NetApp Reports Strong Cloud, Cloud Data Services, All-Flash Storage Sales

'While we cannot predict when the world will return to normal, the enduring importance of data is clear. We are confident that the demand for our products and services will be strong as we emerge from this crisis,' said NetApp CEO George Kurian on the company's fiscal fourth-quarter 2020 earnings call.

NetApp Wednesday reported yet another fiscal quarter with declining revenue and earnings, but said its cloud-related business and all-flash storage sales were strong and ready to lead a recovery as the industry emerges from the COVID-19 coronavirus pandemic.

While NetApp started its fiscal fourth quarter 2020 on a strong footing, with strong gross margins and cash flow, everything changed in April, said NetApp CEO George Kurian Wednesday during his prepared remarks in the company's quarterly financial analyst conference call.

"The quarter started off well, and we were tracking to our target until countries around the world began going into lockdown. ... We saw delays in some large deals, while at the same time some companies accelerated orders to get ahead of shutdowns and others initiated new transactions to address the demands of remote working and digital business," Kurian said.

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Netapp is looking to return to growth after the COVID-19 coronavirus pandemic, Kurian said.

"While we cannot predict when the world will return to normal, the enduring importance of data is clear," he said. "We are confident that the demand for our products and services will be strong as we emerge from this crisis. The strength and resiliency of our business model enables us to continue to execute on our strategy while navigating on a range of demand environments. We will continue to make prudent decisions in the face of the current reality, focusing on the priorities that will enable us to return to growth."

NetApp during the fourth fiscal quarter, which ended April 24, brought its cloud technology to general availability on all the leading cloud providers, Kurian said.

"NetApp Cloud Volumes is the No. 1 shared file storage platform available in all the public clouds," he said. "Our intellectual property is embedded in every region and data center that Microsoft, Google and Amazon Web Services bring online."

That close tie between NetApp's cloud technology and the major public cloud providers is opening NetApp to an expanded customer base, Kurian said. For instance, over 40 percent of the company's Azure NetApp Files customers are new to NetApp, he said.

A number of other moves NetApp made in the last quarter or two will also help lead to the company's growth recovery, Kurian said.

NetApp in March acquired Talon Storage, a developer of software that consolidates data from multiple remote and branch offices into a centralized location from which it is managed and then made available to users outside the central office.

NetApp in February also acquired virtual desktop infrastructure management company CloudJumper.

"We added those services to our cloud platform to bring a comprehensive platform to our customers," he said.

NetApp during the fourth fiscal quarter also achieved its target of adding 200 salespeople a full quarter ahead of schedule, Kurian said.

"This additional sales capacity has enabled us to close coverage gaps and dedicate resources focused on new customer acquisitions," he said. "As a reminder, we funded this head count by making trade-offs in the business, not by adding to the company's total operating expenses."

NetApp this month made a major change in its executive team with the hiring of former Microsoft executive Cesar Cernuda as its new company president, Kurian said. Cernuda is slated to start with NetApp July 1.

"He will continue to evolve our go-to-market strategy and operations to transform how we capitalize on the changing customer landscape to drive growth, particularly in cloud," he said.

During the question-and-answer period of the call, Kurian responded to a question about cross-selling opportunities between on-premises and cloud technologies by saying a lot of new customers coming to NetApp's cloud technology previously had little to no NetApp on-premises storage deployed.

"For the vast majority of these customers, we have a slim part of their wallet," he said. "So the opportunities are big there."

NetApp can be expected to continue acquiring other technology developers as long as they can help the company's software and services business, Kurian said in reply to another question.

"We're not leaning towards more horizontal acquisitions for scale," he said.

For its fourth fiscal quarter 2020, which ended April 24, NetApp reported total revenue of $1.40 billion, down 12 percent from the $1.59 billion the company reported for its fourth fiscal quarter 2019.

This included product revenue of $793 million, down from last year's $1.00 billion; software maintenance revenue of $267 million, up from last year's $242 million; and hardware maintenance and other services revenue of $341 million, down from last year's $350 million.

The Americas commercial business accounted for 43 percent of that revenue, while the U.S. public sector accounted for 11 percent.

For the quarter, indirect sales channels accounted for 77 percent of NetApp's total revenue.

Mike Berry, who two months ago took over as NetApp's new chief financial officer, said during the conference call that NetApp's all-flash storage revenue for the quarter was $656 million, down 3 percent over last year.

Berry said that only 24 percent of NetApp's installed base is all-flash storage, making this a big opportunity going forward. "We continue to believe there is a very healthy runway for all-flash adoption," he said.

NetApp also recorded $111 million in annual recurring revenue for its fourth fiscal quarter 2020 cloud data services business, which was up 113 percent over last year, Berry said. During the quarter, NetApp also more than doubled its cloud data services customer count to 3,500, he said.

For the quarter, NetApp reported GAAP net income of $196 million, or 88 cents per share, down from last year's $396 million, or $1.59 per share. On a non-GAAP basis, NetApp reported net income of $265 million, or $1.19 per share, down from last year's $305 million, or $1.22 per share.

For all of fiscal year 2020, NetApp reported revenue of $5.41 billion, down 12 percent from the $6.15 million it reported for fiscal year 2019.

For the year, NetApp reported GAAP net income of $819 million, or $3.52 per share, down from last year's $1.12 billion, or $4.60 per share. On a non-GAAP basis, NetApp reported net income of $944 million, or $4.05 per share, down from last year's $1.17 billion, or $4.52 per share.

Because of the COVID-19 coronavirus pandemic, NetApp is not providing fiscal year 2021 guidance, Berry said.

However, for the first fiscal quarter of 2021, NetApp is expecting revenue of $1.09 billion to $1.24 billion, which he said at the midpoint would be a 6 percent drop in revenue from the first fiscal quarter of 2020.

The company is also expecting gross margins of 60 percent to 68 percent and operating margins of about 10 percent for the quarter, Berry said. It also expects non-GAAP earnings per share of 36 cents to 44 cents, down from last year's 65 cents per share.