When it comes to dealing with cloud infrastructure giants exacting a lot of long-term pressure on traditional enterprise server and storage sales, storage vendor NetApp (NTAP) has very much taken an "If you can't beat 'em, join 'em" philosophy.
Though it doesn't completely neutralize cloud pressures, this approach has been paying dividends, as NetApp's latest earnings report shows. And in a talk with TheStreet on Wednesday afternoon, CEO George Kurian asserted NetApp's attempts to play nice with public clouds are also set to open up large new software revenue streams.
Results and Guidance
After the bell on Wednesday, NetApp reported April quarter (fiscal fourth quarter) revenue of $1.64 billion (up 11% annually) and non-GAAP EPS of $1.05, beating consensus estimates of $1.60 billion and $1.01. It also guided for July quarter revenue of $1.365 billion to $1.465 billion and EPS of $0.76 to $0.82, close at the midpoints to consensus estimates of $1.41 billion and $0.78.
In response, shares fell 4.5% in after-hours trading to $63.81. With NetApp's stock up 21% on the year and 69% over the last 12 months going into earnings, expectations were somewhat high. And it looks like the company's guidance, which arrived shortly after rival HP Enterprise (HPE) forecast its sales growth would slow in the coming quarters, fell a little short of those expectations.
Storage Share Gains
Research firm IDC previously estimated NetApp's external storage systems share grew 1.2 percentage points annually in Q4 to 11.2% (good for third place behind Dell EMC and HPE), with its 14.5% revenue growth easily outpacing industry growth of 1.8%. It looks like share gains continued in NetApp's April quarter: The company's product revenue (hardware and software) grew 19% to $1.01 billion.
Strong demand for NetApp's all-flash storage arrays (AFAs) has helped out a lot. Kurian says sales of products and services related to NetApp's AFA offerings ended fiscal 2018 on a $2.4 billion annual revenue run rate, and that this represents a 43% increase from a year earlier. "We're substantially outpacing the market, and closing from #2 to #1 quite quickly," he declared. Dell EMC, which recently refreshed much of its storage lineup, has been pegged as the market leader by research firms.
In recent years, NetApp has improved its hardware competitiveness by rolling out software tools that let companies jointly manage, secure and back up their local NetApp storage and the storage they're using on public clouds (quite often non-NetApp). In addition, NetApp has worked with cloud giants Amazon (AMZN) , Microsoft (MSFT) and Alphabet/Google (GOOGL) to develop software that aims to improve performance, reliability and ease-of-use for the cloud storage purchased by a company.
Kurian, echoing April analyst day remarks, predicts that offerings running on public clouds will produce $400 million to $600 million in annual recurring revenue (mostly high-margin software revenue) by the end of fiscal 2021 (ends in April 2021). For comparison, NetApp's total fiscal 2018 revenue was $5.9 billion.
IT Spending Trends
Like many others in the industry, Kurian is upbeat about near-term IT spending trends. He suggests tax policy clarity and healthy global macro conditions are giving a lift to spending, as is greater clarity among enterprises about what they'll be doing on public clouds versus their traditional infrastructures.
"I think clearly that IT spending is reflective of the broader economic environment," he added, while noting that NetApp has been seeing good growth in both Europe and the Asia-Pac region.
NetApp has made its share of acquisitions over its history. Among recent deals, the company's $870 million 2015 purchase of AFA vendor SolidFire was an especially big one, given how SolidFire's technology underpins both much of NetApp's AFA lineup and its nascent efforts to crack the growing market for hyperconverged server/storage systems (Nutanix (NTNX) and HPE are major players here).
When asked about M&A, Kurian was quick to highlight the SolidFire deal, as well as NetApp's 2017 purchases of storage memory software firm Plexistor and cloud management software firm Greenqloud. He asserted Plexistor "sets [NetApp] up really well" to have the highest-performance systems relying on next-gen solid-state and persistent storage (Intel and Micron's high-speed 3D XPoint memory is a possibility), and that Greenqloud's offerings serve as "the foundation" of NetApp's work with cloud giants.
Not surprisingly, Kurian says NetApp is willing to make additional purchases of companies whose products are deemed a good strategic fit. "We are a diligent acquirer...we'll continue to be disciplined about the bets we make," he added.