NetApp CEO: Cloud, Flash Storage, AI Innovations Will Lead To Growth

‘We are participating in the areas of priority spending with a modern approach to hybrid, multi-cloud infrastructure and data management. By providing customers with the ability to leverage data across their entire estate with simplicity, security, and sustainability, we increase our relevance and value. And we continue to introduce new innovations to deliver greater customer value, further strengthening our position,’ says NetApp CEO George Kurian.

Investors are looking kindly on NetApp after taking heart in how the storage company beat fourth fiscal quarter 2023 expectations while looking past less-than-stellar fourth quarter financial performance and fiscal 2024 expectations.

NetApp Thursday saw its stock price soar nearly 9 percent to over $72 per share following the release late Wednesday of its fiscal fourth quarter 2023 and fiscal year 2023 financials.

For all of fiscal 2023, NetApp reported growth in revenue and in GAAP and non-GAAP net income. However, the company’s fiscal fourth quarter revenue and GAAP income lagged over those of last year.

[Related: NetApp CEO Kurian: Cloud Optimization Spending Takes Toll On Financials ]

NetApp CEO George Kurian, speaking to financial analysts at Wednesday’s quarterly financial conference call, said in his prepared remarks that the San Jose, Calif.-based company’s fourth quarter Q4 results reflect solid execution in the face of ongoing macroeconomic challenges.

“We delivered revenue above the midpoint of our guidance, with disciplined operational management yielding all-time high quarterly operating margin and EPS above expectations,” Kurian said. “For FY23, we delivered record high annual operating margin and EPS, despite the slow demand environment and relatively flat revenue from FY22.”

NetApp did well in the face of those macroeconomic headwinds, giving the company confidence in its ability to grow its business, Kurian said.

“Even as customers are tightening their budgets in response to the macro, they are not stopping investments in applications and technologies that drive business productivity and growth,” he said. “Digital transformation projects involving business analytics, AI, data security, and application modernization, both on premises and in the cloud, remain top priorities for IT organizations. This drives our confidence in the health of our markets and future growth opportunity, despite the temporary macro headwinds.

NetApp is able to take advantage of those customer priorities, Kurian said.

“We are participating in the areas of priority spending with a modern approach to hybrid, multi-cloud infrastructure and data management,” he said. “By providing customers with the ability to leverage data across their entire estate with simplicity, security, and sustainability, we increase our relevance and value. And we continue to introduce new innovations to deliver greater customer value, further strengthening our position.”

Both NetApp’s hybrid cloud and all-flash array sales decreased during the quarter compared to last year because of the impact those macroeconomic headwinds had on the company’s enterprise customers, Kurian said. However, he said, new innovations in those product lines are expected to help turn those sales around.

“We are reinvigorating our storage portfolio, innovating to deliver greater customer value, reach new customers, and better address areas of priority spending and market growth,” he said.

One major area showing promise for NetApp is AI, where the company’s Ontap AI operating system and its FlexPod AI converged infrastructure, built around its all-flash storage technology and Nvidia GPUs, offer tested reference architectures to help speed and simplify AI deployments, Kurian said.

“Our affinity to AI use cases doesn’t stop at performance,” he said. “Ontap includes native data management tools that streamline workflows for data science teams and integrate multi-platform, multi-site, and multi-cloud data pipelines. With new performance and data management features planned in upcoming Ontap releases, we expect to raise the bar again not just for performance but for total workflow solutions that help companies realize the benefits of AI faster and with better results.”

The company is also expanding its all-flash storage array line card with new models targeting markets that in some cases are new to NetApp, Kurian said. These include the NetApp AFF C-series of arrays based on low-cost QLC capacity flash storage, and the NetApp ASA-A-series, the company’s first flash array specifically targeting block data use cases.

Also new during the fourth fiscal quarter was NetApp Advance, a new portfolio of programs starting with the company’s Storage Lifecycle Program for non-disruptive storage upgrades. That was followed with the introduction of Ontap One, which bundles all NetApp software, as well as the introduction of the company’s Ransomware Recovery Guarantee.

One bright spot for NetApp in the fourth fiscal quarter was public cloud annual recurring revenue, which at $620 million was up 23 percent over last year, Kurian said.

NetApp is also looking ahead with a rebalancing of its go-to-market efforts, including focusing its broad sales organization on selling flash through compensation plans and reinstituting a specialist sales team for cloud, Kurian said.

“Entering FY24, I am confident that these actions will enable us to drive product revenue growth and regain share in the all-flash array market,” he said. “We are seeing early positive signs, but the full benefit of these changes will take time to develop and should be a driver for product revenue growth in the second half.”

NetApp believes its first-party storage services, branded and sold by its cloud partners, represent a huge opportunity, Kurian said.

“We have aligned our sales specialist resources to our cloud partners’ customer segmentation and go-to-market structure to tighten our alignment to and improve our execution against this opportunity. … Cloud operations remains an important market for us, and we have dedicated go-to-market resources to address this opportunity,” he said. “We have not wavered in our convictions that public cloud services has the potential to be a multi-billion-dollar ARR business for us. While the shift to cloud is experiencing an industry-wide slowdown, the long-term trend in favor of cloud is unchanged.

For its fourth fiscal quarter 2023, which ended April 28, NetApp reported total revenue of $1.58 billion, which was down nearly 6 percent over the $1.68 billion the company reported for its fourth fiscal quarter 2022.

That beat analyst expectations by $40 million, according to Seeking Alpha.

This included product revenue of $744 million, down from last year’s $894 million, and services revenue of $837 million, up from last year’s $796 million. Included in that services revenue was public cloud revenue of $151 million, up from last year’s $120 million.

NetApp reported GAAP net income of $245 million or $1.13 per share, down from last year’s $259 million or $1.14 per share. On a non-GAAP basis, NetApp reported net income of $334 million or $1.54 per share, up from last year’s $301 million or $1.37 per share. That beat analyst expectations for non-GAAP earnings by 20 cents per share, according to Seeking Alpha.

For all of fiscal 2023, NetApp reported total revenue of $6.36 billion, which was essentially flat compared to the $6.32 billion the company reported for fiscal 2022.

This included product revenue of $3.05 billion, down from last year’s $3.28 billion, and services revenue of $3.31 billion, up from last year’s $3.03 billion. Included in that services revenue was public cloud revenue of $575 million, up from last year’s $396 million.

For the year, 42 percent of NetApp’s total revenue came from its Americas commercial sector, 11 percent from the company’s U.S. public sector, 33 percent from EMEA (Europe, Middle East, and Africa), and 14 percent from Asia Pacific.

About 78 percent of NetApp’s total revenue came from indirect channels, up slightly from last year’s 77 percent.

NetApp reported GAAP net income of $1.27 billion or $5.79 per share, up from last year’s $937 million or $4.09 per share. On a non-GAAP basis, NetApp reported net income of $1.23 billion or $5.59 per share, up from last year’s $1.21 billion or $5.28 per share.

Looking forward, NetApp expects first fiscal quarter 2024 revenue to be in the range of $1.325 billion to $1.475 billion, GAAP earnings of 62 cents per share to 72 cents per share, and non-GAAP earnings of $1.00 per share to $1.10 per share.