NetApp revenue drops for yet another quarter

NetApp’s financial performance for a third consecutive quarter reflected the challenging economic climate as the company reported revenues were lower than expected, despite surpassing estimates.

In its first fiscal quarter of 2024, ended July 28, revenues were down 10 percent year-over-year to $1.43 billion. This was, however, above their forecast midpoint. NetApp reported profit of $149 million, representing a 30 percent fall from the previous year. The hybrid cloud segment generated revenues of $1.28 billion, a 12.3 percent decrease, while public cloud revenues stood at $154 million, marking a 16.7 percent increase. The public cloud annual run rate (ARR) saw a modest 6 percent rise to $619 million, but the direction of travel has some way to go to offset hybrid cloud revenue declines – $180 million this quarter.

CEO George Kurian said: “We delivered a solid start to fiscal year 2024 in what continues to be a challenging macroeconomic environment. We are managing the elements within our control, driving better performance in our storage business, and building a more focused approach to cloud.”

The market was affected by the challenging economic situation with muted demand and lengthened sales cycles. Billings dropped 17 percent annually to $1.3 billion. All-flash array sales were presented in ARR terms as being $2.8 billion, a 7 percent drop on a year ago. Positive momentum surrounds NetApp’s recently introduced the AFF C-Series array, which uses more affordable QLC flash. The product is pacing to be the quickest-growing all-flash system in the company’s history and NetApp expects AFA sales to rise. NetApp launched its SAN-specific ASA A-Series ONTAP systems in May and Kurian hopes they will “drive share gains in the $18 billion SAN market.”

Financial summary

  • Operating cash flow: $453 million up 61 percent year-over-year
  • EPS: $0.69 vs $0.96 a year ago
  • Share repurchases and dividends: $506 million
  • Cash, cash equivalents, and investments: $2.98 billion

A concerning note is that NetApp’s product sales have been on a downward trend for the past five quarters. At present, they stand at $590 million, marking a 25 percent year-on-year decline. Service revenues witnessed a 5 percent rise to $842 million but fell short of offsetting the decline in product sales.

Addressing the performance of NetApp’s all-flash and public cloud revenues, Kurian mentioned “focusing our enterprise sellers on the flash opportunity and building a dedicated model for cloud … The changes have been well received, are already showing up in pipeline expansion, and should help drive top line growth in the second half.” 

Kurian said flash revenues were particularly good last year because NetApp benefited “from elevated levels of backlog that we shipped in the comparable quarter last year. If you remove that backlog, flash actually grew year-on-year this quarter.” NetApp is second in the AFA market behind Dell, according to IDC. The CEO expects NetApp’s “overall flash portfolio to grow as a percentage of our business through the course of the year,” with AFA sales growing faster than hybrid flash/disk array sales.

Public cloud is a particular problem, with Kurian saying: “I want to acknowledge our cloud results have not been where we want them to be and assure you we are taking definitive action to hone our approach and get back on track … First party storage services, branded and sold by our cloud partners, position us uniquely and represent our biggest opportunity.” That means AWS, Azure, and Google, with news coming about the NetApp-Google offerings.

He added in the earnings call that “subscription is where we saw a challenge, both a small part of cloud storage subscription as well as CloudOps and we are conducting a review” to find out more clearly where things went wrong.

NetApp acknowledged the surge in interest in generative AI and said it was well represented in customers’ projects.

NetApp and Pure Storage

NetApp has been announcing its all-flash array storage ARR numbers for the past seven quarters. That gives us a means of comparing them to Pure Storage’s quarterly revenues, either by dividing NetApp’s AFA numbers by four to get a quarterly number, or multiplying Pure’s quarterly revenues by four to get an ARR. We chose the former, normalized it for Pure’s financial quarters, and charted the result: 

By our reckoning Pure’s revenues, based on all-flash sales, passed NetApp’s last quarter, but NetApp has regained the lead with its latest quarter’s revenues.

NetApp was asked in the earnings call about Pure’s assertion “that there won’t be any new spinning disk drives manufactured in five years.” Kurian disputed this, saying: “When you cannot support a type of technology, like our competitors cannot, then you have to throw grenades and say that that technology doesn’t exist because you frankly can’t support it.”

Next quarter’s revenues are expected to be $1.53 billion, with a possible deviation of $75 million. This represents an estimated 8 percent annual decline. Kurian said NetApp expects to see “top line growth in the back half of FY’24,” meaning the second and third quarters should see a revenue uptick. That should be mostly due to increased AFA sales with some contribution from the public cloud business.