NetApp 4Q: Channel Sales Fall, Clustered Data OnTap Transition Tough, Layoffs Coming

NetApp on Wednesday said it will lay off some 500 employees, or about 4 percent of its head count, in the wake of a big hit to its fiscal 2015 fourth-quarter revenue and earnings.

Company executives blamed the drop in revenue and earnings squarely on an unexpectedly slow customer transition to its new Clustered Data OnTap-based storage solutions.

That slow transition impacted both direct and indirect channel sales, particularly on direct sales to commercial customers outside the company's top accounts and on sales via smaller indirect channel partners.

[Related: NetApp CTO Jay Kidd Plans To Retire, Says CTO Role Should Be Group Effort]

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NetApp Chairman and CEO Tom Georgens, in a Wednesday conversation with CRN, said his company will make an incremental investment in both its direct and indirect sales strategies as a result.

"Sales via our top 10 partners, and via the overall majority of our partners, grew during the quarter," Georgens told CRN. "But we've seen those where they didn't make the investment in [Clustered Data OnTap] training and technology were not as successful. We need to invest more in helping them."

That resulted in a significant hit to NetApp's year-over-year channel sales for the fourth quarter, which ended April 24.

NetApp did not disclose channel sales for the quarter. However, the company said total indirect sales, which includes sales via both channel partners and OEM customers such as IBM and Fujitsu, accounted for 79 percent of total revenue for the fourth fiscal quarter of 2015, down from 83 percent of sales for the fourth quarter of fiscal 2014.

NetApp also said OEM sales, which is a component of the total indirect sales, in the fourth quarter of 2015 amounted to $101.7 million, down from last year's $109.8 million.

Given that total revenue for the fourth quarter of fiscal 2015 was reported at $1.54 billion, down from the $1.65 billion a year ago, sales via the channel, excluding OEM business, was $1.11 billion, down 11.5 percent from last year's channel sales of $1.26 billion.

Georgens told CRN it is important for NetApp to get more of its channel partners up to speed on Clustered Data OnTap in order to help them, and NetApp, as a whole, to grow revenue.

This includes investments in helping customers transition from a previous version of Data OnTap to Clustered Data OnTap, and in customer-facing, go-to-market activities, Georgens said.

"We see these in our biggest accounts," he said. "But we've also seen them in our channel partners. We've seen some of them make the transition, and some who haven't. We need to investing in helping them."

Georgens said NetApp's planned layoffs should not impact the channel. "There will be individual stories," he said. "But in the aggregate, our investment is going up. There will be incremental investment in increasing both direct and indirect sales."

For the fourth quarter of 2015, NetApp also reported GAAP income of $135 million, or 43 cents per share, down from $197 million, or 59 cents per share, in the fourth quarter of 2014. Fourth-quarter non-GAAP income was $202 million, or 65 cents per share, down from last year's $284 million, or 84 cents per share.

For all of fiscal year 2015, revenue was $6.1 billion, down from $6.3 billion in fiscal 2014. GAAP income for the year was $560 million, or $1.75 per share, compared to last year's $638 million, or $1.83 per share. On a non-GAAP basis, 2015 income was $865 million, or $2.70 per share, compared to last year's $968 million, or $2.78 per share.

During NetApp's Wednesday financial analyst conference call, Georgens said his company's business is seeing some impact as customers adopt the cloud, but little impact from startups in the storage or hyper-converged infrastructure markets.

"The transition to the cloud dwarfs any of these other transitions," he said.

This, he said, is because customers who have not yet adopted Clustered Data OnTap because of any difficulties in switching to the new storage operating system are not likely to consider a transition to competing technologies either.

Instead, the focus now is on getting direct and indirect sales teams better able to sell Clustered Data OnTap, and getting them out visiting more accounts.

"Where there's business, and where we show up, we win accounts," he said in response to an analyst's question. "So it's not a question of making deals. We need to get in front of more accounts."

In response to another analyst's question, Georgens also said that NetApp is not seeing a lot of competitive wins from traditional storage vendors, either, as evidenced by the fact that the company's installed base, including existing and new equipment, continues to grow.

"If there was this big, competitive push taking us out, we'd see it," he said.

NetApp CFO Nick Noviello during the call said that, despite transition issues, the number of Clustered Data OnTap customers grew 135 percent in fiscal year 2015 compared to 2014. The bulk of this growth came from a 250 percent growth in the number of new NetApp customers during the year.

Unit shipments of solutions based on the FlexPod, developed jointly with Cisco, were up about 20 percent in 2015, with more than 70 percent of FlexPod systems shipping with Clustered Data OnTap, Noviello said.

NetApp also did well in the all-flash storage business, with shipments of all-flash FAS systems in the fourth quarter up more than 350 percent compared to last year, he said.

Looking forward, Noviello provided disappointing guidance. Revenue for the first quarter of fiscal 2016 is expected to be in the range of $1.275 billion to $1.375 billion, which, at the center point, would be an 11 percent fall compared to last year's first quarter. This, he said, is despite the first quarter of 2016 having an extra week compared to last year.

NetApp also expects first-quarter GAAP loss per share to be in the range of 6 cents to 11 cents, down significantly from a GAAP income of 27 cents per share. On a non-GAAP basis, NetApp expects earnings to be in the range of 20 cents to 25 cents per share, down from last year's 60 cents per share.

Noviello said he expects revenue for full-year 2016 to be flat over 2015, with "headwinds" in the first half of the year being mitigated by growth in the second half.