NetApp, Inc. (NTAP) on Q4 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen. Welcome to the NetApp Q4 and Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the call over to, Kris Newton, Vice President, Investor Relations. Kris Newton: Thank you for joining us. With me today are our CEO, George Kurian; and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at netapp.com. George Kurian: Thanks, Kris. Good afternoon, everyone. Thank you for joining us today. Before we get started, I want to take a minute to acknowledge that it’s been over a year that we have all been working remotely. I’m encouraged by the public health and economic improvements in many parts of the world, but the recovery is uneven. As you know, we have a large team in India. Our thoughts are with them, as they deal with a distressing surge in COVID cases. Thank you to the entire NetApp team for your dedication, focus, and execution throughout this challenging year. Now to the results of the quarter. We delivered strong fourth quarter results, capping off a solid year of growth. Our results were all above our Q4 guidance ranges. I am most excited by the return of product revenue to growth, the strength of our public cloud ARR, and an all-time high free cash flow. Our performance was broad-based, as certain verticals, the U.S., and parts of Europe and Asia are recovering faster than many expected. Cloud and digital transformation initiatives have been accelerated by the pandemic and companies look to NetApp to support these key initiatives. Going into FY21, we had two clear priorities: returning to growth in our storage business powered by share gains from our industry-leading file, block and object software and scaling our highly differentiated public cloud services business. As I reflect on the past year, I am proud of what we have achieved during a globally challenging period. We remained focused in executing our strategy and extending our innovation. Mike Berry: Thank you, George. Good afternoon, everyone, and thank you for joining us. As a reminder, I’ll be referring to non-GAAP numbers unless otherwise noted. As we look back on what was an unprecedented year, I cannot help but be incredibly proud of the focus, execution, and commitment of the entire NetApp team. We delivered billings of $5.9 billion, an increase of 9% year-over-year, while revenue of $5.7 billion grew 6%. We delivered free cash flow of $1.2 billion, up 25% year-over-year, while continuing to aggressively invest in our public cloud franchise. We finished the year strong, with Q4 billings of $1.7 billion, up 12% year-over-year, while revenue of $1.6 billion was up 11% year-over-year. Both were solidly ahead of our expectations, driven by accelerating enterprise demand throughout the quarter. Gross margin, operating margin and EPS all came in above the high-end of guidance. Q4 free cash flow of $521 million was an all-time high for NetApp. As George highlighted, public cloud ARR of $301 million was up 171% year-over-year and an impressive 27% sequentially. In fiscal ‘21, the scale of our cloud franchise really started to impact the overall growth profile of NetApp, delivering 4 of the 9 points in billings growth and 3 of the 6 points in revenue growth. In addition to the strong cloud ARR performance, we are excited that we exited the year with cloud gross margins near our overall corporate average. Given the growing impact on our total Company performance, we anticipate sharing more detail on our public cloud business in fiscal ‘22. When combined, software revenue, recurring support and cloud revenue totaled $1.1 billion and increased 18% year-over-year, representing 72% of total revenue. For the first time in company history, we ended Q4 with over $4 billion in deferred revenue, an increase of 8% year-over-year. Deferred revenue continues to be a leading indicator for future recurring revenue growth. Product revenue returned to growth in Q4, importantly, we expect this trend to continue throughout fiscal ‘22. Product revenue of $840 million increased 6% year-over-year. Consistent with the trends we have seen throughout fiscal ‘21, software product revenue of $480 million dollars increased 18% year-over-year, driven by the continued mix shift towards our all-flash portfolio. Kris Newton: Thanks, Mike. Let’s open the call for Q&A. Please keep to just one question so we can get to as many people as possible. Operator? Operator: Thank you. Our first question comes from Amit Daryanani with Evercore. Amit Daryanani: Thanks for taking my question. Congrats on the nice strength. I was hoping if you could just talk a little bit more on the cloud data services business. And I guess, a, I would love to understand sort of what really drove the upside in the quarter versus the $260 million to $290 million guide that you already had out there? And then, really, when I think about the full year number you provided of $425 million to $500 million, the low end, I think, is ticking up by $20 million -- $25 million. What is driving the confidence in this business as you go into next year? And how important is it for you to scale beyond Azure to achieve the fiscal year targets laid out? George Kurian: Thank you for the question. We have been working on multiple innovation parts of our portfolio, all of which performed extremely strongly. Cloud Volumes for storage; Cloud Insights for monitoring; Spot for compute management, all had really strong Q4s and overall, really strong years. We saw good expansion in the number of customers and strong growth in the number of new-to-NetApp customers. We saw customers spending against their digital transformation and their cloud programs throughout the quarter. So, it was a smooth trajectory through the quarter. And I think that sets us up well for next year. I think, if you look at our dollar-based net retention rate, you can see that our organic business grew strongly this year, and we had about $60 million of this year being inorganic from acquisitions of Spot, Talon and CloudJumper. So, when you back that out, we expect next year’s growth rate to also continue the acceleration of our organic portfolio and continued strength of our inorganic portfolio. We have a really good and differentiated portfolio of services. We have deep partnerships and are expanding the range of things we do with the hyperscalers. And we are growing our customer base of people who are doing many business-critical projects on the public clouds with us. So, I’m really excited with every confidence. We’ll tell you more about our cloud business, as Mike indicated, as we go through the year, giving you more details on it. Operator: Thank you. Our next question comes from Rod Hall with Goldman Sachs. Rod Hall: I’m going to do the old question and clarification thing, if I can. The question is on ARR and what the ceiling on that is. Obviously, you’ve done really well there. And I’m curious if you could George, maybe just give us some idea of what the -- what do you think the headroom is there? Because clearly, there’s a lot of growth coming through. And then, the clarification just on the EPS calculations for the full year guide. We’re getting a number lower than the range you guys are giving. So, I’m not sure if using all the inputs you’re talking about, we get something like $4.41. So, I’m not sure, if you add all that up, why we would be ending up at a different place than maybe your guide is. So, I don’t know, Mike or if you could clarify that, that would be helpful. Thanks. George Kurian: Thanks, Rod. With regard to the cloud portfolio, listen, I think the heavy lift in terms of getting the innovation portfolio to be in really good shape is behind us. I think, we have, as I said, three really strong innovation engines, and we are bringing out cloud-native innovations across those lineups as well through the course of the summer. We are making investments, as we indicated last quarter, to accelerate and expand the range of things we’re doing in the cloud portfolio. With regard to what’s it going to take to further accelerate the course of the business, it’s all the things that we’re doing, right? We’re expanding the number of sellers and revenue-generating teams facing customers. We’ve seen really good success with Microsoft in terms of their route to market. We’re working with the other hyperscalers to also train and expand the range of ways we take our products to market with them. And we’re building our customer service and customer success teams. I feel even more confident that we have the range of capabilities to achieve the $1 billion target in ARR that we indicated. And the customer use cases that we are deploying on our public cloud portfolios, these are run the business applications, mission-critical, highly differentiated business value-creating application. So, I feel really, really good about where we are at the year. Mike, do you want to take the other part of the question? Mike Berry: Sure. Thanks, George. Hey, Rod. So, I just want to make sure -- we could go through it separately with you and the team. We want to make sure that hey, the gross interest is not the net interest. It could be in the OIE calculation as well, so. And there’s a lot of sensitivity, obviously, to that count. So, it’s probably below operating income that it’s a little bit different in our model. We’re happy to walk you through that separately. Rod Hall: Mike, just for the call, could you maybe say what that OI&E number is? Then people can just plug that in. Mike Berry: Yes. So, we said 65 to 70 for the interest. For the OIE that we have in there is -- yes, that’s the interest, that’s what we did on the -- in my script. And as you know, that number jumps around quite a bit. There’s more than just obviously, interest in that OIE number. Operator: Our next question comes from Aaron Rakers with Wells Fargo. Aaron Rakers: Yes. Thanks for taking the question. And congratulations on the quarter, clearly confident in kind of how the story is progressing. I know you touched on this in your prepared remarks a little bit. But, I just wanted to go back to kind of the component environment. There’s a lot of discussion out there around SSDs and some controller constraints, and pricing moving upward on flash and SSDs in general. Just help us maybe appreciate the confidence that you have in component supply and how you’re reacting to any kind of inflationary pricing dynamic? Thank you. Mike Berry: Sure. Hey Aaron, it’s Mike. Thanks for the question. So, we have certainly contemplated the challenges in the supply chain when providing our gross margin guidance for Q1 and fiscal ‘22. Supply chain teams, they’ve really performed well all year long, working closely with our suppliers. And we have confidence we can continue that performance this coming year. As you know, we’re a cloud world software company. Our product margins, we expect to continue to benefit from the higher-margin software-rich configurations. And we continue to do a lot of hard work on the services margin. As we talked about, cloud margins should continue to improve as we go through the year, as well as you’ll see the benefits of the consumption of the deployed system and more increase in our Software-as-a-Service. There’s always unforeseen circumstances that may come into play. But as we sit here today, we feel good about it. And, when you talk about total -- our total component cost, we expect it to be a little bit of a tailwind in the first half. And then, based on prices that we have today and you know as well as those things change, potentially a little bit of a headwind in the second half when we take that into our guidance. George Kurian: With regard to our technology portfolio, as Mike said, we have a range of configurations that we can support our customers with all the way from 900 gigs to 16 terabytes. And so, we have plenty of capability to given the flexibility in our software operating system to qualify the right components to meet customer needs and support them. With regard to the demand environment and gross margins, listen, as Mike said, we’ve operated through a tough year and done a really good job. I think that you’ll see us continue to remain prudent, balancing end-user demand with margin management as we go through the year. Operator: Our next question comes from Nik Todorov with Longbow Research. Nik Todorov: Yes. Thanks, and congrats from me as well on the great results. George, I do appreciate the full year guide. I’m just wondering if we can double click maybe on the revenue outlook, 6% to 7% growth. Can you give some more color around the assumptions there? Maybe if you can talk how much of that comes from share gains versus the market or any breakdown between the drivers of product or CDS or software? Thank you. George Kurian: Okay. Listen, as we go through the year, we see a continuing improvement in public health and the overall demand environment. We have been benefiting from cloud and digital transformation projects through the course of the year. We have not seen any major -- so we don’t see some unique snapback or something like that in government spending or in enterprise spending. We see us benefiting from long-term trends and projects that are strategic to customers. We see more countries, especially the U.S. and parts of Western Europe come on line in a more significant way through the course of our fiscal year, the U.S. more likely in the first part of the fiscal year, Europe coming on line more strongly in the second half of our fiscal year. We have every confidence that our product portfolio is differentiated, and we’ll continue to see product revenue grow faster than services revenue and the strength of our cloud portfolio. We have a much bigger base of customers now in the cloud business. We have a much broader range of application certifications that we entered last year. And so, we feel really, really good about the year ahead. Operator: Our next question comes from Matt Cabral with Credit Suisse. Matt Cabral: Yes. Thank you. I was wondering if you can give an update on the ramp of the 200 quota-bearing heads that you’ve added over the past, I think it was 18 months or so. Just where they are in their ramps relative to full productivity? And as we’re heading into fiscal ‘22, just how you’re thinking about investments in sales capacity for the next fiscal year and beyond? George Kurian: I think, as we said, the typical sales productivity ramp happens over the course of four quarters. We are -- the 200 reps that we started adding in fiscal year ‘20 are fully productive. They’re part of NetApp teams. You saw some of the benefits from their performance and additions to our teams, particularly in the Americas business, which was really strong, and it sets us up well for what we think will be a strong American recovery over the course of the next 12 months. With regard to continued additions, as Mike has said and what we have said before, we continue to be prudent about where we add those teams. We will do so where we see demand and environments being strong. And we’ll tell you more about the course of that. We added some headcount in our customer success teams and in our cloud teams this past quarter. You should anticipate us continuing to do that to support the growth of the cloud portfolio. But, Mike, if you want to add any other color? Mike Berry: Yes. Thanks, George. So, I would just underline the additions that we talked about last quarter and this quarter as well into specific areas around cloud, and then the customer success team which is, as you all know, in a cloud business super important in terms of upsell, cross-sell renewals. So, we do continue to make investments there. And I think you’ve seen some of the results in the ARR results this quarter. Operator: Next question comes from Katy Huberty with Morgan Stanley. Katy Huberty: Thank you. Public cloud profitability is ramping faster alongside the better revenue performance. Is that purely due to revenue scale, or have you tuned the business model in any way to capture cost efficiencies? And then, Mike, just as a follow-up to that, can you clarify whether we should expect cloud margins for the full year 2022 to be dilutive, neutral or accretive to the model? Thank you. Mike Berry: Sure. Thanks for the question, Katy. Let me do the last one first. So, we said, as we go through the year, we expected cloud margins to be accretive to the total Company average. So, as we get through the year and certainly ending the year. And then, yes, we have seen a much bigger increase in our cloud margins than we had originally expected. Certainly, scale -- revenue scale matters. I would also give a lot of kudos to the team, though, for being really efficient in terms of how they use not only the hardware, but also all this stuff that goes to support those businesses as it relates to people and process. So, it’s all of the above. But certainly, growth in ARR is the key driver followed next by a really good job by that team in terms of managing the margins. George Kurian: Katy, I think we have many avenues as we have described to continue to drive the gross margins in our cloud business. There’s a growing portfolio of software-only offerings in the cloud business. Spot, Cloud Insights, several versions of our Cloud Volumes offerings are all software. We -- Mike mentioned the hardware utilization. We have brought out new versions of our ONTAP operating systems that continue to be more efficient in terms of data management and storage efficiency. And so, we feel very good about our path to continuing to improve cloud gross margins in the direction that Mike articulated. Operator: Our next question comes from Wamsi Mohan with Bank of America. Wamsi Mohan: You noted some seasonality in Cloud ARR through the course of the year where Q2, Q4 are typically higher. I was wondering, is it -- would it be accurate to think that the net organic growth sequentially should be at least at a higher level relative to last year, even though we look at some -- maybe some seasonality going into Q1? And can you give us any color on these cloud deals, how much of those were NAV generated versus partner generated? Thank you. Mike Berry: Yes. So, on the organic growth, Wamsi, what I -- this is Mike, by the way. I would point you to the dollar-based net retention number. And as you saw in the quarter, it actually accelerated quarter-over-quarter. So, you can assume, if you take a look at that the organic business is doing -- call it, the organic business is doing very, very well. And as George talked about, a lot of those offerings are -- is that organic business. And we don’t break out the contributions from the hyperscalers versus the core business or the NetApp business. What I would say is a lot of the seasonal pickup that you see in Q2 and Q4 is driven by our sales teams, in addition, obviously, with the hyperscalers. And I just want to underline that, please, which is, hey, when you guys do your models for next year, please make sure that you take that seasonality into account. Don’t just take the increase in ARR and divide by 4. There is absolutely seasonality in that business as you’ve seen in the last two years. Operator: Our next question comes from Steven Fox with Fox Advisors. Steven Fox: George, I was just wondering, when I listened to everything that you said, you talked about improving market share. It sounds like a better mix as you go through the year. You had accelerating digital transformation engagements during the quarter and into this quarter. And then, when I look at the full year guidance, it seems to imply when I look at the market, you’re expecting some sort of deceleration as you go up throughout the year, even when I take into account some of the tougher comparisons. Am I thinking about that conservatism right, or is there anything else you would say on the markets? Thanks. Mike Berry: Listen, I think when we look at the full year guidance for next year, we’ve guided 6% to 7% in terms of revenue growth. I think that what you see from us is real confidence in the business. The second half of the year is on a compare basis compared to a stronger second half this year as enterprise spending came back on line through COVID, right? So, it isn’t an expectation of us having a deceleration in terms of our ability to grow cloud or gain share. It’s just a kind of a realization that the second half of this year is a stronger compare than the first half of this year. Operator: The next question comes from Jim Suva with Citigroup. Jim Suva: Thank you. My question and it’s kind of a clarification, but also related forward-looking is, can you clarify for this quarter, how much of the revenues were organic versus acquisition? And then, the outlook, George, I know you mentioned $1 billion run rate. Is that based upon all organic? I assume that’s the case. But I just wanted to clarify because I think Mike mentioned about 30% of cash flow could be used for M&A. But I just kind of want to clarify organic versus M&A as you sit today, reported and as you look out. And again, congratulations on the great results and outlook. Mike Berry: Hey Jim, it’s Mike. On the first one from the organic contribution of revenue, it was very small. It was less than 0.5 percentage point of growth. It was really not much at all in terms of -- but keep in mind that that is related to the cloud acquisitions earlier in the year, not much of an impact at all. And in the quarter, it was very little. George Kurian: Hey, I think, Jim, when we look at the business, we feel very good about our portfolio capabilities that we have today getting us to that $1 billion ARR number in fiscal year ‘25. We’re not going to break out organic versus inorganic. I think, we feel that we’ve achieved a full year of integration of our core acquisitions, Spot, CloudJumper and Talon. So, we feel that the core bets are in place for this year. We will continue to look at inorganic acquisitions to fill out our portfolio, right? So, we think that we have a strong start to differentiated position in the cloud market. We feel really strong about the capabilities that we have. We will tell you more about it through the course of the business, through the course of -- as we expand the cloud business. And I’ll just sit on three things, right? We are growing our cloud business while growing our core business. We are acquiring a lot of net new customers. We are accelerating our organic business growth and our inorganic acquisitions. And so, I feel really, really good about our business overall. Cloud gross margins, as Mike said, are near the corporate average, and as we go through next year, will be accretive to company gross margins. So, I just feel very, very good about our opportunity in the cloud and the work that our team has been doing with the cloud providers. And we’re going to double down on it. Jim Suva: Congratulations. Kris Newton: Thanks, Jim. Next question? Operator: Next question comes from Shannon Cross with Cross Research. Shannon Cross: Thank you very much. I had a question on cash flow. I understand that you guided to over $1.1 billion and this fiscal 2022 is going to have pressure from inventory and higher CapEx. But, as you think about the model on a longer term basis, should we expect that when you don’t have to buy excess inventory, we’ll start to see cash flow growth that maybe more closely mirrors what you’re able to do in terms of earnings, or will the increased CapEx be a drag for a longer period of time? Thank you. Mike Berry: Hey Shannon, it’s Mike. So, thanks for the question on cash flow, happy to do that. So, a couple of things. If you look over the last four years, the operating cash flow results in NetApp have really mirrored the operating -- non-GAAP operating income. It’s like 107% of that number. So, we do expect over time that we’ll see operating cash flow mirror operating income we’ll see operating cash flow mere operating income growth. Now there’s -- it’s going to bumper on a little bit, and I’m going to do operating and then I’ll take you to free cash flow. Next year, for instance, in fiscal ‘22, we would expect to see operating cash flow growth be a little bit more than earnings, just because of the working capital impact of some of the expenses in ‘21, and we’ve put that in the script. From a free cash flow perspective, we really look at next year CapEx as hopefully the high watermark. A couple of pieces there. One is the -- we are certainly continuing to install hardware and some of the data centers to support the cloud business. As George talked about, we’re super excited about some of the software options there as well. And as we have more software defined, that will help. Also next year in that number, there’s about $50 million in CapEx related to two facilities projects, related to our Wichita site and to a lesser extent, our new building in San Jose. We obviously have a little bit of facilities CapEx, but that’s a big number next year. That’s why we feel comfortable going forward that we can have CapEx below the $200 million that I discussed in the script. So I just want to walk you through those puts and takes. But over time, yes, I do expect operating cash flow to pretty much near operating income with some bumping around every year largely due to working capital. Operator: The next question comes from Ananda Baruah with Loop Capital. Ananda Baruah: Hey, guys. Yes. Congrats on the strong results. Thanks for taking the question. I guess, just going back, so George and Mike, to new sales force. Is there any -- I guess, is sort of the go-forward on that -- the incremental, is there anything meaningfully incremental that collectively those add initiatives can contribute? And not just with regard -- I mean, I know the 200 were sort of across the portfolio. So, I’m really thinking in totality, not just on the cloud side, but also on the new customer side and with regards to how you were repositioning the go-to customer from a solution perspective? And that’s it. Thanks. George Kurian: I think, we’ll continue to be careful about where we add sales teams. I think, we constantly rebalance to areas of opportunity, both in terms of the composition of the sales force and the locations where we put the headcount. I think, as I’ve said before, the recovery will be at different rates in different geographies. And I think as the public data indicates, the Americas is the place where we expect the recovery to be more pronounced this coming year, Europe lagging 6 to 9 months thereafter, and the rest of the developing economies maybe 6 to 9 months after that. So, we’ll prioritize any additions in accordance with how we see the end user demand. With cloud, we have been adding, step-wise. I think one of the important things that we’re focused on this year is to get our frontline sales teams to be balanced with selling cloud and our systems in customers’ data centers. And so, I feel like, listen, we’re not going to have a stepwise addition in our investment. We’ll do it as the business comes. And we feel very good about the disciplined approach we’ve taken and the payoffs for those investments in fairly short order. Ananda Baruah: And George, are the current adds -- or the adds so far, are they fully optimized at this point? George Kurian: I think on the 200 heads, as we’ve said, they are fully productive, fully part of the NetApp sales team. We are adding some -- we added some cloud headcount in last quarter, we anticipate to add some more this year. Alongside the course of the business, they will take some time to get productive, but those are in the same range of productivity ramps as our traditional sales headcount. I think, what you see from this coming year from our guidance to the coming year is that revenue outpaces the growth in operating expense, leading to additional leverage in our business model. That reflects our disciplined approach to investing where we see the opportunities. Operator: Our next question comes from Mehdi Hosseini with FIG. Mehdi Hosseini: I joined the call late. So, I apologize if I’m repeating the question. I noticed your inventories are at a two-year low. And I want to see what’s your strategy and how aggressive are you going to be out there buying key components, especially storage? And I have a quick follow-up. Mike Berry: Sure. Hey Mehdi, it’s Mike. So, yes, we had very good inventory turns at the end of Q4. As I mentioned in the script, we -- and we’ve already started and we will expect to continue a couple of different programs. One is to double down on some of the key components related to our storage products to make sure that we have enough resources. We’ve always done that. And we will continue to do that. We will also add some safety stocks, so that if there are issues throughout the world, and hopefully, we’re able to respond to that. In addition, we’ve also -- will have longer, I’ll call it, purchase orders that we will extend through the year. So, we’re doing everything that we can to make sure that we have enough inventory. I would expect, in Q1, you should see those turns probably go back to the 12 to 14 number. And again, given lower cost of capital, our goal to make sure that we always have product and we could meet customer requirements, we think that’s a very good investment. So, thanks for the question. Yes, you should see those inventories increase and the inventory turns go down in Q1 and likely through the rest of fiscal ‘22. Mehdi Hosseini: Great. And just a quick follow-up. Your cloud services margins is becoming accretive. But is that higher cost of component that is capping the gross margin? George Kurian: Listen, I think with regard to component costs, as Mike said, as we look out the next year, we see that the component cost in aggregate for the full year is going to be relatively flat to this year with some puts and takes in terms of the mix. I think that with regard to cloud gross margins, it’s really reflecting the balance of certain regions getting more heavily utilized and seeing customer consumption of the installed footprint, while we make investments in other regions to continue to expand our business. And that trade-off between investing to continue to expand the business with the growth in ARR is the balance we walk. I think as I also mentioned, we have several other avenues to continue to drive gross margins in cloud. The software mix in the portfolio is growing with solutions like Spot and Cloud Insights and some versions of our Cloud Volumes products being software-only. The second is we continue to drive efficiency in the software, in ONTAP operating system software. So, there are lots of avenues to continue to accelerate cloud gross margins. Team has done a good job this year. And we expect it to be accretive to company gross margins as we go through next fiscal year. Operator: Our next question comes from Sidney Ho with Deutsche Bank. Sidney Ho: Maybe one more question on gross margin. In the past, you talked about a target to get product gross margin back to the mid-50s. You are at 54 and change already this quarter. Should we expect this gross margin to continue to improve over the next few quarters, given the mix shift towards the software heavy side products, or should we think about hardware and software margins both still have room to grow? And it sounds like higher component costs may not have an impact in the near term, but I just want to confirm that. Thanks. Mike Berry: Yes. Hey Sidney, it’s Mike. We have guided in our fiscal ‘21 in our Q1 numbers, product gross margins to be relatively consistent with how we exited Q4. Again, component costs over the full year, at this point, as we sit here today, relatively flat. It will move on a little bit by quarter, but keep in mind as well, mix matters a lot in that as well. Also in Q1, we talked about 68% gross margins. Keep in mind that there’s a much bigger component of revenue in Q1 that’s services versus product. So you also get that bump in margin. You saw that in the last couple of Q1s as well. So, as we sit here today, we don’t see a lot of movement in the gross margin numbers. Again that’s based on the component costs that we see today. Mix does matter in the quarter, but we’ve largely stayed relatively consistent with how we’re exiting Q4. Operator: Our next question comes from Nehal Chokshi with Northland Capital Markets. Nehal Chokshi: Thank you. And congrats on a great quarter and great guidance. And also, thank you for the providing the extra visibility in PCS in terms of profitability with the gross margin comment, which is actually quite impressive about the scale. But, I always want more. So, my question here is, what about the operating income profitability of the PCS division? And/or maybe you can comment on where on the Rule of 40 is PCS operating at right now? Mike Berry: So, I want to make sure I understand the question. You’re not talking about gross margins. You’re talking about operating margins, Nehal? Nehal Chokshi: Correct, correct. And then, maybe if you want to put that into the context of Rule of 40? Mike Berry: Yes. So, at this point, as you said, you always want more. We feel good about talking about our gross margins. We’re not going to go down to operating margins in that business that gets into a lot of allocations and things. So, what we’re going to do is we’re going to focus the business on gross margin. Do we certainly look at OpEx? And where we spend the money? Yes, we do. So, in terms of the Rule of 40, again, we have to go down the operating income. We won’t do that. We will keep it at the gross margin discussion. Nehal Chokshi: In the future, do you expect to be able to break this out, or do you expect that the -- there’s just too much cross-selling going on that would prevent that kind of breakout to happen? Mike Berry: What I would say is, hey, tune in after the Q1 call, and we’ll talk about what we’re going to disclose going in ‘22. Operator: Our last question comes from Karl Ackerman with Cowen. Karl Ackerman: Yes. Thank you. Your latest run rate all-flash array revenues are near a record of $2.9 billion and your year-over-year growth exceeded most peers. And so, I was hoping you could provide some parameters, at least qualitatively, around your fiscal ‘22 expectations for all-flash array growth, and maybe how the mix of your installed base plays into those expectations? Thank you. George Kurian: Listen, I feel really good about our flash business. We are focused, differentiated and executing in the market. I think, our strong position in the sweet spot of the storage industry, which is the midrange part of the market, is clearly evident, and it is affecting the growth rates of our competitors. We have taken share for the last several quarters, and we see every confidence that we will continue to do that going forward. What we said at the Analyst Day was that over the next few years, the all-flash array market will grow at about 7.5% CAGR, and we expect to outpace that this coming year. We expect that the storage industry will grow around 4%, and our revenue picture expects us to outpace the growth of the storage industry overall. So, we feel really good. And ONTAP 9.9 coming out gives us even more confidence in our differentiation. Kris Newton: All right. Well, thank you, Karl. That’s our final question. So, I’ll hand it over to George for some closing remarks. George Kurian: Thanks, Kris. In closing, we delivered a great end to a strong year. And we are well-positioned as we move into fiscal year ‘22. I want to reiterate that our public cloud business is at a scale where it is contributing meaningfully to revenue and billings growth. And the innovations we deliver to our hybrid cloud business will support continued product revenue growth. In fiscal year ‘22, we expect to grow the top line, deliver operating leverage and generate significant free cash flow, all while investing in growth initiatives. I am excited by and confident in our ability to capitalize on the industry transitions and the market opportunities ahead. I look forward to speaking with you again next quarter. Thank you for joining us. And a special thank you to our NetApp team. Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.NTAP Ratings Summary
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NetApp Shares Jump 18% Following Strong Q3 Results
NetApp (NASDAQ:NTAP) shares soared 18% in pre-market today following the announcement of its Q3 results, which surpassed expectations in terms of earnings, revenue, and operating margin expansion.
The company recorded earnings per share of $1.94, outperforming the forecasted $1.69 by analysts. Quarterly revenue reached $1.61 billion, exceeding the anticipated $1.59 billion.
Additionally, NetApp achieved historical highs with a gross margin of 73% and an operating margin of 30%.
For the upcoming Q4/24, NetApp projects EPS to fall between $1.73 and $1.83, compared to the analysts' expectation of $1.73. The company estimates Q4 revenue to range from $1.59 billion to $1.74 billion, against a consensus of $1.64 billion.
For the full fiscal year, NetApp revised its adjusted EPS forecast upwards to $6.40-$6.50 from the previously estimated range of $6.05-$6.25.
NetApp Posts Better Than Expected Q1 Results
NetApp (NASDAQ:NTAP) released its Q1 results that exceeded expectations. The company achieved an earnings per share (EPS) of $1.15, surpassing the Street estimate of $1.07. The revenue experienced a year-over-year decline of 10%, amounting to $1.43 billion, which still managed to exceed the Street estimate of $1.41 billion. Billings also showed a decrease, reaching $1.30 billion, reflecting a year-over-year drop of 17%.
For the upcoming second quarter of 2024, NetApp projects an EPS range between $1.35 and $1.45, which compares to the Street estimate of $1.38. Additionally, the company anticipates revenue to fall within the range of $1.455 billion to $1.605 billion, compared to the Street estimate of $1.51 billion.
Looking at the full fiscal year, NetApp expects its EPS to range from $5.65 to $5.85, compared to the Street estimate of $5.70.
NetApp Reports Mix Q3 Results & Soft Full-Year Guidance
NetApp (NASDAQ:NTAP) reported its Q3 results and lighter-than-expected Q4 outlook on Wednesday.
Q3 EPS came in at $1.37, better than the Street estimate of $1.31, while revenue was $1.53 billion, missing the Street estimate of $1.61 billion. The company expects Q4/23 EPS to be in the range of $1.30-$1.40, compared to the Street estimate of $1.43. For the full year, they expect EPS in the range of $5.30-$5.50, compared to the Street estimate of $5.41.
Looking beyond Q4, analysts at Deutsche Bank expect demand weakness to persist, but are encouraged that there could be multiple gross margin tailwinds (FX, component premiums, NAND costs and product mix) in 2024, and believe OPEX will be in check given the recent headcount reduction.
Post results, the analysts lowered their 2023 EPS estimate from $5.60 to $5.40, but maintained 2024 EPS at $6.00. However, they lowered the price target from $74 to $70 as they await the company's key growth driver (i.e. public cloud service) to resume growth.
NetApp Reports Mix Q3 Results & Soft Full-Year Guidance
NetApp (NASDAQ:NTAP) reported its Q3 results and lighter-than-expected Q4 outlook on Wednesday.
Q3 EPS came in at $1.37, better than the Street estimate of $1.31, while revenue was $1.53 billion, missing the Street estimate of $1.61 billion. The company expects Q4/23 EPS to be in the range of $1.30-$1.40, compared to the Street estimate of $1.43. For the full year, they expect EPS in the range of $5.30-$5.50, compared to the Street estimate of $5.41.
Looking beyond Q4, analysts at Deutsche Bank expect demand weakness to persist, but are encouraged that there could be multiple gross margin tailwinds (FX, component premiums, NAND costs and product mix) in 2024, and believe OPEX will be in check given the recent headcount reduction.
Post results, the analysts lowered their 2023 EPS estimate from $5.60 to $5.40, but maintained 2024 EPS at $6.00. However, they lowered the price target from $74 to $70 as they await the company's key growth driver (i.e. public cloud service) to resume growth.
What to Expect From NetApp’s Upcoming Q3 Earnings Report?
Deutsche Bank provided its outlook on NetApp, Inc. (NASDAQ:NTAP) ahead of the company’s upcoming Q3 earnings announcement on Feb 22.
The analysts expect Q3 results to be in line with or slightly below the mid-point of guidance but turned more cautious on the revenue outlook for 2023 given the company's headcount reduction announced on Jan 31.
While the analysts had expected storage demand to be resilient, large-scale layoffs in recent weeks by technology companies suggest that the macro environment is expected to remain challenging. Deutsche Bank now believes the company's storage hardware could see a correction for 4-6 quarters, and its Public Cloud business could also see slower growth due to shrinking IT budgets. Therefore, the analysts lowered their 2023/2024 growth rates from -2%/+7% to -5%/+3%.
NetApp Shares Plunge 11% on Q2 Revenue Miss & Disappointing Guidance
NetApp (NASDAQ:NTAP) shares were down more than 11% pre-market today after the company reported its Q2 results, with revenue coming in at $1.66 billion (up 6% year-over-year), missing the Street estimate of $1.68 billion. EPS was $1.48, compared to the Street estimate of $1.33.
The company anticipates Q3 EPS to be in the range of $1.25-$1.35, worse than the consensus estimate of $1.44, and revenue of $1.525-1.675 billion, compared to the consensus estimate of $1.71 billion.
Fiscal 2023 EPS is expected to be in the range of $5.30-$5.50, missing the consensus estimate of $5.52. Management expects net revenue to grow in the range of 2-4% in 2023.
Analysts at Deutsche Bank provided their views on the company, expecting slower growth for the business over the next few quarters despite some positive demand indicators. Post results, the analysts reduced their 2023 EPS estimate from $6.00 to $5.60 and cut their price target from $84 to $78, while reiterating the Buy rating.
NetApp Shares Plunge 11% on Q2 Revenue Miss & Disappointing Guidance
NetApp (NASDAQ:NTAP) shares were down more than 11% pre-market today after the company reported its Q2 results, with revenue coming in at $1.66 billion (up 6% year-over-year), missing the Street estimate of $1.68 billion. EPS was $1.48, compared to the Street estimate of $1.33.
The company anticipates Q3 EPS to be in the range of $1.25-$1.35, worse than the consensus estimate of $1.44, and revenue of $1.525-1.675 billion, compared to the consensus estimate of $1.71 billion.
Fiscal 2023 EPS is expected to be in the range of $5.30-$5.50, missing the consensus estimate of $5.52. Management expects net revenue to grow in the range of 2-4% in 2023.
Analysts at Deutsche Bank provided their views on the company, expecting slower growth for the business over the next few quarters despite some positive demand indicators. Post results, the analysts reduced their 2023 EPS estimate from $6.00 to $5.60 and cut their price target from $84 to $78, while reiterating the Buy rating.
