A Tech Analyst’s Thoughts On NetApp’s 2Q FY2018 Results

By Steve McDowell - November 20, 2017
NetApp is living one of the great stories in technology right now. In a storage market dominated by Dell Technologies (with its EMC unit) and Hewlett Packard Enterprise , NetApp has just beat consensus on earnings by $0.20/share. NetApp delivered a $1.42B quarter, driving 6% growth year-over-year. More impressively is that its product revenue grew 14% year-over-year, putting $807M into its coffers. The company’s earnings become more impressive when considered in the context of the its situation just a few short years ago. In 2015, NetApp’s earnings had been falling quarter-over-quarter. The press and analysts alike were bemoaning its “stagnate” product sales. The storage industry was transitioning to new technologies, and NetApp  was missing out. It’s a very familiar story. NetApp was a technology company that helped invent a market and achieve great dominance, only to lose its way. After spending a decade as one of the leaders of the storage sector, NetApp became a victim of its own success.   NetApp ’s innovation stalled under the weight of maintaining the it’s own legacy—the stock fell, and key employees who helped invent the market all scattered to the winds. These stories often end with the company vanishing, subsumed by merger or acquisition. They vanish, or they find new leadership who arrive just in time to “pivot” the business into new directions. NetApp  is clearly still around, and it hasn’t pivoted away from its core competencies of delivering enterprise storage solutions. They did bring in new blood—George Kurian arrived came over from Cisco in 2011, only to be named CEO four short years later. Kurian has shaken things up significantly, by relentlessly focusing on product strategy. It’s clearly working; with Kurian at the helm, NetApp has delivered six consecutive quarters of earnings above consensus. The company has only missed estimates three times since he took over. NetApp has zeroed in on the technologies that enterprises are asking for today. It’s not about traditional arrays filled with spinning disks anymore. The environment today is about all-flash arrays, hybrid cloud, convergence, and hyper-convergence, which are all key components of NetApp ’s strategic focus. NetApp claims its strategic lines drove 69% of its net product revenue this past quarter.
NetApp has continuously delivered on new technologies in 2017. The NetApp Hyper-Converged solution, NetApp  HCI, was released this past summer. The company has announced a collaboration with Microsoft Corporation to put NetApp NFS technology into Azure Cloud.  NetApp  has also delivered a new version of OTAP (their storage operating system), which puts a new face and better performance onto its legacy products. The company continues to deliver its SolidFire all-flash solution, putting it into new hardware and giving NetApp a significant stake in that market.
Exciting as these achievements are, NetApp  is simply evolving. It is not necessarily out-innovating the competition. NetApp ’s products are “good enough” for the market, with the strength of a strong brand and stellar support organization behind them. It’s the right strategy for NetApp to pursue as it focuses on realigning its business. This is a strategy that works well for the markets NetApp sells into, where customers aren’t always keen to deploy bleeding edge technologies to hold their business-critical data. Market analysts can speak to what all of this means for the future price of everyone’s stock. Examining NetApp  strictly as a technology provider, the outlook is bullish. Kurian and his team have clearly identified the gaps in their product strategy, and have demonstrated focused and effective execution to close those gaps. They have done similar with their own internal finances, driving continued gains in operating margin. NetApp has strong vision, coupled with demonstrably effective execution—this gives me strong confidence in the future of the company.
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