CFD3 Prep Post: NetApp

This is part of my series of posts on Cloud Field Day 3.

NetApp Logo

Ah, NetApp.

I last spoke to NetApp at Cloud Field Day 2 back in July 2017. At the time, the senior leadership in co-founder Dave Hitz and CTO Mark Bregman were quite open and honest about the challenge facing NetApp which was good to see. NetApp has been in need of a refresh for some time.

Financial Analysis Time!

I hadn’t taken a close look at NetApp’s financials since this post back in 2016 for Storage Field Day 9, so I figured it was time to do some more charts. Let’s start off with the same revenue growth chart as last time:

NetApp Revenue Growth 2010-2017

NetApp Revenue Growth 2010-2017 (Source: SEC filings and eigenmagic analysis)

2016 growth ended up being worse than my (simplistic) forecast of around negative 6%. The good news is that in 2017 the trend was reversed, and NetApp managed to not shrink. That’s a good start.

NetApp also managed to hang on to more of that sales money and convert it into profits.

NetApp Sales Sources 2009-2017

NetApp Sales Sources 2009-2017 (Source: SEC filings and eigenmagic analysis)

Net income was up 122% from 2016 to 2017. This has a lot to do with why the share price went from $36.12 in 2015 to $23.64 in 2016 and then back up to $39.85 in 2017. At time of writing, NTAP is around $62, which is quite the recovery.

Forecasting 2018

NetApp’s fiscal year runs to the end of April, so we don’t have the full year number for FY2018 as yet, but I want to see what’s going on and try to figure out why investors are so keen on NetApp at the moment. I’ve just pulled the last three quarters of statements from the SEC (the online EDGAR tool is very helpful) and plugged them into my analysis spreadsheet, and then fiddled with the numbers to create a very simple projection of the fourth quarter figures to give me a pro-forma yearly forecast for 2018.

It looks like this:

 

Pro-forma NetApp Revenue Growth 2010-2017 (Source: SEC filings and eigenmagic analysis)

Pro-forma NetApp Revenue Growth 2010-2017 (Source: SEC filings and eigenmagic analysis)

It looks like NetApp revenues will go up this year, for the first time in a while. Investors like that.

Forecast NetApp Income Growth 2009-2018F (Source: SEC filings and eigenmagic analysis)

Forecast NetApp Income Growth 2009-2018F (Source: SEC filings and eigenmagic analysis)

And it looks like NetApp will keep quite a bit of the money as well.

Note that this forecast is based on ignoring a one-off (I believe) tax provision for Jan 2018 of $991 million. $72 million in taxes is from NetApp selling some buildings in Sunnyvale, CA, but the other $856 million is “primarily as a result of the impact of U.S. tax reform”. I reckon that’ll make NetApp have an on-paper loss for the 2018 fiscal year, but I don’t believe it’s an ongoing thing, and I’m trying to look at the operations of the company, not the futzing around with tax policy that the current US administration is doing.

Engineering a Turnaround

There’s no one thing a company does to stop a decline, particularly not one as large as NetApp. Here’s my take on what’s going on.

Firstly, there’s better internal discipline around cost management. When growth is happening very quickly, you can get a bit loose with your spending because it looks like everything you invest in pays off. It’s not true, but discipline isn’t one of humanities strengths, and no one likes the boring people who call for fiscal discipline when there’s a party going on.

The fiscal discipline people are right, though, and the best companies are prudent about getting their discipline systems in place when there’s loads of money around, because when (not if, when) tougher times come along there suddenly isn’t enough money to fix everything you broke during the party.

We see this in the overheads as a percentage of sales. Sales expenses, general and admin, and R&D expenses are all down as a percentage of sales, which means NetApp keep more of the money it makes selling its stuff. That’s why we see more profit in 2017 than in 2016 on roughly the same amount of sales.

The 2018 forecast numbers show why keeping your costs down is great when you manage to sell more stuff as well: profits go up more. The forecast sales figure for 2018 here (about $5.5 billion) is lower than 2015 ($6.1 billion) but operating income is up from $717 million to around $900 million on my (lazy and wrong, but I dunno by how much yet) forecast.

We can see this in the Du Pont analysis as well, with a healthy improvement in operating efficiency:

NetApp Operating Efficiency 2009-2018F (Source: SEC filings, eigenmagic analysis)

NetApp Operating Efficiency 2009-2018F (Source: SEC filings, eigenmagic analysis)

People Are Buying

Along with some increased internal discipline and efficiency (though I’m sure that’s laughable to a bunch of my NetApp friends; sadly, this is relative to other enterprise organisations. None of them are very efficient) NetApp is convincing more people to buy its stuff. Partly this is higher prices (gross margin is up a couple of percentage points) but mostly it’s about having products people actually want to buy.

NetApp don’t break down their segments by product line, so they don’t explicitly tell us what is selling well and what isn’t. My read on things is that it’s the SolidFire lines NetApp acquired a couple of years ago, the newer HCI and all-flash stuff, and possibly some of the cloudy things.

I’m sceptical of the cloud stuff, partly because I was fairly nonplussed with the cloud guy NetApp wheeled in front of us last time, so it’ll be interesting to see what NetApp have to say about their cloud oriented stuff this time around. NetApp was pushing the Data Fabric concept for ages but it’s completely disappeared from the front page of netpp.com, and isn’t listed as a product or solution, so I assume that idea has been abandoned.

I wonder what has replaced it? Why would you choose NetApp if you were thinking about cloud? Let’s see how well they answer this question on the day.

 

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