This is one of my traditional preparatory posts for Tech Field Day 18.
A quick review of NetApp’s public filings shows I was pretty much on the money for the 2018 forecast I did in my prep post for CFD3 last year. Not that this was difficult, because not a lot changed in one quarter. The actual numbers lined up pretty close to my forecast figures. Slightly better, in fact.
As I mentioned in my previous post, due to changes in US tax law, NetApp allocated an income tax provision of $732 million (on top of the $358 million that would ordinarily be owed), which brought its income before tax of $1,166 million down to $76 million net income instead of $808 million. I’ve taken this out in my calculations because it’s a one-off and obscures the underlying performance of the company.
Only have a couple of quarters of results have been published since then, but I’ve done another simple forecast and it appears that NetApp are continuing to grow profitably. It looks like about 4-5% revenue growth for 2019, down a little from the 7.1% in 2018.
Most of the growth is product sales, rather than maintenance and services (which are included in the Hardware Maintenance figure).
NetApp sees itself as “the data authority for the hybrid cloud” which is fairly clear positioning, but the numbers aren’t quite matching the rhetoric as far as I can work out.
Products are classified as either strategic solutions (new stuff NetApp wants you to buy) or mature solutions (old stuff like 7-mode ONTAP systems that NetApp expects to sell less of). Strategic products made up 71% of sales in 2018 (up from 66% in 2017) so people are moving to the new stuff, but not super-fast. Getting off old storage systems is a tricky business, as data migrations suck.
Most of the growth in strategic solutions in 2018 was from a 4% increase in the number of clustered ONTAP systems sold, and the higher price of all-flash arrays.
There are 114 mentions of the word ‘cloud’ in NetApp’s 2018 10-K, but I had to wade through them to find where the Cloud Data Services revenues were. They’re included in software maintenance revenue, which is the smallest line item that’s broken out in the figures. Software maintenance revenue has been essentially flat for five years, which is a concern if (as NetApp appears to believe) “hybrid cloud will be the dominant model for enterprise IT”.
At CFD3, NetApp had its newly acquired Greenqloud folk present to us, and it was pretty compelling stuff. The pricing and availability of Cloud Volumes made it an obvious thing to at least test out. It looked like NetApp was finally starting to get a handle on this whole cloud thing, and might be able to get some traction on its Data Fabric idea.
So where’s the revenue?
My theory is that it’s because NetApp is a large and well-established company with lots of enterprise customers. For all the time and energy devoted to talking about cloud, only about 8% of global IT spend is on cloud (according to a Gartner analyst I spoke to recently) so we should expect that it’ll only be a small amount of NetApp’s overall revenue, particularly since NetApp isn’t AWS, Azure, or GCP.
Transitions take time, and that’s assuming NetApp even wants to be a mostly cloud company. I don’t think they do, because their customers don’t want to be mostly cloud. They want options, which means hybrid, and today hybrid means NetApp storage that is accessible from cloud, on-site, at the edge, whatever, but mostly the storage lives in a datacentre somewhere.
I think NetApp needs to have some cloud in the mix, yes, because that’s what their customers demand of the company, but it doesn’t need to be most of what the company does because it’s not most of what their customers do. They do need to lead customers a bit, because they need to be ready for where the market is going, not stuck with where it was years ago, but change in the enterprise doesn’t happen quickly.
Cloud is a state of mind, not a location, and (as I wrote in Forbes.com recently) changing all the non-technology parts of a company to do things in a cloudy way takes a long time. Most of NetApp’s customers aren’t anywhere near doing that yet, so until they are, the cloud revenues will be slow to grow unless NetApp abandons its traditional customer base (annoying them all in the process) and tries to be another AWS. Which would be suicide.
That’s the context I’ll have in mind going in to NetApp’s presentations this time around.
Disclosure: NetApp is a past customer of PivotNine, and is likely to be a future analyst customer.