NetApp sees ‘early signs of relief in supply availability’

Supply chain woes, war in Ukraine, inflation – none of these appear to have had much affect on NetApp, which declared strong results for its first fiscal 2023 quarter and forecast continued growth for the next, with CFO Mike Berry remarking: “We are seeing early signs of relief in supply availability.”

Revenues of $1.59 billion were reported for the quarter ended July 29, up 9 per cent on the year, with profits of $214 million, up 5.9 percent annually. The outlook for the next quarter is for revenues between $1.595 billion and $1.745 billion, $1.67 billion at the mid-point, which would represent a 6.3 percent year-on-year increase.

Berry said in his earnings call remarks: “In Q1, despite elevated freight and logistical expense, significant component cost premiums and unprecedented FX headwinds, we delivered solid revenue with both operating margin and EPS coming in above the high end of guidance.”

CEO George Kurian added: “We delivered a great start to the year, with company all-time Q1 highs for billings, revenue, gross margin dollars, operating income, and EPS, fueled by broad-based demand across our portfolio and geographies. Achieving record results in the face of ongoing macroeconomic uncertainty, decades-high inflation, and supply constraints underscores our disciplined operational management.” 

NetApp revenues
A chart of quarterly revenues by fiscal years shows this is NetApp’s ninth consecutive growth quarter and conforms its Q1 record revenue (blue line)

He said that the COVID pandemic and turbulent macroeconomy – meaning inflation, the Ukraine-Russia war, and supply chain woes – caused an urgency for customers to respond to “the complexities created by rapid data and cloud growth, multi-cloud management, and the adoption of next-generation technologies, such as AI, Kubernetes, and modern databases.” Dollar foreign exchange rates did not work in NetApp’s favor either.

Financial summary

  • EPS: $0.96 compared to $0.88 a year ago.
  • Cash flow from operations: $281 million. It was $242 million a year ago.
  • Free cash flow: $216 million, down from last quarter’s $343 million but up from the year-ago $191 million.
  • Net cash: $802 million compared to $1.489 billion a quarter ago.
  • Gross margin: 66.7 percent vs 69.3 percent a year ago.
  • Deferred revenue: $4.2 billion, up 7 percent annually.

Product revenues were $786 million, up 7 percent. Software product revenues grew 15 percent year-on-year to $476 million, while hardware product revenues declined 2 per cent on the year to $310 million.

AFA revenues

The run rate for all-flash arrays (AFA) was said to be $3 billion, implying $750 million AFA revenue for the quarter. This run rate was down on the prior quarter’s $3.2 billion.

Kurian attributed this to “the combination of some supply constraints and also we have an FX (foreign exchange) headwind to product revenue.” 

There was a possible switch in customer spending as well. “At times like this in the past, we have seen customers choose to buy more economic configurations in certain cases. So we had a strong quarter in our hybrid flash segment, which is really targeting customers who want to buy the most cost-effective configuration.”

Back in June, Pure, which only sells all-flash arrays, reported 50 percent year-on-year revenue growth to $620.4 million. Dell’s Q1 2023 results were reported in May with 16 percent revenue growth overall and storage growing at 9 percent to $4.2 billion. That storage growth rate is the same as NetApp’s, with Pure outpacing both of them.

Inside NetApp’s installed base, 32 percent of customers are now running all-flash arrays. It was 31 percent and 29 percent in the previous and year-ago quarters, respectively. 

NetApp revenues
NetApp’s revenues and profits fy2017 to fy2023 with Q1 column tops circled

Public cloud on the Spot

NetApp’s public cloud area is doing well, helped by the acquisition of Instaclustr, which contributed about $35 million of annual recurring revenue (ARR) in the quarter. Kurian said there was “strong demand for our Public Cloud services. Public Cloud ARR grew 73 percent year-over-year, exiting Q1 at $584 million. Public Cloud segment revenue grew 67 percent from Q1 a year ago to $132 million and dollar-based net revenue retention rate of 151 percent remains healthy. We continue to expand our Public Cloud customer base, the penetration into our Hybrid Cloud installed base, and the percentage of customers using multiple of our public cloud services.”

Public cloud revenues – led by Azure NetApp Files, the largest portion, AWS FSx for ONTAP, and Google CVS – are a small but constantly growing fraction of NetApp’s main (hybrid cloud) revenues.

NetApp cloud revenues

CFO Mike Berry said: “Our Public Cloud business had an outstanding quarter, with excellent performance by our Cloud Volume service offerings from AWS, Azure and Google Cloud, which collectively grew ARR over 100 percent year-over-year. We also saw improved execution in our CloudOps portfolio.”

Kurian commented: “We’ve had a really good start to the year in the Spot portfolio, where we’ve had new sales leadership, strong disciplined execution in the product team and in the field organization, and I feel pretty good about the focus so far.”

William Blair analyst Jason Ader said there was “a rebound in the Spot portfolio and continued Cloud Volumes Service strength across the three big hyperscalers (collectively up triple digits).”

Kurian answered an earnings call question about the public cloud business, saying: “We see strong demand for our offerings because they help our customers use the cloud more efficiently. Our storage cloud services are much more efficient than sort of hyperscaler native services, so you can get more performance for less dollars using our capabilities.

NetApp will be adding sales and marketing head count in the public cloud area. It provided a forecast for Public Cloud ARR at the exit of fiscal 2023 in the range of $780 million to $820 million.

Supply chain

Wells Fargo analyst Aaron Rakers said public cloud ARR is expected to grow 10-11 percent quarter-on-quarter in the next quarter, implying 72 percent annual growth. He added: “NetApp noted that it is seeing early signs of supply chain relief and expects inventory normalization to be a tailwind to FCF (Free Cash Flow) through fy2023.”

Looking ahead, Mike Berry said: “We are seeing early signs of relief in supply availability. The timing of a full supply recovery remains uncertain… We are cautiously optimistic that supply constraints will ease further in the second half of our fiscal year, reducing our dependence on procuring parts at significant premiums. We should also start to see a benefit from declining prices for our hardware components.” Good news on the supply chain front will be welcome.

NetApp provided a full fiscal 2023 forecast of 6 to 8 percent revenue growth over 2022. At the mid-point that means $6.76 billion, which would be a record amount.