Investors Pummel NetApp Over 2013 Guidance, But Channel Does NetApp Well

NetApp on Wednesday reported strong revenue growth of 22 percent in fiscal year 2012 thanks to the strength of its unified storage business.

Unfortunately, the storage vendor's bright yearly revenue figure was overshadowed by a fall in income over 2011 and a relatively dim outlook for the first quarter of fiscal 2013. That outlook, stemming primarily from uncertainty in U.S. government and in overall European spending, caused NetApp investors to dump shares in the company in after-hours trading.

However, NetApp cannot blame the channel for its outlook. Indirect sales accounted for 79 percent of the company's overall revenue, a record level for NetApp.

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NetApp said that its revenue for fiscal year 2012, which ended April 27, reached $6.2 billion, up 22 percent compared to the $5.1 billion the company reported for its fiscal year 2011.

Income, however, could not keep up with the revenue rise. NetApp reported 2012 income of $605 million, or $1.58 per share, a 10-percent drop from the $673 million, or $1.71 per share in 2011.

For its fourth fiscal quarter of 2012, NetApp reported revenue of $1.7 billion, up 19 percent compared to the $1.4 billion it reported during the same period last year. Income for the quarter was $181 million, or 47 cents per share, up from the $161 million, or 40 cents per share, the company reported last year.

The channel continues to do extremely well for NetApp.

Tom Georgens, NetApp president and CEO, said during the company's Wednesday financial analyst call that channel partners accounted for 79 percent of revenue in the fourth quarter compared to 75 percent in the year-ago period.

NetApp's distributors, Arrow and Avnet, together accounted for 31 percent of the company's overall revenue in the quarter, Georgens said. Arrow in fiscal year 2013 actually breached the $1 billion mark in sales of NetApp products, he said.

NetApp also had its highest number of $5 million-plus deals ever in a quarter during the fourth quarter, he said.

Julie Parrish, senior vice president of global partner sales at NetApp, told CRN after the conference call that NetApp's channel growth comes from customer adoption of its technology.

NEXT: Channel Sales Continue To Dominate And Grow For NetApp

For instance, NetApp in the fourth quarter had a 6-percent year-over-year growth in storage product revenue, not including the company's E-series of products, which are primarily sold by OEM partners, Parrish said. This compares to a 3 percent growth by EMC and a drop of 8 percent by Dell.

In addition, Parrish said, sales of NetApp's 2000-series midrange storage systems rose 23 percent year-over-year, while sales of its enterprise-class 6000 series nearly doubled during the same time. The bulk of those sales are through the channel.

NetApp's channel partner count has remained at about 6,000, with a small amount of recruiting going on, she said.

She contrasted NetApp's partner consistency to that of arch-rival EMC, which this week unveiled several measures aimed at taking more of its business to partners.

"What's feeding our channel growth?" Parrish rhetorically asked. "Us handing partners more deals? No. It's our technology and the customers' adopting of our technology through the partners."

Parrish said that NetApp's partners are leading the market in helping customers adopt proven server and storage architectures with the FlexPod converged infrastructure offering from NetApp and server and networking partner Cisco.

There are currently 850 FlexPod customers around the world, up 400 percent compared to last year, Parrish said. Customers, working exclusively through solution providers, are now purchasing two FlexPods per day, she said.

Parrish admitted that, while many FlexPod sales would have been NetApp sales anyway if they hadn't be part of a converged infrastructure sale with Cisco, growth in FlexPod sales prove the power of a proven architecture in the minds of customers.

"This shows the adoption of fully vetted architectures is growing," she said. "And it shows we're heading in a direction customers care about."

Looking forward, for the first quarter of fiscal 2013, NetApp estimates revenue will be $1.4 billion to $1.5 billion, which is somewhere between a 4-percent drop and a 3-percent rise over its reported first fiscal quarter 2013 of $1.46 billion.

The company on Wednesday also said it expects first fiscal quarter earnings per share of between 10 cents and 15 cents, significantly down from the 34 cents per share it reported last year.

That pessimistic outlook, and the fact that NetApp declined to give full year 2013 guidance, resulted from increasingly uncertain economic issues, said Nick Noviello, executive vice president of finance and CFO at NetApp.

"(We're showing) conservatism due to the macroeconomic situation," Noviello said.

NEXT: Challenges Across The Storage Industry

Georgens said that the entire industry's storage business is challenged despite the fact that storage still accounts for the biggest part of customers' IT budgets.

"However, given the increasing uncertainty of the economic environment, and the fact that Q1 is normally our most challenging quarter, we are not providing guidance for fiscal year 2013," Georgens said.

The uncertainty was not just economic but political in nature given the upcoming U.S. elections and the situation in the European Union, Georgens said. "And Q1 has never been our strength," he said. "If there's a quarter where our visibility is limited, this is it."

Investors were not happy with NetApp's guidance. Share prices during the trading day fell 44 cents, or 1.3 percent, to $32.86. However, share prices plummeted to as low as $24.36, or down 26 percent, before recovering to well over $27 per share a few hours later.