NetApp gloats over storming fourth quarter
Wall Streeters relish a pleasurable beating
With a storming fourth quarter and year NetApp's 2011 fiscal year revenues grew 30 per cent as the company revelled in its server virtualisation storage business.
It recorded fourth quarter revenues of $1.43bn, up from $1.27bn a year ago and 11 per cent sequentially. Net income was $160.6m, up from $145.1m a year ago. The full year numbers were equally impressive, with revenue amounting to $5.123bn ($3.931bn in fy 2010) and net income of $673.1m, up $272.7m from 2010's $400.4m. This company is churning out profits like a dairy churns out cream.
Was Wall St, the street that likes to be beat, pleased? Do bears make brown deposits in the woods? The shares rose slightly to $53.6, a gain of 3.61 per cent, in after hours trading. Financial analysts raised their expectations of NetApp's future earnings.
Tom Georgens, NetApp's CEO, was on a roll, saying: "NetApp delivered 30 per cent revenue growth, 38 per cent growth in cash from operations and over $1B in non-GAAP operating profit during fiscal 2011. We achieved the largest market share gains in our history and closed a record number of million dollar deals, demonstrating our momentum in the market as enterprise customers increasingly choose NetApp as their vendor of choice for storage virtualisation and cloud deployments."
Eat your VNX heart out, EMC. CFO Steve Gomo hinted that the results could have been even better, saying in the earnings call transcript: "Despite being hampered by supply constraints through the first half of the quarter, NetApp finished Q4 with solid revenue growth, record earnings per share and new record free cash flow generation."
Georgens said there were "a record number of deals over $1m and a record number of deals over $5m," and talked of making "the largest market share gains in our history." He virtually gloated over product shipment growth, saying: "The 6000 family saw units increase 86 per cent sequentially and 64 per centyear-over-year. The 3000 family grew 39 per cent sequentially and 51 per cent year-over-year. The 2000 family was up 11 per cent year-over-year and down 4 per cent sequentially, as some demand moved up to the newer 3200 platforms. The V-Series, which continues to be a compelling vehicle for enabling the introduction of Data ONTAP into new accounts, grew 37 per cent sequentially and 35 per cent year-over-year."
Discussing demand drivers, he offered this: "The major driver of this demand was the customer preference for additional Flash Cache modules which increased about 200 per cent from Q4 of last year and are now attached to two-thirds of the [FAS] 6200s and one-third of the 3200s." Alluding to EMC, he said: "Recent competitor announcements notwithstanding, we remain confident in our competitive position."
The competition falters
Stifel Nicolaus analyst Aaron Rakers wrote: "EMC reported total Information Storage revenue of $3.430bn for its C1Q11, up 17.5 per cent yr/yr but down 5.8 per cent sequentially. EMC reported high-end Symmetrix growth at 25 per cent yr/yr (we estimate +12 per cent seq.) and midrange growth of 20 per cent yr/yr (down 15 per cent seq.), which was below the growth rates reported by NetApp for its comparable systems. HDS reported 9 per cent yr/yr total storage revenue growth with revenue roughly flat on a sequential basis". (After converting to US dollars, revenue was up 19 per cent yr/yr and down 1 per cent sequentially).
He added that HP had around 3 per cent disk storage growth and Dell 11 per cent. HDS reported 19 per cent total storage revenue growth, and the overall disk storage market grew 13 to 14 per cent in the first quarter of fy 2011 on a year-on-year basis. These competitors all look to be pale shadows of NetApp.
We should bear in mind, though, that EMC's VNX range is still quite recent and it could do very well. EMC has announced it is putting flash caches into servers with ProjectLightning, and Georgens talked about this:
I expect that there will be flash in large quantities deployed in the servers. And I think there'll be various ways of utilising it, some simply as a cache, some as effectively permanent storage or effectively like disk drives. So I think as time goes on, I think you'll see or continue to see innovation. You'll continue to see participation from NetApp in various different dimensions putting cache into these environments... I'm sorry, flash into these environments. I expect flash to be a big deal, and I think the Flash Cache has been very, very effective for us. And I think we've got aspirations to do more with it as time goes on and you'll see that come up from NetApp over the next couple of years.
Engeno and OEMS
He also discussed the positioning of the V-Series, the product that virtualises third-party arrays and brings them into NetApp-land, with Engenio's OEM customer base:
The V-Series represents an opportunity to add value to that installed base, but we're going to do it in collaboration with the OEMs because to try to go around them I think would jeopardise all the OEM business and that's clearly not our intention now. Our intention is to keep the OEM business alive and well and thriving. So for a lot of them, the ability to add V-Series to their existing installed base is an opportunity to protect their installed base and add more value to their customers and reduce the risk of them being replaced by some joint competitor.
Georgens also discussed the NetApp and IBM relationship and said IBM has aspirations to have its own products in the Engenio and N Series space. But:
The desire by their internal groups to develop their own products makes the positioning very, very complicated. And are we happy with the positioning? No. On the other hand, our engagement with IBM's customer facing groups, the people who actually have to put solutions in front of customers, that relationship is actually exceptionally strong. So I think that an approach to storage from a pure platform perspective and basically creating SAN products and NAS products and unified products in a very, very hardware point of view is interesting, but it's just recreating the fractured product line that's given us an opportunity to gain share ... IBM has introduced products that are competitive with both Engenio and with the NetApp offerings over the years, yet this business still continues to grow, it still continues to be robust.
I think that [IBM] internal groups are looking to compete and develop competitive products and if they truly are competitive and they truly can compete with our feature set both from a hardware and a software perspective, clearly demand will shift in that direction. But if we continue to out-innovate them and have a higher development gains and introduce products to market faster, then we'll preserve the business. It's no different. It all comes down to innovation and execution excellence. And it's been that way for the last five years and that's the nature of the OEM business.
NetApp and EMC
Georgens thinks NetApp and EMC will draw away from other storage vendors because they have the resources to out-innovate the pack. They will also thrive against the server vendors because the server vendors only sell storage to customers that buy their servers. He says the server vendors have all lost ground. "The server guys are basically going to use the value proposition that's effectively one of integration, that they will basically come to the end users with a stack of hardware, software and services with a single support function and basically sell an integration."
What customers gain in integration they give up in best of breed. The ones who don't mind will buy storage from server vendors and that's why NetApp is in the OEM business. The ones that do mind will buy best of breed products and that's why NetApp is partnering with Cisco, VMware, Microsoft and others to build best of breed integrated stacks:
The idea is that if we can come to the customer with something that is every bit as integrated with a common support on the back-end and companies that can provide professional services on the front-end, then the customer doesn't have to trade off best of breed for an integrated solution. They can get something that is actually even more integrated, yet still best of breed, and I think that's the value proposition that we're pushing.
Looking ahead, NetApp sees no slowdown. It estimates revenue for the first quarter of fiscal year 2012 to be "approximately $1.500bn, plus or minus 3 per cent, which equates to approximately 2 to 8 per cent sequential revenue growth and approximately 26 to 34 per cent year over year revenue growth." No Engenio OEMS are deserting following NetApp's acquisition of Engenio and everything looks rosy in Sunnyvale. ®