CEO cites NetApp cloud storage as key to turnaround

Like most storage vendors, NetApp is working hard to make the cloud a big part of its long-term strategy. It's also finding customer defections to the cloud hurting its sales in the short term.

During its quarterly earnings call last week, NetApp said it missed expectations for revenue and earnings, with its sales of $1.4 billion down 10% from the same quarter a year ago. That continued a string of disappointing quarters for NetApp, which was riding high until its slump. Two years ago, NetApp was the only legacy vendor that managed to post gains in external storage sales, while its competitors lost share or stayed flat.

NetApp projects its 2020 fiscal-year revenue will fall by 10% from a year ago, a wider drop than the 8% decline it projected three months ago. Revenue guidance for next quarter ranges between $1.45 billion and $1.65 billion, which at the midpoint would imply a drop of 4% from last year.

NetApp CEO George Kurian said the vendor's cloud storage and Data Fabric-connected storage hardware provide a baseline for future growth. But that growth may have to wait until a recent expansion of the sales team goes into full effect. In the meantime, NetApp will selectively invest in storage technologies, but otherwise plans to limit operating expenses.

George Kurian

Kurian blamed macroeconomics with making enterprise customers more cautious and deliberate in buying new storage, but that's only part of the story. NetApp, which gained early traction from its Data Fabric launch, has come back to the pack as other storage vendors have brought to market similar branded storage fabrics to manage data across hybrid clouds.

"I think that we're seeing the environment is choppy," Kurian said during the earnings conference call. "We are seeing that customer spending, enterprise IT spending for on-premises data centers is choppy and that has been true for a few quarters now. Do I have enough data to say, it's a shade better or a shade worse? I don't have that data right? I'm just saying it is pretty choppy and uncertain."

Kurian said customers moving to the cloud can be a "near-term hindrance to revenue growth" but expands NetApp's potential revenue in the long run if it can help them store and manage data in the cloud.

"People are buying for now versus buying capacity for the long term," he said. "Even though you hand people incentives to buy a larger transaction, they're more sort of comfortable buying for the short term."

To turn things around, NetApp hopes to win more customers like Pacific Biosciences, or PacBio, a manufacturing company that makes advanced equipment for genome sequencing. The company, based in Menlo Park, Calif., uses NetApp cloud storage and Data Fabric technologies to seamlessly allocate storage on demand across its research environment.

"It allows us to kind of scale out and scale up and grow performance, while still leveraging our existing storage investments," said Adam Knight, PacBio's senior IT manager. "The cool thing about Data Fabric is how it lets us connect a complex, high-performance pool of storage and gives us the flexibility to use it how we want."

For all its talk about NetApp cloud storage, the vendor still gets the lion's share of its revenue from sales of hardware arrays. NetApp posted a revenue run rate for all-flash of $2.3 billion during the quarter, a 7% jump quarter on quarter but down 1% from the prior year.

Annualized recurring revenue from NetApp Cloud Data Services -- which allows customers to run Ontap file storage in Amazon Web Services, Google Cloud Platform and Microsoft Azure -- came in at $83 million. NetApp private cloud storage business, which includes NetApp HCI, all-flash SolidFire arrays and StorageGrid object storage, remained flat quarter to quarter at $344 million.

Kurian concedes his company needs to "get in front of more customers," a strategy that is fueling a surge of newly hired salespeople, particularly in the Americas. NetApp has been boosting sales staff by about 50 people each quarter during the past several quarters. It expects to have about 200 new sales reps fully trained in the field by the first quarter of 2021.

The exodus of executives from NetApp is also continuing with the retirement of Ron Pasek, who said he will leave the company in March after four years on the job. Pasek is staying on to aid in a search for his successor. His departure follows those last year of NetApp founder Dave Hitz and top execs Tom Mendoza and Joel Reich.

NetApp said it has not experienced any impact to its supply chain as a result of the Coronavirus in China.