Financial

posted on 14 August 2008 07:39

NetApp reassured us all that storage is a healthy place to be with a 26 percent rise in Q1 fy09 revenues and a 12 percent rise in net income.

There are several bell-weather stocks in the storage industry. Brocade, EMC, IBM and NetApp have now all reported solidly successful quarterly results indicating that recessionaly influences have not afftected them much, if at all.

For its first fiscal 2009 quarter NetApp reported revenues of $869 million, compared to Q1 fy08's $689 million, and down sequentially by 7 percent. GAAP Net income for Q1 fy09 was $38 million (£0.11/share) compare to Q1 fy08's $34 million ($0.09/share), an increase of 11.8 percent year on year.

However GAAP net income as a percentage of revenues fell from 4.935 percent in Q1 fy08 to 4.373 percent in Q1 fy09.

Dan Warmenhoven, NetApp's chairman and CEO, said: "Our new fiscal year got off to a good start, and our efforts to increase awareness and sales capacity in order to secure new customers are delivering results. Despite economic uncertainty, customers have continued to expand and evolve their storage infrastructure and are looking to NetApp to help them reduce costs and enable new capabilities."

CFO Steve Gomo said in the earnings call: "Product revenue of $548 million was down 13% sequentially and up 18% year-over-year accounting for 63% of total revenue. Add-on software which is a subset of product revenue was almost 20% of total revenue this quarter."

He added: "Product margins were impacted by volume related effects from lower Q1 revenue levels and a heavy low end mix of products. "

Generally the business is being run more efficiently; Gomo pointed out that: "... accounts receivable day sales outstanding were 45 days compared to 56 days last quarter and 53 days in Q1 of last year. Inventory turns were 21.7x this quarter, up from the 20.3x achieved in Q4."

COO Tom Georgens said: " On the product side, total store systems shipped were up 35 percent year-over-year. Entry level units continue their aggressive growth and were up 74 percent. The high end was also quite robust with units shipped up 36 percent. This is clear evidence of the expansion of our product offerings both up and down market. The mid range growth was not nearly so aggressive but still represents over 50 percent of systems revenues. ... . Total terabyte shipped were 195 [terabytes] and the mix was 63 percent ATA, 33 percent Fibre Channel and 4 percent SAS."

Regarding deduplication he said: "Q1 continued the robust pace of deployment of our deduplication technology with almost 13,000 systems installed and over 3,000 licenses added in July alone. We believe that this is the largest footprint in the industry and NetApp is the only vendor that can deploy deduplication in all workloads and on all FAS platforms." The 'FAS platform' point refers to NetApp's VTL (virtual tape library) offering which does not have block-level deduplicaion - yet. This lack is, it is assumed, to be very soon rectified.

The company pointed out that it gained share in the networked storage market (which includes FC SAN, NAS, and iSCSI) in Q1 calendar 2008  in both revenue and capacity shipped, as reported in IDC's Worldwide Quarterly Disk Storage Systems Tracker Q1 2008. According to this, NetApp share gains moved the company from the fourth position in the networked storage market to tying for the number-two slot, growing to a 12.0% share in the first quarter of calendar year 2008, up from a 10.1% share in fourth quarter of calendar year 2007.

A problem has been for NetApp that it has been overtaken in its originally core filer market by EMC and consequently tended to be overshadowed perception-wise and so under-rated by potential customers. It needs to grow its large enterprise base of customers and the recent logo change and emhanced marketing profile are a response to that. Statistics such as these from IDC will encourage it and result in it, hopefully, becoming generally recognized as the number two network storage supplier, possibly in 2010. By then it will probably have recorded its first billion dollar quarter which will be a welcome milestone.

Referring to the enterprise customer base growth need, Georgens said: "We are looking at the top 5,000 buyers of storage in the world or the S5000. In March we had achieved high penetration in just under 10 penetration of those customers. We had now penetration in about 17 percent and did not yet have a presence in more than 73 percent of the S5000. The percentage of our highly penetrated accounts has grown modestly mostly through the efforts in growing our lesser penetrated accounts. The highly penetrated category includes many of our top enterprise accounts or TEAs which had flattened out or declined as the economy slowed. However in the US non-federal market our TEAs grew 11 percent over Q1 of last year for the first double-digit growth quarter in a long time. This reinforces our belief that the lull in growth was a result of spending constraints not losses to competition."

He added: "Our V series controllers had their best quarter ever with units more than doubling over Q1 last year. This quarter’s V series highlight was the announcement of our ability to deduplicate EMC storage, before they offer that capability on their own systems. Using our V series controller running our ONTAP 7G operating system customers can now have deduplication and our other data management and storage efficiency products for their primary storage systems from EMC, HP, Hitachi, and others. This represents an important entry point for us into new accounts. "

Warmenhoven pointed out: "Early leading indicators from our awareness campaign are encouraging with more than double the number of unique visitors to our website, significantly increased sales inquiries and almost a 5x increase in global online search clicks for NetApp."

The company is hoping that its rise in awareness and better enterprise account penetration together with sales force increases will generate more revenues and help its gross margin rise. It believes that traditional SAN storage archirectures are dated and do not have anywhere near as good a storage efficiency story as NetApp itself does. It reckons its updated mid-range stacks up well against EMC's new CLARiiON CX4.

NetApp's outlook is for Q2 fy09 revenues of $910 million to $940 million and GAAP earnings per share of $0.16 to $0.19.

As a way of increasing shareholder value the NetApp board has approved a $1 billion stock repurchase program which will follow on from the current repurchase program which has $96.3 million remaining in its budget.

^{[Chris Mellor.]}