NetApp faces “current economic realities” as cloud growth stumbles | CRN

November 29, 2022, 06:56 PM EST

“The public cloud ARR (annual recurring revenue) of $603 million did not meet our expectations. As our cloud partners discussed on their earnings calls, growth has slowed as customers seek to optimize cloud spend. This macro-related optimization has also resulted in some slowdown in the growth of our cloud storage services,” NetApp CEO George Kurian said during the company’s second quarter fiscal 2023 conference call.

Macroeconomic headwinds and concerns about a deceleration in cloud services revenue caused NetApp to lower its guidance for the coming quarter and the rest of the fiscal year, despite all-time highs for billings, revenue, gross margin in dollars, operating income and second quarter earnings per share.

NetApp CEO George Kurian, in his prepared remarks Tuesday to financial analysts on the company’s second fiscal quarter 2023 analyst conference call, said the company had a strong quarter in a dynamic environment.

“However, we are disappointed with the slow growth of our cloud services,” Kurian said.

[Related: NetApp CEO George Kurian: Pure Storage Boss’ Comments Inaccurate]

On a macro level, NetApp saw changes in customer behavior impact the San Jose, Calif.-based company’s fiscal 2023 second quarter, Kurian said.

“We saw increased budget oversight, requiring higher-level approvals, which resulted in smaller deal sizes, longer sales cycles, and some deals going out of the quarter,” he said. “In the second quarter, we felt it most acutely in the US high-tech and service provider sectors. We see no change to our underlying opportunity and are confident in our position. However, current economic realities and unprecedented Fx (foreign exchange) headwinds have and will continue to impact IT spending, forcing us to moderate our second half revenue forecast.

NetApp shares fell about 10% in after-hours trading Tuesday to $64.

NetApp’s public cloud segment revenue in the second quarter grew 63% year-over-year to $142 million, while net dollar revenue retention rate remained healthy at 140%, Kurian said. .

“However, the public cloud ARR (annual recurring revenue) of $603 million fell short of our expectations,” he said. “As our cloud partners discussed on their earnings calls, growth has slowed as customers seek to optimize cloud-related spend. This macro-related optimization has also resulted in some slowing growth in our cloud storage.”

At the same time, NetApp had a few customers with large project-based workloads like chip design that came to a natural conclusion, leading to capacity reductions in those environments, Kurian said.

“We expect these customers to launch new projects early next calendar year,” he said. “As the number of cloud customers and their use of our cloud services grows, the impact of this type of workload will be smoothed out to a much broader customer base.”

In NetApp’s cloud operations portfolio, NetApp’s Spot cloud optimization business grew as customers sought to optimize their cloud spend, which Kurian said was the result of the same factors that drove leads to a decrease in cloud storage services.

NetApp is taking steps to reduce operating expenses in response to the expected slowdown in revenue, Kurian said. This includes implementing a widespread hiring freeze, cutting discretionary spending and further optimizing its real estate footprint, he said.

“We are clearly aligned with our clients’ strategic priorities and remain confident in our long-term opportunity, despite the current external headwinds,” he said. “By focusing on what we can control, we will aggressively seek to maximize near-term returns from our portfolio of products and services while leveraging our leadership position in optimizing all-flash infrastructure, cloud storage and cloud infrastructure.

For its second fiscal quarter of 2023, which ended October 28, NetApp reported revenue of $1.66 billion, up 6% from the company’s reported $1.57 billion. for its second fiscal quarter of 2022.

This includes product revenue of $837 million, up from $814 million previously; support income of $607 million, compared to $598 million previously; professional services and other revenue of $77 million, up from $76 million previously; and public cloud segment net revenue of $142 million, compared to $132 million previously.

In the revenue mix, NetApp’s hybrid cloud revenue grew 3% year-over-year, while its all-flash storage array business grew 2% year-over-year. another to achieve an annualized revenue rate of $3.1 billion. The company’s all-flash array penetration rate reached 33% of the company’s installed base.

Americas business operations accounted for 40% of NetApp’s business, while the US public sector accounted for 14%.

Indirect sales accounted for 77% of NetApp’s revenue, down slightly from 79% last year.

Total revenue exceeded analysts’ expectations by $10 million, according to Seeking Alpha.

NetApp reported GAAP net income of $750 million or $3.46 per share, up significantly from $224 million or $1.00 per share last year. On a non-GAAP basis, NetApp reported $326 million or $1.48 per share, compared to $269 million or $1.20 per share last year.

Non-GAAP earnings beat analysts’ expectations by 15 cents a share, according to Seeking Alpha.

Looking ahead, NetApp expects revenue of $1.525 billion for fiscal third quarter 2023, which would be down from the company’s reported $1.61 billion for its fiscal third quarter. 2022. The company also expects earnings per share of between $1.25 and $1.35. compares to non-GAAP earnings last year of $1.44 per share.

NetApp is also trimming its full fiscal year by 1-2 points, with revenue expected to increase 2-4% from fiscal 2022. Public cloud annual recurring revenue is expected to be approximately $700 million.