NetApp's CEO Discusses Earnings Guidance and Cloud Demand

Following NetApp's latest earnings report, CEO George Kurian said that COVID-19 has hurt demand from some customers, while pulling forward demand from others.
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NetApp’s  (NTAP) - Get Report stock is down about 3.5% in Thursday trading as markets digest the mixed numbers shared in the enterprise storage giant’s April quarter report.

NetApp, which like other enterprise hardware vendors has seen COVID-19 weigh on its deal activity, reported April quarter (fiscal fourth quarter) revenue of $1.4 billion (down 12% annually) and non-GAAP EPS of $1.22. EPS topped a $1.10 consensus, but revenue was slightly below a $1.41 billion consensus.

And for the July quarter, NetApp guided for revenue of $1.09 billion to $1.24 billion (flat to down 12%) and non-GAAP EPS of $0.36 to $0.44. Revenue guidance was in-line with a $1.17 billion consensus, but EPS guidance was below a $0.64 consensus.

Also: While NetApp reported that annualized recurring revenue (ARR) for its “cloud data services” -- storage software and managed services that run on public cloud platforms such as AWS and Microsoft Azure -- grew 113% annually to $111 million, the company withdrew guidance for cloud data services ARR to be in a range of $400 million to $600 million by the end of fiscal 2021 (it ends in April 2021).

Following the release of NetApp’s report, I once more had a chance to talk with CEO George Kurian about his company’s current performance and strategic thinking. Here are Kurian’s comments on some subjects of interest, slightly edited for clarity.

On the factors leading NetApp’s July quarter EPS guidance to be below consensus even though revenue guidance is in-line, and whether any near-term margin or expense headwinds are playing a role.

“No...with regards to the July quarter, [it’s] an extra-week quarter. It comes around every several years, and as a result, our expenses are a bit higher than you would have in a normal quarter. We also are being cautious about [interest rate expectations], and the return that we get on some of our investments. Those are two offsets to essentially an in-line guide on the top line.”

The impact of COVID-19 on deal closings and implementations, and whether (like rival Hewlett-Packard Enterprise) NetApp saw its backlog grow due to this impact.

“Our supply chain team did some phenomenal work through the course of the quarter to ensure that we could meet the predominant part of our customers’ demand. So we’re entering next quarter with a relatively normal backlog.

Once the COVID impact started to become more real, we did see different types of behavior [among our] customers. Some of them pulling forward transactions so that they could get things deployed before any shutdowns, [and] several others deferring transactions or downsizing transactions.

One of the other things we noticed in the quarter was [that] the ability of customers to accept equipment shipments from us to them was also in some cases impacted. So overall, I would say that COVID reduced the visibility we had on the business. I think there [wasn’t] one thing that drove that, there were a bunch of different things.”

How demand is currently trending across different customer verticals, and whether verticals such as travel and hospitality are under pressure.

“I would say that healthcare and financial services were strong during the quarter. I think that some of the verticals you mentioned, hospitality, sports and entertainment, as well as oil and gas...were impacted during the quarter.”

On whether NetApp has seen demand pick up for its cloud data services offerings -- a key part of its efforts to profit from public cloud adoption, as public clouds eat into on-premise enterprise storage demand -- in the current environment.

“We see the trend of IT as a service growing, and COVID perhaps accelerating that transformation. Our cloud data services offerings enable modern workplace solutions for a broad range of customers…[We] brought online several institutions that needed to bring business processes online. I’ll give you a couple of examples.

We work with many of the world’s largest media and entertainment companies. There is clearly an interest in digitizing archives and bringing them online for streaming services. One of the world’s largest media and entertainment companies had a lot of its digital archives on tape, and we’ve enabled them to bring [the content] online as a digital asset that they can now use for streaming and other purposes.

In the remote working...category, NetApp acquired two companies. One called Talon, which is a global and remote office cloud consolidation [software] company. And the second is a company called CloudJumper that we acquired in Q1 of this year. Both of them, together with our cloud data services portfolio, give us a compelling modern workplace offering.

And we brought several customers online there. For example, a very, very large, well-known...risk management company had tens of thousands of employees around the world that needed from home, while being able to collaborate. We [set up] cloud-based offerings for them in all the major geographies...on our cloud data services platform. And we enabled them to move tens of thousands of people to work from home in two days.”

The recent performance of NetApp’s storage joint venture with Lenovo, which was formed in 2018 and targets Chinese businesses.

“The China market took a hit earlier in the calendar year, [when] the COVID impact was pretty severe...China is a big and strategic market, and to participate successfully in the China market, you need a local partner with scale, and I think we’ve been able to accomplish that.

We’re committed to the business long-term, I think the short-term is affected by the COVID crisis, and we’ll have to see how the China market recovers. They were the first hit, they seem to be the first back to work, but it’s too early to tell.”

NetApp’s plans for its MAX Data software, which accelerates the performance of demanding applications with the help of Intel’s  (INTC) - Get Report Optane next-gen memory.

“MAX Data is essentially software that is part of our overall high-performance storage roadmap. You’ll see us integrate much of that capability into our all-flash storage arrays, so that we can take the performance higher and higher.

And we had some really good wins through the course of the quarter in our all-flash [business], especially Fibre Channel...we’ve been displacing people like Dell  (DELL) - Get Report and Pure Storage  (PSTG) - Get Report in some of those markets.”

NetApp’s plans for Project Astra, a recently-announced software solution for managing storage for applications running within app containers that are being orchestrated using the popular Kubernetes container-management platform.

“Project Astra is really software that is focused on enabling customers who are building these highly modular, distributed, cloud-native applications to be able to use state-of-the-art storage and shared storage...We are working closely with Google  (GOOGL) - Get Report, and [the] Google Cloud Platform, to mature Project Astra, and you’ll hear more from us over the next few months.

“It’s in early trials. Customers have really liked the technology, but there’s a lot more to do to make it fully generally available. And so you should expect more from us later in the year.”

On how NetApp, which until recently was aggressively buying back stock, plans to handle capital returns in the near-term.

“What we are doing right now is to prioritize our free cash flow on dividends. And we are continuing to maintain our dividends. We are going to take a pause on stock buybacks until we have better visibility into the go-forward environment.”