NetApp confirms revenue miss as enterprises reduce AFA purchases

A sharp slowdown in enterprise customers’ all-flash array purchases has sucker-punched NetApp, and though it is hiring more sales heads to fix this worry, things aren’t forecast to get better anytime soon.

NetApp warned investors two weeks ago that things had gone awry but the actual decline for its Q1 fiscal ’20 ended 26 July (PDF) was less bad than the company detailed: revenue dropped 15.6 per cent year-on-year to $1.236bn.

Product sales was where the pain was felt the most, sliding 26.4 per cent to $644m, though hardware maintenance didn’t help, dipping 7.5 per cent to $342m. Only software maintenance moving in the right direction for the company, rising to $250m from $229m.

Two-thirds of the slide was attributed by senior management to macroeconomic concerns, such as the US-China trade dispute, and a third to sales execution issues.

CEO George Kurian said he was “clearly disappointed” in the top-line figure and claimed work to improve its gross margin and “cost structure” in recent years “enables us to navigate the ongoing macroeconomic headwinds”.

“We have further analysed the dynamics of what happened in the first quarter and they confirm that we are seeing a combination of slowdown related to overall macro conditions and company specific go-to-market execution issues,” said the CEO.

“We continue to see pressure on deal sizes, longer sales cycles and deferral of transaction… our underperformance is not across the board. Our APAC, Europe and US Public Sector geographies are mostly on track.”

He used the example of two major clients that are “exposed to the China tariff situation” that had slashed their capital spending by “north of 30 per cent year-on-year”.

The top global customer accounts and corporate business in the Americas proved to be NetApp’s soft underbelly, Kurian added, saying it needed to “expand our share of wallet” with some of the bigger businesses.

“We have deep relationships with too few of these customers, which increases our susceptibility to a slowdown in spending related to the macro.”

The all-flash array run rate slipped 24 per cent to $1.7bn.

In the earnings call, Kurian said:

“What we saw with our AFA business is that customers bought more of the mid-range configurations and bought the capacity that they needed for the next year, rather than rightsizing the equipment for a three-year outlook.”

The fix? Getting in front of more buyers by investing in “sales capacity without increasing total operating expenses, by continuing to make disciplined trade offs in our spending priorities”. NetApp saved money by moving 15 EMEA countries from direct NetApp coverage to being looked after by channel middlemen.

Some 200 sales people will be bolted onto the business with a specific target for the Americas, winning new accounts and cross-selling to existing punters. Thomas Stanley, the senior veep in charge of the Americas, has resigned.

The second part of the get-better proposal was to market the ass out of its all-flash gear in areas where customers are still spending.

“We expect that this, combined with additional sales capacity will return us to a position of growth in the all-flash market,” said the boss man.

NetApp has made its services available in Azure and is adding Google to the list – Kurian’s twin brother Thomas heads up Google’s Cloud biz. No surprises here, but NetApp forecast revenue acceleration in its Cloud Data Services in the public and private cloud.

Kurian said Cloud Data Services sales are “also helping us now with new footprint on-premises, as customers now say, listen, I discovered NetApp in the public cloud. I want to give them a bigger footprint on-prem.”

Expenses for the quarter were marginally up, but the sales hit fed into the profit drop, with net earnings down 63 per cent to $103m.

Sombre outlook

The macroeconomic situation behind most of the decline is not going to get better quickly, Kurian warned.

“With regard to our outlook for the rest of the year, we are not expecting a rapid resolution of either the macro or some of the uncertainty around trade… we’re not expecting some miraculous rebound in terms of the macro environment.”

The full 2020 outlook is for revenues to be down 5 to 10 per cent on the prior year.

Meanwhile, Cisco’s latest results also showed a marked slowdown in enterprise purchases, and it too called out the trade war with China as the dampening factor. “We’re being uninvited to bid. We’re not being allowed to even participate anymore,” Cisco CEO Chuck Robbins told analysts last night.

Wells Fargo senior analyst Aaron Rakers wrote: “With increased macro and geopolitical uncertainties (most notably seen in weakened enterprise results and very weak service provider trends), Cisco is guiding F1Q20 (Oct ’19) revenue to grow 0 to 2 per cent y/y.”

This supports NetApp’s view that that the macroeconomic situation will affect all suppliers of IT to large enterprises. We’ll see if this is confirmed when Pure Storage and Dell Technologies report their quarterly results later this month.