UPDATED 19:53 EDT / FEBRUARY 14 2018

INFRA

NetApp earnings impress, but weak guidance sends shares plummeting

NetApp Inc.’s stock plunged almost 13 percent in early trading Thursday after the company issued only somewhat weaker-than-expected guidance for the current quarter.

The shares recovered to fall only 5 percent by the end of the day. Nonetheless, it’s clear investors were unhappy despite the networked storage firm’s better-than-expected earnings for its fiscal third quarter reported Wednesday.

Revenue rose 8 percent, and earnings per share before certain costs such as stock compensation of 99 cents also handily surpassed analysts’ expectations of 91 cents per share. On paper, the storage provider posted a loss of $506 million for the quarter thanks to a onetime $856 million charge related to tax cuts in the U.S.

NetApp has spent the last two years pivoting its business model away from a legacy focus on network storage to cloud, all-flash arrays and hyperconverged storage. By all indications, executives said, the strategy is paying off. Revenue from strategic solutions, which comprise the new product lines, grew 26 percent in the quarter, and now make up 70 percent of overall revenue, said Chief Executive George Kurian (pictured).

Declines in the company’s legacy network storage business have also halted. Meanwhile, the all-flash business grew 50 percent and is now on an annualized run rate of $2 billion. “The 26 percent year-over-year growth in strategic products is a good benchmark, and for mature products to reach stabilization gives us confidence,” Kurian said.

NetApp said the shift in customer sentiment away from network-attached storage to hyperconverged and cloud infrastructure drove an average of two competitive displacements per day during the quarter. “As customers build cloud-architected data centers, they’re turning to simpler deployment models of converged and hyperconverged infrastructure,” Kurian said. NetApp’s converged infrastructure-related business grew by a half-percent in the quarter, and the company said it’s gaining share, according to International Data Corp. estimates.

On the company’s earnings call, executives were repeatedly questioned about the weaker-than-expected fourth-quarter guidance. NetApp’s revenue estimates of $1.525 billion to $1.675 billion came in slightly below Wall Street’s forecast and indicated seasonal weakness that hasn’t been seen for the last two years. NetApp executives were cagey about offering any further help before its upcoming analyst day in April, prompting one analyst to remark, “It’s almost a hide-and-seek here.”

“Gross margin coming in lighter could suggest that competitive intensity might return,” Barclays analyst Mark Moskowitz wrote in a note to clients. “The company deferred a lot of details to its April 5 analyst meeting, which could concern investors that bigger problems are being masked.”

NetApp executives said nothing is out of the ordinary, though. “Overall growth [in the fiscal fourth quarter] should be in the range you see in the current quarter,” Kurian said. Added Chief Financial Officer Ron Pasek, “We’ve been consistent in the guidance we’ve given all year. We’re not trying to be better or worse, just consistent.”

On the competitive front, executives said they’ve never been more confident in their position versus Dell Technologies Inc.’s market-leading Dell EMC subsidiary. “They have to rationalize a confusing product portfolio and they lack a compelling cloud story,” Kurian said. “They have fundamental alignment issues with customer needs.”

Dell EMC officials admitted as much in the company’s most recent earnings announcement, when senior Dell executive Jeff Clarke praised NetApp for “extreme focus and clarity,” qualities he said Dell EMC needed to emulate. Clarke effectively took over the former EMC’s storage portfolio in a shakeup last month.

NetApp executives said their company’s cloud strength is also driving on-premises deployments with customers that are building hybrid cloud environments. They also said NetApp is benefiting from surging interest in artificial intelligence projects, which need large amounts of data for training. “We are seeing customers start to build out those environments in line with [graphics processing unit] stacks or in the cloud, and we are the only vendor who can deliver both on premises and in the cloud,” Kurian said.

That cheered some analysts. “Commentary related to cloud services seems to suggest NetApp could have a first-mover advantage when that revenue arrives later this year,” Moskowitz said.

Image: NetApp

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