NetApp’s stock jumps 10% as it tops earnings expectations

Hardware

Data storage hardware and services provider NetApp Inc. posted better-than-expected fiscal first-quarter results today, a day after it was reported to have laid off 5% of its workforce.

The company, which sells data center storage hardware and software for managing cloud infrastructure, reported a profits before certain costs such as stock compensation of 35 cents per share on revenue of $1.3 billion, up from $1.24 billion the year before.

Wall Street was looking for earnings of 31 cents per share on revenue of $1.15 billion. NetApp’s stock rose more than 10% in after-hours trading.

“Revenue, operating margin and EPS all exceeded our guidance, despite a challenging environment,” NetApp Chief Executive George Kurian (pictured) said in a statement. “We are building on a strong foundation of industry-leading data-centric software innovation, trusted customer relationships and an open-ecosystem approach that is strengthened by partnerships with the leading public cloud companies who endorse our Data Fabric Strategy.”

NetApp said its core all-flash array business had an annualized net revenue run rate of $2.3 billion, down from $2.6 billion in the previous quarter. Meanwhile, annualized recurring revenue from its cloud data services business jumped to $178 million, up 192% from a year ago.

Moor Insights & Strategy analyst Steve McDowell told SiliconANGLE that NetApp surprised a lot of people with its strong performance during the quarter, but said it was also quite fortunate.

“Critical to this quarter’s performance is a sharp 14% uptick in hardware and software maintenance contracts,” McDowell said. “A disproportionate amount of that growth, about $40 million, is due to a quarter that was five days longer than the same quarter a year ago. Absent that, the estimate ‘beat’ becomes closer to an estimate ‘meet.’”

The software and maintenance contracts are of vital important for NetApp, since they accounted for 71% of its revenue during the quarter, McDowell said.

NetApp has traditionally been a seller of data storage hardware, but its business has slowed in recent years because of the growth of cloud computing services such as Amazon Web Services Inc. and Microsoft Azure. The company’s response has been to shift its strategy to selling products that enable customers to access their data wherever it lives, as if it were on a local file system.

McDowell said he saw indications that this cloud-first strategy is gaining traction. “Its recent acquisitions delivered a combined $44 million of annual run rate to the quarter, and it continues to show triple-digit growth on public cloud services,” he said.

Still, the analyst said he was concerned that NetApp’s overall product revenue fell 5% from the same period a year ago, with hardware sales down 7%. He said there’s no sign yet that NetApp can fix the fundamental issues with its declining enterprise storage businesses. That could be a problem later, because if the company doesn’t fix it, then its all-important maintenance contracts will eventually go away.

“NetApp may have beaten estimates, but it wasn’t because of an uptick in its core businesses,” McDowell said. “NetApp’s cloud business, while showing impressive percentage growth, is still less than 15% of its overall business, so that needs to dramatically accelerate. Overall, I remain very cautious about the path the company is on.”

NetApp made no mention of yesterday’s layoffs in its earnings release, but Kurian confirmed the report was true during a conference call with analysts. He said the decision was a hard one to make, but said the shifting needs of the company’s business had forced its hand.

For the third quarter, NetApp said it expects revenue of between $1.225 billion and $1.375 billion, the midpoint of which is well ahead of Wall Street’s forecast of $1.24 billion.

Photo: SiliconANGLE

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