actually rose despite the drop in GAAP income due to NetApp's recent share buyback program.

On a non-GAAP basis, NetApp reported income of $238 million, or 75 cents per share, compared to last year's $261 million, or 75 cents per share.

NetApp blamed 1 percent of the drop in revenue to the increasingly strong U.S. dollar vs. foreign currency. The company also said NetApp's acquisition of Riverbed's SteelStore product line, combined with the foreign currency impact, cut 2 cents from the company's earnings per share results.

Tom Georgens, NetApp chairman and CEO, told CRN that the relatively flat third fiscal quarter compared to last year came despite a 30 percent rise in total capacity shipped.

The industry is going through a period of relatively slow growth in storage revenue, with companies like NetApp and EMC experiencing low-single-digit growth, Georgens said. "The server vendors are reporting double-digit falls in storage revenue," he said. "The startups are in growth mode, but they're still small."

NEXT: Professional Services Important To Channel, Software Important To NetApp

There are major long-term opportunities for the company, Georgens said.

One of those is software to manage and protect customers' growing data stores, he said. "Wherever the cost-per-GB is most compelling, data will flow there," he said. "But that doesn't mitigate the need for data management. As customers use the cloud, they still need data management software to handle it. NetApp, at the end of the day, is a data management company."

However, Georgens declined to break out NetApp's software revenue as it is in large part embedded in the company's hardware sales, and varies by platform from the entry-level 2000-series where there is less software attached to the sale to the higher-end models with more software.

Nick Noviello, NetApp's executive vice president of finance and operations and CFO, said during Wednesday's third fiscal quarter analyst conference call that the company's indirect sales, which includes both channel sales and OEM sales, fell to 80 percent of the company's total revenue due to a 22 percent year-over-year drop in OEM sales.

NetApp distributor Arrow accounted for 24 percent of total revenue, while Avnet accounted for 17 percent, Noviello said.

Georgens, in response to an analyst question during the question-and-answer period of the conference call, said that NetApp is working to drive more of its professional services business through channel partners as a way to make partners more profitable while giving NetApp a chance to develop more enterprise services business.

"We're looking for our channel partners to become more self-sufficient in pre-sales and post-sales. ... [We are not] competing with them for this business," he said.

Looking forward, NetApp expects fourth fiscal quarter 2015 revenue to be in the range of $1.55 billion to $1.65 billion, or about flat year-to-year with the same period of 2014. GAAP earnings per share is expected to be in the range of 46 cents to 51 cents per share, while non-GAAP earnings per share is expected to be in the range of 70 cents to 75 cents per share, the company said.