Regarding NetApp’s strong second quarter

Analysis NetApp turned in a good second fiscal quarter 2019, though its all-flash array revenue growth rate slowed.

It spent a lot of earnings call time emphasising its Elements hyperconverged infrastructure prospects. This could imply that the the company has been slow out of the HCI starting blocks and / or that this is where it thinks the next growth kicker lies.

NetApp is the strongest standalone enterprise storage supplier. With its Data Fabric product set, the company is well-positioned as customers combine on-premises storage with multiple public cloud storage silos in a hybrid infrastructure. They need to store and move data between these locations and NetApp helps them do that. 

Here is a snapshot of NetApp’s Q2: 

  • Revenues of $1.52bn up 7 per cent on the year-ago $1.42bn
  •  Net income of $241m, up 38 per cent on the year-ago $175m
  • Product revenues $913mn were up 11 per cent y-o-y
  • All-flash array (AFA) business has $2.2bn annual run rate, up 29 per cent y-o-y
  • Cloud data services (led by Cloud Volumes) has a $27m run rate
  • $663m returned to shareholders via buy-backs ($561m) and dividends
  •  $165m cash flow from operations compared to $314m a year ago
Starting in fy17 we can see a pattern of gently and steadily  rising revenues emerging, with each 4-quarter group being higher than the previous one. See how fy18’s four quarters are each higher than those in fy17. So far fy19’s two quarters are each higher than the equivalent fy18 quarters.

In the earnings call CEO George Kurian said: “We delivered another quarter of solid results. Our Q2 revenue was in line with the expectations.” Almost boring.

William Blair analyst Jason Ader writes: “NetApp delivered mixed fiscal second-quarter results, beating consensus on non-GAAP EPS by $0.07 but slightly missing on revenue. … The culprit according to NetApp management was lower-than-expected federal sales, as a disproportionate amount of business this quarter was tied to multi-year projects, diminishing the effect of normal year-end budget flush.”

According to Wells Fargo senior analyst Aaron Rakers, NetApp said it had not dropped system prices because of lower NAND pricing. So that wasn’t the cause of the slowdown.

A mid-teens percentage of NetApp’s installed base has converted to all-flash arrays.  There are strong growth prospects as more of the base converts from all disk and hybrid flash-disk arrays to all-flash.

Why HCI?

NetApp boasted about the Cloud Data Services  business, but did not reveal the Elements HCI run-rate. However, Kurian was upbeat: “We are seeing strong momentum in NetApp HCI with significant wins against all of our competitors.”

CFO Ron Pasek sang off the same HCI-boosting hymn sheet: “Product revenue reflected the strength of our all-flash array business and expanding traction in our HCI platform as well as roughly a $20 million benefit from ELAs.”

ELAs (Enterprise License Agreements, are broad multi-year enterprise customer agreements with software-based capacity enablement. 

Kurian boosted HCI some more: “Our thesis on the HCI market that it was time for disruption with a mainstream enterprise grade offering, like in the all-flash arrays, absolutely playing out. We can’t be more excited looking forward.”

And yet, with all this enthusiasm, there are no standalone HCI numbers as there are for Cloud Data Services. This implies HCI is not growing slower and from a lower starting point.

 Multi-cloud could boost HCI

Analyst Erik Suppiger asked: “Could you compare the prospects for your multi-cloud with your HCI solution?”

Kurian said: “Multi cloud will inherently become a part of what most hyperconverged solutions will have to offer.”

He explained: “We are clearly uniquely positioned in the public cloud marketplace for having the ability to connect applications, infrastructure using NetApp Kubernetes service and data using a technology called Trident that we have to make multi-cloud, hybrid multi-cloud deployable today across all the major cloud providers. When we combine that with hyper-converged, you now not only get to do that on the public cloud but also on-prem.”

Then he hit the answer booster mode button and added: “All the other hyperconverged vendors have some form of walled garden they’re building in the public cloud that doesn’t give you the benefits of real public cloud. So, we’re excited you’ll see that play out and we’re just going to keep our head down and prove that out. We think we’ve got a really strong start the first half of the year in hyper-converged. Lookout out, here we come.”

Kurian acknowledged some issues about the HCI offering: “We’ve got work to do to continue to expand the scaling of our go-to-market pathways and to expand the number of price points that we need to address. But, we’re very-very pleased with where we are year-to-date.”

The company aims to increase sales by adding multi-cloud features to its HCI product line.

Competition and outlook

NetApp sees no change on the competition front, Ader said in the call, “despite recent data points suggesting a potential Dell-EMC resurgence in the storage market.”

NetApp gives the impression of a company on top of its own destinies, confident it’s delivering what its customers need and developing its products in the right direction.

 The outlook for the third quarter is revenues between $1.55bn and $1,65bn, which at the mid-point, implies a 4 per cent increase year-over-year; steady as she goes Cap’n Kurian.