Q&A: NetApp CEO Kurian Talks About SolidFire Integration, Upcoming Layoffs, And A Disappointing Q3
NetApp In A State Of Flux
NetApp is a company in flux. The storage vendor is encouraging its customers to adopt all-flash storage technologies and its new Clustered Data Ontap architecture. NetApp has also just closed the acquisition of SolidFire, one of the top startups in the very hot all-flash storage market, in a move that caused a lot of head scratching ever since CRN first broke the news.
On top of that, NetApp last week reported year-over-year revenue and earnings drops during its third fiscal quarter of 2016, and said it is starting a new "transformation program" centered on a 12 percent reduction of its global workforce.
After the report, CRN sat down with NetApp CEO George Kurian to discuss the quarter, the layoffs, and the start of the integration of SolidFire into the NetApp solution portfolio.
Turn the page to get the details.
Why the drop in revenue and earnings over last year's third fiscal quarter?
Our Q3 performance reflects our focus and operational execution, as well as continued challenges from a number of headwinds.
From the overall revenue side, we felt short of expectations despite the fact that the volume of business was within the guidance range. We saw in January, as a result of the uncertain and volatile macro, customers deferring tech refresh projects in favor of maintenance contracts and enterprise services agreements. Which is reflected in record deferred revenues, but, as a consequence of that, lower than expected product revenues that booked in the quarter.
Our disciplined focus on operational execution allowed us to meet expectations from an operational margin perspective ahead of what we had provided as guidance. And, from an operating cash flow perspective, delivered $365 million of operating cash flow.
Wasn't the push to get NetApp customers signed up for its new Clustered Data Ontap supposed to bring up revenue by shifting the product mix toward higher-end solutions?
Our focus on the strategic products in the portfolio, including Clustered Ontap and all-flash arrays, has done very well. More that 55 percent of our product revenues are now from the leading solutions in our portfolio, and represent 26 percent year-on-year growth. So the new products have grown extremely well.
[Our data shows] 24 percent of FAS systems on Clustered Ontap, up substantially from 17 percent a quarter ago. I feel very good about the progress of our strategic solutions.
The traditional 7-mode and OEM business declined substantially, 40 percent year-on-year, ahead of our projections, which is what caused the mix change, relative to product bookings and deferred revenue.
NetApp, during its financial analyst presentation, discussed a "transformation program" to reduce the cost structure. What does that program include?
[This] is a project we undertook starting a few months ago to evaluate the efficiency and effectiveness of NetApp. We have benchmarked ourselves, both from a business process perspective as well as an organizational and cost-structure perspective, with the leading companies in the industry. And we are taking action to streamline decision making and optimize the organizational structure to improve focus, speed and efficiency.
You'll see us announce a restructuring action in Q4 ... that impacts about 12 percent of our global workforce, which is a first step in the transformation. The transformation is not just about people. It involves all aspects of our P&L, cost of goods, the operating expense stack, indirect spending, and working capital and balance sheet items. So it's a pretty comprehensive program we've undertaken.
So let me make sure I understand this. NetApp is looking at a reduction in force of about 12 percent of its total employee base?
So where are the cuts going to hit the most?
I think that it reflects our perspective on aligning our resources with the biggest opportunities. Certainly, as part of our acquisition of SolidFire, we bring on new capabilities into the company. And as a result, we are also taking action on some of the more mature parts of our business. We'll tell you more once we complete the action.
Any parts of the business that might actually disappear?
We're not announcing sales of any part of our business. It's just a broad-based restructuring of a variety of mature activities in the company to improve the focus on the growing parts of our business as well as the efficiency of operating the mature parts of our business which are now declining.
Now that the acquisition of SolidFire is closed, what is the integration framework for NetApp? What happens next?
First of all, we are integrating SolidFire from a position of strength. You see in our earnings announcement that our all-flash array portfolio now has achieved $600 million in annual run rate.
This was before the acquisition?
Correct. This is up from the $390 million annual run rate in the prior quarter, so it's a more than 50 percent quarter-on-quarter growth rate, which is very substantial. That represents the strength of our all-flash FAS and EF-series products, to which we now add SolidFire.
SolidFire will be a product line within the NetApp product portfolio. The CEO of SolidFire, Dave Wright (pictured), leads that product business unit within the NetApp product operations team reporting to Joel Reich. We have a shared services leader who will help integrate the back-office functions of SolidFire with NetApp over a period of time. And, as is customary for our go-to-market team, we have a specialist sales force dedicated to SolidFire sales as part of our global go-to-market organization. ... So we feel good about the integration of SolidFire into NetApp.
So the sales forces for NetApp and SolidFire will be separate. Does this mean the customers are going to be separate?
NetApp's sales teams are being educated about SolidFire technology, and are compensated for the sale of SolidFire [solutions]. There's a sales team within the broader NetApp sales organization that is compensated only on SolidFire sales. So they're specialists that enable the generalist NetApp sales reps be able to close SolidFire-related transactions.
What kinds of cross-technology integrations might we see between NetApp and SolidFire?
Our primary intent is to keep SolidFire stand-alone. So we do not see heavy integration of SolidFire with any NetApp technology. There are some simple [integrations]. One that is already complete, for example, allows our OnCommand Insight storage resource product line to monitor, plan and assess the deployment of SolidFire just like it does for other NetApp products. You will probably see the integration of our replication software, SnapMirror and SnapVault, with SolidFire so that you can have your primary copy of data on high-performance SolidFire systems and backups, for example, on either AltaVault or our FAS product line.
But our primary intent is to keep SolidFire as a stand-alone product line.