Better High-End Sales, Easing Clustered Data OnTap Transition Lift NetApp

NetApp is still fighting an uphill battle in terms of revenue growth, but a surprisingly strong first fiscal 2016 quarter earnings report fed renewed enthusiasm for the storage company's share prices.

Strong growth in sales of its higher-end storage solution -- including an improved move to transition customers to its Clustered Data OnTap solution after a couple of quarters in which that transition stalled -- helped overcome slower sales of its older technology and the adverse impact of foreign exchange changes, company executives said Wednesday.

NetApp CEO George Kurian said Wednesday during the company's first fiscal quarter financial analyst call that NetApp was making progress against its financial plans with new customers and an "aggressive" expansion of its technology.

[Related: NetApp Ousts Georgens, Names Kurian New CEO]

"We did what we said we would, but it's clear we have a lot of work to do," Kurian said.

Kurian, who in June was appointed interim CEO after the former CEO, Tom Georgens, was fired, was early this month officially named NetApp CEO.

NetApp reported revenue of $1.34 billion for its first fiscal 2016 quarter, which ended July 31. This was down from the $1.49 billion the company reported for the first fiscal quarter of 2014.

On a GAAP basis, NetApp in the first fiscal quarter of 2016 lost $30 million, or 10 cents per share, compared with GAAP income of $88 million, or 27 cents per share, in the same period last year. On a non-GAAP basis, the company reported income of $89 million, or 29 cents per share, compared with last year's $198 million, or 60 cents per share.

However, investors cheered the news, as revenue was within target expectations while earnings exceeded expectations. As a result, NetApp share prices, which closed the official trading day down 1.7 percent at $29.78, skyrocketed in after-market trading to a high of $34.84 per share before dipping to around $31 per share and then rising to over $33 per share in the early evening.

About 56 percent of NetApp's revenue came from the North American market, a share that has remained fairly steady over the past few years. About 77 percent of NetApp's sales came via indirect channels during the first fiscal quarter.

NetApp CFO Nick Noviello told CRN that NetApp did what it said it would do during the quarter.

"This quarter was the first half of a rebuilding phase," Noviello said. "The quarter was good. We were inside the range of revenue guidance, and did better than our guidance on [earnings per share]."

NetApp during the first quarter focused on improving sales via the channel, especially of its Clustered Data OnTap technology, Noviello said.

"Will we turn everybody overnight? No," he said. "Our channel partners need to understand the power of the transition, and the importance. So the first half is a rebuilding time for us."

NetApp's results exceeded expectations in part because of improved sales of the company's higher-end solutions.

The company reported unit shipments of its Clustered Data OnTap storage nodes increased 113 percent over the same period last year. The company cited a poor transition from its older 7-node FAS technology to Clustered Data OnTap technology for its lackluster fourth fiscal quarter financials.

Kurian said 7-node FAS shipments fell 7 percent over the same period last year. The 7-node storage operating system accounted for 35 percent of FAS sales in the quarter, down from about 75 percent last year. Clustered Data Ontap was deployed on 65 percent of the FAS systems shipped in the first quarter of 2016, up from roughly 25 percent a year ago, he said.

Meanwhile, NetApp's all-flash FAS storage unit sales rose 137 percent over the same period last year.

NetApp also continued to enjoy growth in sales of FlexPod reference architecture solutions developed in conjunction with Cisco, and recently started shipping hyper-converged infrastructure appliances based on VMware's EVO:Rail technology, Kurian said.

The quarter also saw NetApp add a new global channel chief and a new worldwide channel team, as well as increase channel marketing resources, Kurian said.

"I personally have met with partners in the Americas and EMEA [Europe, Middle East and Africa], and I've seen their enthusiasm," he said.

During the question-and-answer part of Tuesday's call, Kurian said NetApp was not concerned about the coming acquisition of rival Dot Hill by Seagate, which supplies disk drives to NetApp.

NetApp's competing Engenio line of arrays has done well for the company via its reseller channel, Kurian said. "We feel the acquisition does not impact our business," he said.

Looking forward, NetApp expects fiscal year 2016 revenue to be down 5 percent compared with fiscal year 2015, thanks to impact from foreign exchange headwinds and from limited top-line predictability in the first half of the year, which will ease in the second half of the year, the company said.

PUBLISHED AUG. 19, 2015