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NetApp: Fiscal 3Q16 Financial Results

Slashing 12% of workforce following 9th consecutive quarter with sales diminishing Y/Y

(in $ million) 3Q15 3Q16 9 mo. 16 9 mo. 16
Revenues 1,551 1,386 4,583 4,166
Growth   -11%   -9%
Net income (loss) 177 153 425 237

 NetApp, Inc. reported financial results for the third quarter of fiscal year 2016, ended January 29, 2016.

Third Quarter Financial Results
Net revenues for the third quarter of fiscal year 2016 were $1.39 billion. GAAP net income for the third quarter of fiscal year 2016 was $153 million, or $0.52 income per share1, compared to GAAP net income of $177 million, or $0.56 income per share, for the comparable period of the prior year. Non-GAAP net income for the third quarter of fiscal year 2016 was $206 million, or $0.70 income per share,2 compared to non-GAAP net income of $238 million, or $0.75 income per share, for the comparable period of the prior year.

Cash, Cash Equivalents and Investments
NetApp ended the third quarter of fiscal year 2016 with $5.0 billion in total cash, cash equivalents and investments and generated $355 million in cash from operations. During the third quarter of fiscal year 2016, the company returned $137 million to shareholders through share repurchases and a cash dividend.
The next dividend in the amount of $0.18 per common share will be paid on April 27, 2016, to shareholders of record as of the close of business on April 8, 2016.

NetApp’s third quarter results demonstrate good progress in advancing our strategy and strong operational execution despite the challenging macroeconomic environment,” said George Kurian, CEO. “To position NetApp for long-term success, we launched a transformation program designed to streamline the business and reduce our cost structure, while at the same time, maintaining our ability to invest in strategic opportunities. We are confident that we have the right strategy to further pivot the company toward the growth areas of the market and deliver long-term value.”

Q4 Fiscal Year 2016 Outlook

  • Net revenues are expected to be in the range of $1.35 billion to $1.50 billion.
  • GAAP earnings per share is expected to be in the range of $0.12 to $0.21 per share.
  • Non-GAAP earnings per share is expected to be in the range of $0.55 to $0.60 per share.

Business Highlights

NetApp technology leader in the all-flash-array market

  • Accelerates customer adoption of all-flash data centers with SolidFire. With the acquisition of SolidFire, NetApp now has all-flash offerings that address each of the three largest all-flash-array market segments. SolidFire combines the performance and economics of all-flash storage with a webscale architecture that simplifies data center operations and enables rapid deployments of new applications. SolidFire products will be incorporated into the strategy for the Data Fabric enabled by NetApp, delivering seamless management across flash, disk and cloud resources.
  • NetApp flash storage improves student and faculty experience. With NetApp solutions, Western Oregon University (WOU) speeds educational, operational and financial decisions, while enhancing online collaboration benefits.
  • Performance of flash at the price of disk. NetApp’s new software technology and higher capacity drives within the NetApp all flash FAS array series make it now possible for customers to reduce capacity requirements by as much as 30:1.

Data Fabric Vision extended with new solutions, services and partnerships
NetApp provides customers with the enterprise data protection that they need to confidently embrace the hybrid cloud. With NetApp SnapCenter, StorageGRID Webscale, NetApp Private Storage, NetApp MetroCluster  and NetApp SnapMirror DR solutions; as well as Commvault IntelliSnap, NetApp customers can now build a new generation of hybrid cloud services designed to move, manage, and protect data.
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Comments

NetApp recorded lower than expected revenue at $1.39 billion, down about 4% sequentially and 11% yearly.

It's the 9th consecutive quarter with sales diminishing Y/Y and the 10th one maybe will not happen as the company expects next quarter sales to be in the range of $1.35 billion to $1.50 billion, representing a quarterly progression between -3% and 8%.

11% yearly sales decrease is also the highest percentage decrease of yearly revenue since nine consecutive quarters.

Revenue for the current fiscal year will be largely under $6 billion, a figure surpassed each fiscal from 2012 to 2015.

Product revenue declined 8% Q/Q and 19% Y/Y.

Following these bad results, NetApp announced reduction in workforce of 12% of total headcount or 1,500 people, hoping to generate annualized run rate savings of $200 million against its gross target. The majority of this workforce reduction will be next quarter. The firm launched a program to reduce the cost base of business by $400 million gross annually with run rate savings achieved by the end of FY17.

For the company the problem comes from mature solutions OEM, ONTAP 7-Mode and add-on, declining 40% year-over-year. On the other side, ONTAP, branded E-Series, all flash arrays, hybrid cloud solutions and OnCommand Insight made up 55% of product revenue and grew 26% Y/Y. Clustered Data ONTAP node shipments increased 69% year to year. Clustered ONTAP was deployed in almost 80% of FAS systems shipped in Q3, up from roughly 40% a year ago. Unit shipments of clustered ONTAP systems saw strong continued customer demand, growing 70% year-over-year. FAS install base is growing and clustered ONTAP now represents 24% of installed systems. Both the total number of customers and new to NetApp customers, who made clustered ONTAP purchases in 3FQ16, grew by 60% from 3FQ15.

All-flash systems are the only products able to invigorate NetApp. This business, inclusive of EF and all-flash FAS products and services, has accelerated to $600 million annual run rate. But it will take several quarters for the company to come back to revenue of more than $1.6 billion recorded as far as in 4FQ14.

The acquisition of SolidFire is an excellent deal because this start-up has a product able to compete successfully with all the other all-flash system makers. But, it's true for other storage giants like EMC, HDS, IBM, HP or Dell, and these new systems are not able actually to offset their traditional HDD systems.

Period Revenue Y/Y Growth Net income (loss)
1FQ14 1,516 5% 82
2FQ14 1,550 1% 167
3FQ14 1,610 -1% 192
4FQ14 1,649 -4% 197
FY14 6,325 -0% 638
1FQ15 1,489 -2% 88
2FQ15 1,542 -0% 160
3FQ15 1,551 -4% 177
4FQ15 1,540 -2% 135
FY15 6,123 -3% 560
1FQ16 1,335 -10% (30)
2FQ16 1,445 -9% 114
3FQ16 1,386 -11% 153

To read the earnings call transcript

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