NetApp's Q3 Results: Innovation, Channel Drive Growth

NetApp on Wednesday reported better-than-expected earnings for its third fiscal quarter thanks to growing strength of its branded business and its indirect channels.

The storage vendor also reported a relatively anemic revenue growth over last year, but noted that growth in sales of branded products, the part of its business most impacted by its channel partners, far outweighed a drop in OEM sales for the quarter.

NetApp also said it has acquired ionGrid, a small startup developer of iPhone and iPad applications for remotely accessing enterprise content.

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NetApp reported revenue for its third quarter of fiscal year 2013, which ended Jan. 25, of $1.63 billion, which the company said was in line with prior guidance. This was up about 4 percent from the $1.57 billion the company reported in the third fiscal quarter of 2012.

Third-quarter GAAP income was $158 million, or 43 cents per share, compared to the year-ago GAAP income of $120 million, or 32 cents per share. On a non-GAAP basis, income for the third quarter was $243 million, or 67 cents per share, compared to last year's $216 million, or 58 cents per share.

The non-GAAP earnings were higher than NetApp's previous guidance of 53 cents per share to 58 cents per share.

When asked why NetApp's revenue grew a mere 4 percent compared to the 8 percent year-over-year growth rival EMC reported last month, Nick Noviello, NetApp's executive vice president of finance and CFO, told CRN that NetApp's third-quarter branded business was up 8 percent over last year, while the company's OEM business was down 17 percent during the same period.

Tom Georgens, NetApp president and CEO, also talked during NetApp's financial analyst call about the 8-percent year-over-year growth in branded business, and he noted that last year it was the OEM business that was growing while the branded business was down.

"If anything, that [branded] business is probably the best it's been all year long," Georgens said.

The growth in NetApp's branded business stems from both technology innovations and a growing channel, Noviello said.

About 50 percent of NetApp's installed base is currently running the company's Ontap 8 operating system, and adoption of the latest version, Ontap 8.1, has been rapid, he said.

NEXT: Flash Storage, FlexPod Bright Spots For Third Quarter

In addition, NetApp's Noviello said, the number of clustered nodes shipped in the third quarter was up 70 percent over the second quarter.

Flash storage has also become an increasingly large part of the company's business, NetApp's Georgens said. The company shipped about 36 petabytes of flash storage over the past three years, including 20,000 storage systems with flash as a part of the total capacity.

In the third quarter, NetApp also shipped over 100 all-flash storage arrays based on the company's E-series storage systems, and it expects part of the business to grow, he said. NetApp is planning to roll out new flash storage products in the very near future, he said.

At the same time, Noviello said, indirect channel sales, including OEM sales, accounted for 81 percent of NetApp's total revenue, up about 7 percent from last year. NetApp's distribution partners Arrow and Avnet accounted for 33 percent of NetApp's total revenue, up from 27 percent last year, he said.

NetApp's FlexPod partnership with Cisco is also continuing to grow. Georgens said that over 700 channel partners have sold solutions based on the FlexPod reference architecture to over 2,100 customers across more than 35 countries.

He also said the FlexPod architecture in January was expanded to offer improved branch and cloud storage capabilities.

Looking forward, NetApp expects revenue during the fourth fiscal quarter to be in the range of $1.7 billion and $1.8 billion. This compares to the $1.7 billion the company reported for its fiscal fourth quarter of 2012.

NetApp also expects GAAP earnings per share for the fourth fiscal quarter of 43 cents to 48 cents and non-GAAP earnings per share of 65 cents to 70 cents. That compares to GAAP earnings per share of 47 cents last year.

PUBLISHED FEB. 13, 2013