NetApp Fourth Quarter '16: Down Year Over Year, But New Strategic Technologies Expected To Lead Growth Going Forward

George Kurian

A shift in sales from mature technologies to more strategic technologies is laying the groundwork for an improved future for NetApp, but the company in the meantime is still dealing with slowing revenue and earnings growth, the company's CEO reported.

NetApp plans to provide a glimpse of that future as the company prepares for the June unveiling of a new version of its Ontap operating system and new solutions based on its SolidFire acquisition, said NetApp CEO George Kurian during the company's 2016 fiscal fourth quarter financial analyst call.

"We are very confident about our strategic solutions. … We are looking forward over fiscal year 2017 to having growth in strategic solutions offset mature solutions," Kurian said.

[Related: Q&A: NetApp, SolidFire Execs On NetApp's SolidFire Integration, Competition, Flash Storage Future]

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For the fourth quarter, which ended April 29, NetApp reported revenue of $1.38 billion, down about 10 percent from the $1.54 billion the company reported in the fourth fiscal quarter of 2015.

The company also reported a GAAP loss in the quarter of $8 million, or 3 cents per share, which was significantly down from the $135 million, or 43 cents per share, it reported the year before. On a non-GAAP basis, NetApp reported income in the fourth fiscal quarter of $157 million, or 55 cents per share, down from last year's $202 million, or 65 cents per share. Analysts had been expecting non-GAAP earnings of 58 cents per share.

For all of fiscal 2016, NetApp reported revenue of $5.55 billion, down about 9 percent from last year's reported $6.12 billion.

The company reported GAAP earnings for the full year of $229 million, or 77 cents per share, which was less than half the previous year's earnings of $560 million, or $1.75 cents per share. Non-GAAP earnings for the year were $633 million, or $2.13 per share, compared with last year's $865 million, or $2.70 per share.

About 43 percent of NetApp's revenue comes from commercial business in the Americas, while the U.S. public sector accounts for 12 percent. About 77 percent of total sales over the past year came from indirect sales channels.

Investors had been hoping for better news from NetApp, and caused shares to rise about 1.3 percent by the close of the trading day Wednesday. However, after the results were released, investors in after-hours trading drove shares down about 7 percent after a number of wild swings in share prices.

Kurian said during his prepared remarks that customers are being cautious because of macroeconomic issues, and are increasingly moving their data to the cloud.

Kurian also said NetApp continues to execute on its move away from its mature businesses, including its Ontap Mode 7 technology and its OEM business, toward its more strategic businesses including all-flash storage, its Clustered Ontap operating system and its OnCommand Insight management technology.

The new strategic solutions accounted for 61 percent of product revenue in the fourth fiscal quarter and 53 percent of product revenue for all of fiscal 2016, Kurian said. However, he said, while growth in this part of the business was brisk, it was not yet enough to offset the declines in the company's mature businesses.

NetApp expects growth of its strategic solutions business to offset its declining mature business over time, and looks to push that migration along with some upcoming product introductions, Kurian said.

The first is a new version of NetApp's Ontap operating system, which Kurian said will offer customers new levels of efficiency and flexibility, with the ability to better manage and more quickly deploy their storage across disk and flash systems and the cloud.

NetApp also plans to be the first storage vendor to help customers take advantage of 16-TB SSDs as part of their all-flash storage systems, Kurian said.

During the question-and-answer period of the call, Kurian, when asked about the impact to NetApp's business from customers' moving data to the cloud, responded that such a move was good for the vendor.

Kurian said that, rather than a drop in business as data moves to the cloud, NetApp is seeing business grow because of it. Enterprises or services providers are building clouds, which is good news for NetApp's Clustered Ontap and SolidFire all-flash storage array sales. The company is also a leader in OpenStack cloud technology, and NetApp is also providing technology to tie its storage to clouds in hyper-scale data centers, he said.

Kurian declined to break out financial details of its SolidFire business in response to an analyst question, and said the business is for now immaterial to NetApp's overall results. He did say the company's overall all-flash storage business is doing very well vs. the competition. "We are clearly outpacing both established vendors and startups," he said.

When asked about sales of the FlexPod reference architecture solutions NetApp offers in conjunction with Cisco, Kurian said the two just recently announced an all-flash version, as well as FlexPod Lifecycle Automation, an automated deployment solution for rapid deployment.

"This is competitive with hyper-converged solutions in the market," he said.