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NetApp CEO George Kurian: All-Flash, Hybrid Cloud Trends Point To A Bright Future

‘We saw strength in all geographies, with larger customers accelerating their digital transformations with NetApp,. We will continue to exploit competitive transitions, the growth of the all-flash market, and the accelerating shift to cloud to expand our leadership position,’ says NetApp CEO George Kurian.

Strength in the two fastest-growing parts of the storage business—all-flash arrays and hybrid cloud—is giving NetApp new confidence in the future as evidenced by its second fiscal quarter 2021 results, said NetApp CEO George Kurian.

Kurian Tuesday told analysts during the Sunnyvale, Calif.-based company’s quarterly fiscal conference call that he was pleased with NetApp’s progress in an uncertain market environment thanks to improvements the company made in its sales coverage and its tight focus on execution.

“We saw strength in all geographies, with larger customers accelerating their digital transformations with NetApp,” he said. “We will continue to exploit competitive transitions, the growth of the all-flash market, and the accelerating shift to cloud to expand our leadership position.”

[Related: External Storage System Sales: IBM, Huawei Grow; Dell, HPE, NetApp Plummet]

At NetApp’s investor day presentation during the quarter, NetApp introduced its vision for a “new” NetApp that is a cloud-like, data-centric software company, one that can grow its cloud business while gaining storage market share, Kurian said.

“These foundational elements fuel growth in our high-margin software, cloud services and recurring maintenance revenue streams,” he said. “This, coupled with our disciplined Opex management, balanced approach to investing for growth, and sustained capital returns, will create significant long-term shareholder value.”

This resulted in a second fiscal quarter 2021 public cloud services annualized revenue run rate of $216 million, which was triple that of last year, and an all-flash array annualized run rate of $2.5 billion, up 15 percent over last year, Kurian said.

Despite that growth, only 26 percent of NetApp’s installed systems were all-flash systems by the end of the second fiscal quarter, Kurian said.

“[This is] giving us opportunities for continued growth by converting our installed base in addition to winning new customers with our industry-leading all-flash solutions,” he said. “Growth in all-flash drove momentum in software product revenue, which increased 14 percent year over year, and recurring maintenance and cloud revenue, which increased 11 percent from last year.”

NetApp is helping customers manage data far more effectively for digital transformation and for tackling hybrid cloud challenges, Kurian said.

“No matter where an organization is on its hybrid cloud journey, NetApp can help it achieve its goals,” he said.

The COVID-19 coronavirus pandemic has clearly reshaped the environment, making digital transformation now an urgent necessity requiring speed and agility to respond to changing business conditions, Kurian said.

“Hybrid cloud is the default architecture at digitally transformed enterprises for the foreseeable future,” he said. “Having an integrated, flexible data management foundation is critical to the success of digital transformation efforts. Because of this, data is growing in scale and importance, and we believe that NetApp is a primary beneficiary of this trend.”

During the question and answer period, Kurian responded to an analyst’s question about its cloud services business growth by saying that NetApp is pleased with the expansion in regions and certifications that allow it to serve new industries and customer segments.

NetApp also has a wide range of cloud services offerings, he said. “With both Microsoft and Google, we now serve a huge range of applications, everything from databases to virtualized environments to Windows environments and so on,” he said. “So there’s a very large opportunity in front of us.”

NetApp is capturing a broad range of customers including born-in-the-cloud companies without central data centers, net-new customers with data center businesses that previously did not include NetApp technology, and NetApp customers looking to expand their IT footprints as they expand their IT environments, Kurian said.

After another analyst asked about the competitive environment, Kurian replied that there’s no question that NetApp is taking market share.

“I think our product portfolio is the best in the market,” he said. “In the all-flash array category, the richness of our software capabilities, the hybrid cloud integrations, all have driven advantages in the all-flash array segment. The all-flash array mix was up in the quarter, and within the all-flash configurations, the high-end products, which carry a substantial amount of software and maintenance, leads to a growth in deferred revenue as a part of our business model.”

NetApp continues to take share in the storage market, Kurian said.

“The products that we offer have leadership in performance, efficiency, hybrid cloud connectivity and a scale-out architecture that our competitors cannot match,” he said. “The ‘Run To NetApp’ campaign, which is a competitive migration program, had another very strong quarter in Q2. And, as we noted, we are focused on attacking the competitor product transitions in some of our competitors, and taking share. ... Our competitors have real challenges in executing their product transitions that we are taking advantage of.”

Kurian, responding to an analyst’s question about how sustainable the transition to all-flash storage technology is, said that NetApp is seeing a multiyear transition to the technology.

“We see that because we are still in the early innings of the technology curve in the all-flash array market, and we think that there are more technologies coming online over the next 18 to 24 months that will move more and more of the disk-based market to the all-flash market,” he said. “We don’t think that all of the disk-based market moves to all-flash, but a substantial percentage of the total storage market, meaning let’s say 70 [percent] to 80 percent, will be an all-flash array portfolio.”

For its second fiscal quarter 2021, which ended Oct. 30, NetApp reported revenue of $1.42 billion, which was up about 3 percent over the $1.37 billion the company reported for its second fiscal quarter 2020.

NetApp also reported GAAP net income of $137 million, or 61 cents per share, down from last year’s GAAP net income of $243 million, or $1.03 per share. On a non-GAAP basis, net income for the quarter was $236 million, or $1.05 per share.

Looking forward, NetApp in its third fiscal quarter of 2021 expects net revenue of $1.34 billion to $1.49 billion, which at the midpoint is about 1 percent higher than the $1.40 billion the company reported for its third fiscal quarter of 2020. NetApp also expects GAAP net income per share of 67 cents to 75 cents, or 94 cents to $1.02 per share on a non-GAAP basis, compared with last year’s reported $1.21 on a GAAP basis and $1.16 on a non-GAAP basis.

The COVID-19 coronavirus pandemic will lead to a few challenging months, Kurian told analysts.

NetApp is seeing that companies have begun to move to the “new normal,” including optimizing their operating models to deal with hybrid work and work-from-home environments, and accelerating their movement on projects that were stalled in the past.

“We do think they’re better equipped to deal with the surge, if there is one,” he said. “The human challenge and the cost of doing so is high. And so we’re being appropriately careful in our outlook for the next few months. ... For the most part, we see every sign that things have stabilized.”

When asked whether NetApp could see a better second half in its fiscal year than the first half, Kurian responded that NetApp in the first half delivered on key initiatives and grew share in the all-flash array and cloud businesses, and likes its current market position.

“We have competitive transitions, the pipeline is healthy, the cloud platform is clearly expanding with the big hyperscalers,” he said. “And we see the macro stabilizing. The vaccine trials should give us all incremental confidence. We’re trying to balance the sobering reality of what the next few months look like for businesses, for families ... with the fact that our customer engagements, even in Q3, and competitive wins will continue to be very constructive. We’re trying to take a prudent view of what the near term looks like, given the uncertainty, but we feel very, very good about our position here today.”

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