NetApp: Fiscal 2Q10 Financial Results

(in US$ millions)	2Q09	2Q10	6 mo. 098	6 mo. 10
Revenues	911.6	910.0	1,780	1,748
*Growth*		-0%		*-2%*
Net income (loss)	43.1	95.7	77.8	147.3

NetApp, Inc. reported results for the second quarter of fiscal year 2010, which ended October 30, 2009.

Revenues for the second quarter of fiscal 2010 were $910 million, compared to revenues of $912 million for the same period one year ago.

For the second fiscal quarter of 2010, GAAP net income was $96 million, or $0.27 per share compared to GAAP net income of $43 million, or $0.13 per share for the same period in the prior year. Non-GAAP net income for the second fiscal quarter of 2010 was $130 million, or $0.37 per share, compared to non-GAAP net income of $92 million, or $0.28 per share for the same period one year ago.

Revenues for the first six months of the current fiscal year totaled $1.75 billion, compared to revenues of $1.78 billion for the first six months of the prior fiscal year, a decrease of 2% year over year.

GAAP net income for the first six months of the current fiscal year totaled $147 million, or $0.43 per share, compared to GAAP net income of $78 million, or $0.23 per share for the first six months of the prior fiscal year. Non-GAAP net income for the first six months of the current fiscal year totaled $206 million, or $0.60 per share, compared to non-GAAP net income of $168 million, or $0.50 per share for the first six months of the prior fiscal year.

"NetApp delivered a strong quarter with record gross margins, record revenue from our SAN products, and overall revenue that exceeded our expectations," said Tom Georgens, president and chief executive officer. "Our value proposition resonates particularly well with customers who look to gain efficiency and streamline operations as they begin to build out their next-generation virtualized data centers. Driven by this demand, NetApp is forecasting record revenues for our next fiscal quarter."

Outlook

NetApp estimates revenue for the third quarter of fiscal year 2010 to be in a range of $935 million to $955 million.
NetApp estimates the third quarter of fiscal year 2010 share count to increase by about 5 million shares.
NetApp estimates that the third quarter of fiscal year 2010 GAAP earnings per share will be approximately $0.24 to $0.25 per share. NetApp estimates third quarter fiscal year 2010 non-GAAP earnings per share to be approximately $0.36 to $0.37 per share.

Quarterly Highlights
In the second quarter of fiscal year 2010, NetApp unveiled its cloud strategy and introduced several new products and solutions to help customers transform their data center architectures to achieve greater storage efficiency through innovative data management techniques. NetApp also received numerous industry accolades for its work environment, products, innovative use of technology, and executive leadership.

The makeup of the data center is changing drastically as companies seek to take advantage of virtualization and highly efficient infrastructures. NetApp is primed to take advantage of this major shift in the market by offering enterprises industry-leading storage efficiency and data management solutions that are well suited for both internal and external cloud deployments.

This quarter NetApp introduced Data ONTAP 8, the culmination of years of engineering effort to integrate the Data ONTAP 7G operating system with a next-generation scale-out architecture. Data ONTAP 8 will provide seamless data mobility and secure multi-tenancy, both of which are key requirements for the most sophisticated cloud infrastructures. In addition, Data ONTAP 8 provides a more robust platform for the next 10 years of innovation from NetApp.

NetApp also introduced the following new products and enhancements that uniquely complement VMware vSphere 4 and VMware View to help customers optimize their desktop and cloud computing environments: Virtual Storage Console, SnapManager for Virtual Infrastructure, and Rapid Cloning Utility.

Showing its commitment to midsize enterprise and distributed enterprise customers, NetApp announced the new FAS2040 storage system, providing customers with increased performance and capacity to handle demanding Microsoft Windows consolidation and virtualization workloads all on the same system. NetApp also announced significant price reductions for its FAS2020 systems and associated software, which are now preconfigured with high-capacity drives and include all protocols.

During the quarter, NetApp extended its leadership in Ethernet storage with standards-based products that support converged Ethernet (FCoE, iSCSI, NFS, CIFS) data access and help customers streamline their data centers and maximize ROI. With partners such as Cisco and QLogic, NetApp is expanding Ethernet as a storage infrastructure.

In an effort to help customers maximize the value of their existing storage investments, NetApp unveiled a program to help customers achieve greater storage efficiency in their data centers. Under the terms of the Zero Investment Promise Program (ZIP Program), customers with EMC and HP SANs that deploy NetApp V-Series can reduce storage capacity and the associated costs of their existing third-party storage investments. If after 90 days the customer files an approved claim that the storage savings are not achieved, the customer will keep the equipment at no charge.

Comments

Abstracts of the earnings call transcript:

Steven Gomo, CFO:

"Our head count at the end of the quarter was 8,105, an increase of 63 people.

"Our second quarter business benefited from a record contribution from the public sector business as well as from Europe, both of which are expected to fall off seasonally in the third quarter. This will be modestly offset by an expected increase in the business we do through IBM. Therefore, we are expecting Q3 revenue in the range of $935-$955 million.

"We also expect to have a higher mix of revenue from IBM in Q3."

Tom Georgens, president and CEO:

"Total revenue generated by the Americas was up 3% sequentially and down 4% from Q2 of last year, contributing 55% of total revenue.

"Within this, our public sector team had a record quarter of 32% sequentially and up 1% year-over-year producing 16% of total revenue. We now believe we have achieved number one market share in the US public sector, driven by strong growth in existing accounts as well as multimillion dollar wins in new accounts.

"Led by a stellar performance in Germany, where we also have number one market share, Europe had the second strongest quarter ever up 21% sequentially and up 10% year-over-year to 35% of total revenue.

"AsiaPac was up 3% sequentially and down 7% year-over-year for a total of 10% of revenue. All major geographies were up sequentially, and on a constant currency basis we were up about 1% year-over-year in a quarter where most major competitors were down double-digits.

"Direct revenue was 33% of total revenue this quarter, up 14% sequentially and flat year-over-year. Our indirect channel contributed 67%, up 6% sequentially and also flat year-over-year. Within the indirect channel, Arrow grew to 12% of total revenue and AppNet contributed 11% of revenue again this quarter. Our IBM-OEM relationship contributed 4% of total revenue and we expect it to be around 6% for the upcoming quarter.

"The top 100 accounts increased in the mix this quarter, accounting for about 44% of total revenue, a little higher than previous quarters.

"With respect to protocol trends, this quarter 48% of our configured system product revenue was sold with only NAS protocols. 19% was sold with only SAN protocols and 34% was sold at unified storage, which includes both block and fire protocols.

"We had several multi-million dollar SAN, only wins, including a large US Telco who spent $13 million to refresh their data center using NetApp. A $5 million SAN transaction that were in the largest proprietor a web2.0 companies in the US and a $3 million deal with the largest bank in Italy who is expanding across Europe.

"From the platform perspective, the sales of high-end units came back strongly this quarter, growing 24% sequentially although still down 18% year over year. This was enabled by improved customer sentiment and spending in larger accounts. As well as the strength in the public sector, which has a higher concentration of high-end systems. Our midrange unit shift grew both sequentially and year over year while low-end units were up 4% sequentially and down 13% year-over-year.

"Overall, units shift grew up 4% sequentially and down about 6% year over year with the client driven by a movement towards fewer but larger systems. Our V-series platform, which is our controller in data management software without any disks, once again, delivered tremendous performance.

"Unit shifts are up 68% year-over-year, despite our largest pSeries customer switching to full NetApp FAD systems and is no longer buying the SAN unit from the competitor. One of the fastest growing segments of this business is the deployment in front of EMC mid range systems."