NetApp released their ER last night and it looks like bad news…
Summary
https://seekingalpha.com/news/3433054-netapp-minus-7-percent…
NetApp (NASDAQ:NTAP) drops 7% on Q3 results that beat on EPS but missed on revenue. Q4 guidance has downside revenue from $1.59B to $1.69B (consensus: $1.7B) and in-line EPS from $1.22 to $1.28 (consensus: $1.25).
Revenue breakdown: Product, $967M (consensus: $1B); Software/maintenance, $239M (consensus: $234.5M) Service, $357M (consensus: $368.3M).
Earnings Release
https://seekingalpha.com/pr/17411771-netapp-reports-third-qu…
AFA increased 19% (down from previous quarter’s growth of 29%)
“Our flash, hybrid cloud infrastructure, and AI solutions are serving as pillars of customers’ new architectures and we are seeing adoption of our cloud offerings as part of our customers’ foundation for moving applications and data to the cloud.
Earnings Call
https://seekingalpha.com/article/4240859-netapp-inc-ntap-ceo…
Relevant excerpts for Pure & Nutanix…
AFA increased 19% (down from previous quarter’s growth of 29%)
“Our flash, hybrid cloud infrastructure, and AI solutions are serving as pillars of customers’ new architectures and we are seeing adoption of our cloud offerings as part of our customers’ foundation for moving applications and data to the cloud.
After a normal close to the calendar year, we saw slowdown in purchasing across the Board in January, driven by deteriorating outlooks for the global economy, as well as uncertainty around trade policy.
In the face of these headwinds, our largest customers became more cautious in their purchasing behavior and sought more information on the implications for their businesses of slowing economies. We did not see any real change in the competitive environment. Our wind rates stay constant and our pipeline remains healthy. Our customers’ purchasing decision continue to be based on our features, capabilities and future-proofed cloud integration strategy.
Even in the face of softening demand, we were able to further expand product margins in the third quarter by focusing on the value our solutions bring in addressing customers’ largest IT imperatives. Like any company, we do not have perfect visibility into all the reasons for purchasing slowdown…
This requirement for hybrid multi-cloud capabilities is creating three significant market transitions: disk to flash, traditional IT to private cloud and on-premises infrastructure to hybrid clouds. It is in these key strategic battlegrounds that we have substantial opportunity to exploit the advantages created by the NetApp Data Fabric and take share.
We are driving the market transition from disk to flash, as we help customers modernize, simplify and improve application performance. We are displacing competitors’ complex equipment, gaining share in new workload deployments and upgrading our installed base with cloud-connected all-flash solutions.
In Q3, our all-flash array business inclusive of all-flash FAS, EF and SolidFire products and services grew 19% year-over-year to an annualized net revenue run rate of $2.4 billion. We are over-indexed in the large and growing all-flash market with a significantly higher all-flash array share than in the total storage market.
Our advantage here will continue, as the market shifts to flash, and we expect that shift to accelerate with ongoing NAND price declines. All-flash arrays carry a higher ASP, which benefits not only product revenue, but also recurring services revenue, with only 15% of our installed base currently running all-flash arrays. The runway for this secular transition remains in the early innings.
The second major market transition we’re exploiting is the shift from traditional IT to private cloud. SolidFire and NetApp ACI are the building blocks for private cloud deployments, enabling customers to bring public cloud-like experience and economics into their data centers.
In the third quarter, we announced new validated and proven architectures that simplify the design, deployment and support of on-demand services and applications, as well as support hybrid cloud workflows with an on-premises S3-compatible object storage. Customers are embracing our unique value that couples extreme ease of use with enterprise scalability and quality of service. And as a result, the momentum in our private cloud business that began in the October quarter accelerated in Q3.
The shift from on-premises infrastructure to hybrid clouds is the third key market transition that we are taking advantage of to expand our business. Only NetApp is building a comprehensive set of cloud data services available across multiple clouds. We help customers extend on-premises environments to the cloud, deploy enterprise workloads in the cloud and build and refactor primary workloads for the cloud, with tools to optimize hybrid cloud workloads and cost.
Based on the last month of Q3, our cloud data services annualized recurring revenue is approximately $33 million, up 22% from Q2. As we said before, this is a foundational year for our cloud data services, during which we are focusing on operational readiness and deployment with the hyperscalers…
In the phase of a slower demand environment, our business model leverage and the secular tailwinds created by the three key market transitions: flash, private cloud and cloud data services, will enable us to continue to deliver on the commitments we’ve made to shareholders, partners and customers.
Wamsi Mohan
Okay, great. And, George, just a quick clarification for you. I think you noted that elasticity of demand could sort of kick in, given these NAND prices. Is there typically three to six-month lag, but you expect to see this elasticity of demand with the macro environment sort of clouding, maybe the elasticity of demand from kicking in faster?
George Kurian
We think that over time, as NAND prices continue to decline that customers will shift the mix of their business from disk-based systems to flash-based systems. We saw good acceleration in our flash system counts through the course of the quarter. We saw some incremental caution in terms of how much capacity customers were buying, which could be correlated to buying or today’s needs as apposed to building out for their entire future requirement.
So we saw a little bit of that. It – it’s reflective a bit to the macro environment. We believe that as NAND prices continue to move favorably, it gives us an opportunity. We are well positioned in the flash market. We have strong differentiation with software, which has allowed us to preserve and even grow gross margins. And if you look at the ASPs of a flash-based system as opposed to a disk-based system, they are actually higher. So we think that’s a good trend for us to capitalize on.
Alex Kurtz
Yes. Thanks for taking the questions, guys. George, just on hyperconverged, I know this has been a big area of investment for the company over the last couple of years. I know it’s still kind of working its way through the channel and with the sales organization if we’re looking to fiscal 2020. Are you prepared at this point to provide kind of a run rate that you think is reasonable or a percentage of product revenue, or just serve the contribution to the overall product side of the business, that would be helpful to understand?
George Kurian
Our overall private cloud business, meaning, SolidFire deployed standalone or as part of a hyper-converged model. For large customers, they deploy standalone for smaller and mid-market customers they deployed as hyper-converged, as well as object storage, which are deploying for cloud native applications in a private cloud form or a substantial contributor to NetApp’s revenue this quarter.
I’m not prepared at this point to break it out. But I can tell you that, they performed in a really good pattern across customer accounts, revenue contribution, units, you name it, we guide it. And we think that as we look forward to fiscal 2020, it gives us a really strong second leg foundation to our growth, right?
So we’re already a leader in the al-flash array market. We are seeing accelerating and materially accelerating momentum in the private cloud game. So stay tuned. We’ll tell you more as we headed to fiscal 2020.
Simon Leopold
Great. Thank you for taking the question. I wanted to see if you could talk a little bit about what’s happening in your competitive environment? And to what degree your growth is driven by your customer base upgrading their base of NetApp platforms versus to what degree are you dependent on basically taking footprint from others in the marketplace? Thank you.
George Kurian
We did not see any change in the competitive dynamic through the quarter. I would say that when you look at our all-flash array business, it is expanding wallet that we used to not have within our traditional enterprise customers, as well as through our cloud solutions, both private cloud and certainly public cloud solutions, we are expanding to net new customers.
I’ll simply give you some data, which says that, of all of our cloud customers that we are engaged with either through the hyperscalers or through our own cloud software offerings, two-thirds of them are net new to NetApp. So they’re opening up new relationships and new logos for us to acquire.
So we did not see any fundamental change within the competitive landscape. We think that as the market transitions from disk base to flash-based systems, given that we are a leader in all-flash with a substantially higher market share percentage than we are in disk, there are a lot of weak large players in disk-based systems that we will take share from: IBM, Hitachi, Fujitsu, Oracle, HP, there’s a lot of them. And even Dell has a challenged mid-range portfolio and IM portfolio. So we feel good about our opportunities. We’ve got to execute to capture them.
