Revenue from NetApp all-flash spikes on strong demand

Demand for NetApp all-flash storage surged last quarter, part of strong growth across its cloud portfolio that helped it beat guidance on earnings, margins and revenue.

And the storage vendor has plenty of room for continued growth in flash, CEO George Kurian told investors on Wednesday.

“All-flash arrays now (account) for 14% of our installed base. It remains a small percentage of our installed base, but we continue to gain share and outpace the overall market,” Kurian said.

NetApp said net revenues for the July quarter grew to $1.47 billion, up 12% year over year, although that’s lower than the $1.64 billion it reported in May. Earnings per share of $1.04 beat consensus estimates by 24 cents.

NetApp’s all-flash array business, including sales of All Flash FAS (AFF), EF and SolidFire systems, grew 50% year over to year to an annualized net revenue run rate of $2.2 billion. Product revenue of $875 million was up 20%, while revenue from hardware/services ($370 million) and software maintenance ($229 million) remained relatively flat. Growth in product revenue was mostly due to NetApp’s flash and multicloud Data Fabric strategy, CFO Ron Pasek said.

The quarterly revenue figures included $50 million in enterprise software license revenue from strategic partners. NetApp adopted new accounting standards last quarter that reflects revenue from these type of software agreements up front, rather than over multiple quarters.

Non-GAAP gross margin of 66% was above the high point of NetApp’s guidance. Product margin of 56% marked an increase of 6 points, reflecting in part the inclusion of revenue from the enterprise licenses. Free cash flow of $262 million – cash generated by operations, minus expenditures and shareholder payouts – was 17.8% of NetApp revenues, compared to 27% in the prior quarter.

NetApp said it will issue a cash dividend of 40 cents per share in October.

The results mark the ninth straight quarter of gains for NetApp, bucking industrywide declines in networked storage sales. In July, analyst firm Gartner ranked NetApp second behind all-flash leader Pure Storage. But getting to that spot has been a tough slog for NetApp, which two years ago trailed competitors in both the converged infrastructure and all-flash segments.

Since then, Kurian said NetApp is the first storage vendor to introduce an end-to-end NVMe array, and it averages two SAN displacements a day of competing vendors.

“The market transition to flash, which is still in its early stages, creates enormous new opportunity for us. We continue to displace competitors’ legacy equipment and gain share in new workload deployments,” Kurian said.

The double-digit gains in product sales did not immediately resonate with investors. Shares in NetApp slid nearly 6.5% on heavy afterhours trading, closing at $82.47 a share, down 29 cents. The tepid response likely reflects investors’ ongoing unease with NetApp’s lackluster guidance in recent quarters.

Despite the strong financial results, NetApp gave cautious guidance for the second quarter. Pasek said NetApp is forecasting net revenue of $1.45 billion to $1.55 billion – barely meeting Wall Street’s expectations. At the midpoint, NetApp’s projection would imply a year-over-year increase of 6%.  NetApp shares are estimated to earn between 94 cents and $1, also lower than expectations. Consensus estimates are 97 cents per share on revenue of $1.5 billion.

NetApp all-flash and multicloud opportunities

Kurian said annualized revenue from cloud data services last quarter was approximately $20 million.

“(The 2019 fiscal year) is going to be foundational for the SaaS part of our business. Customers’ consumption patterns are shifting from (owning) data center equipment to hybrid cloud services. We are transforming our business to reflect that, while our competitors struggle to adapt to the cloud era and continue to fall behind,” Kurian said.

Product upgrades last quarter include version 9 of NetApp’s flagship OnTap operating system, adding NVMe over Fibre Channel as a non-disruptive software upgrade on the latest AFF arrays. NVMe over Fabrics technologies combine the performance of server-attached storage with the benefits of shared network storage.

NetApp all-flash product launches during the quarter included the NVMe-based AFF A800 array, which customers can add to existing SAN storage or buy as reference architecture for OnTap-powered AI workloads.

Expanded cloud offerings include beta of NetApp Cloud Volume Services for Google Cloud Platform and public preview of Azure NetApp Files, developed jointly with Microsoft.  Those cloud offerings are expected to be generally available in the second quarter. NetApp also supports Amazon Web Services cloud storage. NetApp also added cloud platforms to its FlexPod-SolidFire converged infrastructure.

Kurian sounded a cautious note on the global economy, which although strong, remains plagued with uncertainties surrounding tariff and trade policies. He said NetApp is planning ahead just in case.

“Enterprise IT spending is benefiting from the strength of the global economic outlook,” Kurian said. “We have shifted our investment and portfolio, and consequently our revenue mix, to high-growth areas of the market. We think this will continue for a period of time. At the macro level, as economic growth slows down, it will impact IT spending in the aggregate.”