NetApp CEO: Company Misses Revenue Expectations, But Flash, Cloud Lay Ground For Future Growth

A focus on three key new product areas gave NetApp strong margins and earnings for its third quarter fiscal 2019, but that did not provide much support for revenue growth.

NetApp Wednesday said its flash storage, private cloud and cloud data services businesses were great for the Sunnyvale, Calif.-based company's bottom line, but that headwinds from macroeconomic factors kept revenue growth below expectations.

By focusing on the variables it could control, NetApp enjoyed strong operational margins and gross margins during the quarter and provided a path for future growth, said CEO George Kurian.

[Related: NetApp's All-Flash Storage Array Sales Take Crown From Dell EMC]

"Regardless of the headwinds, we remain confident in the future," Kurian said during prepared remarks for NetApp's quarterly financial analyst conference call.

Kurian cited macroeconomic conditions outside the company's control, including trade concerns, as headwinds during the quarter. "[But] we did not see any real change in the competitive environment," he said.

When asked by an analyst why Cisco CEO Chuck Robbins did not seem to see any macroeconomic issues in Cisco's second quarter fiscal 2019 results, which were also reported Wednesday, Kurian said he was unable to comment on that.

"I'll leave that to Chuck," he said.

As customers continue their digital transformation and look for ways to generate new insight based on data, Kurian said NetApp is the only company able to meet the three top customer imperatives including the shift from disk-based storage to flash storage, the shift from traditional IT to private cloud, and the shift from on-premises infrastructure to hybrid cloud.

"It is in these three strategic battlegrounds that we have substantial opportunity to exploit the advantages created by the NetApp Data Fabric and take share," he said.

NetApp is helping drive the market transition to flash storage and saw its flash storage business grow 19 percent over last year to an annual run rate of $2.4 billion, Kurian said. At the same time, NetApp has ensured that all its flash storage comes with built-in cloud connectivity, he said.

For now, Kurian said, only 15 percent of NetApp's large installed base has added flash to the mix. "The run rate for this market is still in the early innings," he said.

When asked by an analyst how flash sales to that installed base as a percentage will grow, Kurian said there is much opportunity to grow, even as the percentage of NetApp's installed base adopt flash grows so does its installed base as a whole, which means it will take time to see the overall percentage grow.

"We're seeing both the numerator and denominator grow," he said.

In the shift from traditional IT to private cloud, NetApp continues to introduce new artificial intelligence and flash technologies, including technology that accelerates workflows with flash connections to public cloud storage, Kurian said.

"As a result, the momentum in our private cloud business accelerated in the third quarter," he said.

In the shift from on-premises infrastructure to hybrid cloud, NetApp has placed a huge focus on its new cloud data services business, Kurian said. For the third quarter, NetApp saw what Kurian called a $33 million annual revenue run rate, which was up 22 percent over the second quarter. And, he said, two-thirds of that came from customers who are net-new to NetApp.

That is making this year a fundamental year for NetApp's cloud data services business, Kurian said. "While still in the early phases, we are well positioned for when these services become widely available," he said.

When asked by an analyst how the announcement by Amazon Web Services CEO Andy Jassy that AWS is bringing file-based services to its public cloud offering might impact NetApp's ability to grow its cloud business, Kurian said NetApp continues to see real uptake in its Cloud Volumes on AWS offering.

"I'm sure [Jassy] has his offerings, but we continue to see growth," he said.

About 80 percent of NetApp's revenue comes through indirect channels, a percentage that has been stable for some time, Kurian said.

For its third fiscal quarter 2019, NetApp reported revenue of $1.56 billion, up about 2 percent from the $1.54 billion the company reported in its third fiscal quarter 2018.

Income on a GAAP basis for the quarter reached $249 million, or 98 cents per share, compared with last year's GAAP loss of $479 million, or $1.79 per share.

On a non-GAAP basis, NetApp reported income of $305 million, or $1.20 per share, compared with last year's $289 million, or $1.05 per share.

The company did change how it reported its financials this quarter after adopting the Revenue from Contracts with Customers, or ASC 606 accounting rules, and restated prior results to match the new rules.

Analysts had been expecting revenue of $1.6 billion and earnings per share of $1.15, according to Seeking Alpha.

Looking forward, NetApp provided revenue guidance for its fourth quarter fiscal 2019 of $1.59 billion to $1.69 billion, which at the halfway point of $1.64 billion is flat with fourth quarter fiscal 2018.

NetApp also said it expects next quarter's earnings per share on a GAAP basis of $1.06 to $1.12 compared with last ear's 99 cents per share, and non-GAAP earnings of $1.22 to $1.28 per share compared with last year's $1.05 per share.

Analysts had been expecting fourth-quarter guidance of $1.7 billion and earnings per share of $1.25, according to Seeking Alpha.

NetApp reported its financials after the close of trading Wednesday. In after-hours trading, share prices hovered for several hours down about 7 percent over closing prices.