NetApp Q2 Channel Sales Growth Trumps Direct Account Weakness

Increased channel sales, however, were mitigated somewhat by a weakness in the company's largest direct accounts.

In addition to discussing the quarter's results, Tom Georgens, NetApp president and CEO, used Wednesday's analyst call to address concerns about the discovery that an Italian reseller had sold NetApp equipment as part of a storage and archiving solution slated to be used by the government of Syria to crack down on protesters in that country.

Georgens said that NetApp had no intention to ship any products to Syria, and that it did not do anything to find a legal loophole by selling through the Italian reseller. He also said that the NetApp storage equipment sold as part of the solution to Syria was equipment that could be used for any storage purpose, and that his company was working with the U.S. government to investigate the issue.

"We're as disturbed about the report as anyone. We have no interest in providing product to a banned country," he said.

For its second fiscal 2012 quarter, which ended October 28, NetApp reported revenue of $1.5 billion, up 20 percent compared to the $1.3 billion it reported for last year's second quarter.

NetApp also reported income of $165.6 million, or 44 cents per share, up from the $175.4 million, or 45 cents per share, it reported last year.

NetApp's sales channels are continuing to do very well, with sales through solution providers and other channel partners reaching new heights, Georgens on Wednesday told CRN.

Sales through NetApp's distributors, Arrow and Avnet, grew about 18 percent over last year, and now account for 31 percent of the company's total revenue, Georgens said. Total sales through indirect channels, including OEM sales resulting from NetApp's March acquisition of LSI's Engenio business, reached an all-time high of 80 percent of total revenue, he said.

The U.S. market is driving NetApp's increasing channel business, Georgens said.

"The numbers actually moving channel sales up is in the U.S. business," he said. "Asia is almost all-channel. Europe is almost all-channel. Government sales are all-channel. But we'll never hit 100 percent channel sales. We'll always have some direct accounts."

NetApp currently has 46 large named accounts where its deals primarily direct, and the company took a bit of a revenue hit from that part of its business.

Steve Gomo, NetApp's executive vice president and CFO, said that of those direct accounts, nine of them showed lower-than-expected purchases during the second fiscal quarter.

NetApp's branded product sales revenue grew by only 3 percent during the quarter, Gomo said. "(Sales were) impacted primarily by softness in those nine major accounts," he said.

During his financial analyst presentation, Georgens said that NetApp currently has over 400 customers for its FlexPod converged infrastructure offering, and is enjoying a robust pipeline for future sales.

Looking forward, NetApp estimates revenue for its third fiscal quarter to be between $1.52 billion and $1.61 billion, which is between 18 percent and 25 percent higher than its third fiscal 2011 quarter revenue.

The company also expects third quarter earnings of 36 cents to 40 cents per share.

NetApp also addressed the hard drive shortage caused by this year's massive Thailand floods.

"We believe we'll have sufficient drive inventory through the end of December, but it's difficult for anybody to predict what will happen beyond that," Gomo said.