NetApp : Earnings Call Transcript

Corrected Transcript

Total Pages: 22

CORPORATE PARTICIPANTS

Kris Newton

Vice President-Corporate Communications & Investor Relations, NetApp, Inc.

George Kurian

President, Chief Executive Officer & Director, NetApp, Inc.

Ronald J. Pasek

Executive Vice President & Chief Financial Officer, NetApp, Inc.

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OTHER PARTICIPANTS

Rod Hall

Analyst, Goldman Sachs & Co. LLC

Andrew James Nowinski

Analyst, Piper Jaffray & Co.

Kathryn Lynn Huberty

Analyst, Morgan Stanley & Co. LLC

Aaron Rakers

Analyst, Wells Fargo Securities LLC

Steven Fox

Analyst, Cross Research LLC

Wamsi Mohan

Analyst, Bank of America Merrill Lynch

David Ryzhik

Analyst, Susquehanna Financial Group LLLP

Ananda Baruah

Analyst, Loop Capital Markets LLC

Joseph H. Wittine

Analyst, Longbow Research LLC

Simon M. Leopold

Analyst, Raymond James & Associates, Inc.

Alex Kurtz

Analyst, KeyBanc Capital Markets, Inc.

Erik Suppiger

Analyst, JMP Securities LLC

Eric Martinuzzi

Analyst, Lake Street Capital Markets LLC

Jim Suva

Analyst, Citigroup Global Markets, Inc.

Nehal Sushil Chokshi

Analyst, Maxim Group LLC

Robert Cihra

Analyst, Guggenheim Securities LLC

MANAGEMENT DISCUSSION SECTION

Operator:Good afternoon, ladies and gentlemen. Welcome to NetApp's Second Quarter and Fiscal Year 2019 Financial Results Conference 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 will now turn the call over to Kris Newton, Vice President, Corporate Communications and Investor Relations.

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Kris Newton

Vice President-Corporate Communications & Investor Relations, NetApp, Inc.

Thank you for joining us on our Q2 fiscal year 2019 earnings call. With me today are our CEO, George Kurian; and CFO, Ron Pasek. This call is being webcast live and will be available for replay on our website at netapp.com.

As a reminder, we adopted the new accounting standard, ASC 606 in Q1. Our historical financial results have been restated to conform to the new revenue recognition rules. Reconciliations of our previously reported GAAP results to the restated ASC 606 GAAP results, as well as our ASC 606 GAAP to non-GAAP results are included in our Q2 earnings release for the applicable period, which is posted on our website, along with our financial tables and guidance, a historical supplemental data table and the non-GAAP to GAAP reconciliation. Unless otherwise noted, we will refer to non-GAAP and ASC 606 numbers.

During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects, such as our guidance for the third quarter and full fiscal year 2019, our expectations regarding future revenue, profitability, cash flow and shareholder returns, and our ability to grow and expand our opportunities, all of which involve risk and uncertainty. We disclaim any obligation to update our forward-looking statements and projections.

Actual results may differ materially from our statements and projections for a variety of reasons, including global, political, macroeconomic and market conditions, and our ability to expand our total available market, introduce and deliver new and differentiated products and services without disruption, manage our gross profit margins, capitalize on our market position and cloud strategy, maintain execution and continue our capital allocation strategy.

Please also refer to the documents we file from time to time with the SEC and available on our website, specifically, our most recent Form 10-K for fiscal year 2018 and our current reports on Form 8-K. During the call, all financial measures presented will be non-GAAP, unless otherwise indicated.

I'll now turn the call over to George.

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George Kurian

President, Chief Executive Officer & Director, NetApp, Inc.

Thanks, Kris. Good afternoon, everyone. Thank you for joining us. We delivered another quarter of solid results. Our Q2 revenue was in line with expectations. Gross margin, operating margin and EPS were all above the high end of our guidance range. Our consistent and strong performance reflects the clear differentiation of ourtechnology and the strength of our business model as well as our customers' commitment to NetApp and the significance of our Data Fabric strategy.

In the quarter, we extended our leadership position by introducing new partnerships and substantial innovation across our entire portfolio. Our opportunities framed by the data-driven digital transformation of business and defined by major technology transitions, led by cloud, IoT and artificial intelligence. The adoption of hybrid multicloud environment is changing how modern IT infrastructures are built and consumed and NetApp is at the heart of these transitions.

The NetApp Data Fabric provides unique customer value through an easily implemented catalog of consistent data services, seamlessly connecting on-premises resources to the private and public clouds with unified data services across all environments. This capability enables customers to realize the full potential of their data across edge, core and multiple clouds. Enterprises are responding to our Data Fabric strategy and are signaling their long-term confidence in NetApp by making investments in our software.

As discussed on our Q1 call, we have seen a rising interest in enterprise license agreements or ELAs, a form of broad enterprise agreement. The ELA represents the software-based capacity enablement portion of a multi-year engagement and creates the framework for committed follow-on revenue in the form of systems and support services.

Demand for these agreements is driven by our largest customers and is evidence of our growing importance to their IT strategy. In September, we announced a global strategic partnership with Lenovo, designed to expand our market reach deeper into China as well as to address server-led purchases and SME and commercial segments not traditionally served by NetApp. The partnership also extends the reach of the Data Fabric strategy and capabilities into these new markets.

NetApp is driving the market transition to flash as we help customers modernize, simplify, and consolidate their infrastructure. We are displacing competitors' complex equipment, gaining share in new workload deployments and upgrading our installed base with cloud-connected all-flash solutions.

In Q2, our all-flash array business inclusive of All Flash FAS, EF, and SolidFire products and services grew 29% year-over-year to an annualized net revenue run rate of $2.2 billion. Validating the innovation leadership and momentum of this part of our business, Gartner, for the third year in a row, recognized NetApp as a Leader in its Magic Quadrant for Solid-State Array.

In Q2, we introduced new innovations that further expand our leadership in the all-flash array market. ONTAP 9.5 software delivers leading cloud integration, the highest all-flash performance, and greater efficiency and simplicity. This release furthers our SAN capabilities with improved performance, supported by the industry's first latency guarantee to accelerate critical workloads with industry-leading end-to-end NVMe capability.

At the start of Q2, we announced ONTAP AI in partnership with NVIDIA, which creates a seamless data pipeline across edge, core, and cloud for deep learning deployments. Over the course of the quarter, we extended our participation in the rapidly growing area of AI with the announcement of MAX Data. MAX Data is the industry's first solution to leverage persistent memory in servers to deliver ultra-low latency with flash-like capacity, accelerating the performance of application-level data, and enabling faster processing of data for AI applications, in-memory databases, and real-time data analytics.

In addition to helping customers deliver better business outcomes with AI, we enable them to harness the growing data sources created by the Internet of Things. The latest version of NetApp StorageGRID, flash-accelerated object storage, delivers low latency performance for the billions of small objects generated by IoT devices and cloud connectivity for best-in-class performance and data management capabilities together with object storage economics. Enterprises choose our converged and hyper-converged solutions to accelerate their digital transformation because we help manage applications, infrastructure, and data as one integrated resource across private, public, and hybrid cloud environments.

In Q2, we enhanced the ease of managing FlexPod environment with NetApp Solution Support for FlexPod and Converged Systems Advisor software to reduce time to resolution for service incident. We also enhanced NetApp HCI, our industry-leading hybrid cloud infrastructure. We announced new Element software capabilities for HCI and SolidFire including the ability to replicate from Element to Cloud Volumes ONTAP for disaster recovery, data migration, and remote backup to public cloud as well as to on-premises ONTAP system.

Additionally, we introduced new options in our HCI portfolio, including support for GPU-based compute nodes to accelerate VDI environment and support for Red Hat OpenShift Container Platform. Through tight integration with the Data Fabric, only NetApp can bring the capabilities, architecture, and experience of public cloud to enterprise private cloud. We are delivering on the hereto unmet promise of hyper-convergence by enabling customers to run multiple applications with predictable performance and efficient scalability and our architectural approach is clearly proving out. We are seeing strong momentum in NetApp HCI with significant wins against all of our competitors.

As you've heard me say many times, our unique differentiator is cloud integration. Our entire portfolio is made stronger by the Data Fabric and our ability to support hybrid multicloud environments. A great example of the value of this integration is the cloud tiering service introduced in Q2. Cloud tiering identifies infrequently used data in on-premises storage and automatically and seamlessly moves it to lower-cost object storage in the cloud, freeing up space on high performance data center systems for frequently used data. When the cloud-tiered data is needed again, the service automatically and seamlessly moves it back to the high performance tier.

Also in Q2, we announced substantial innovation to address distinct customer challenges in using public clouds, container orchestration, cloud infrastructure monitoring and management, data compliance and security, and backup. Immediately following our acquisition of StackPointCloud in September, we launched NetApp Kubernetes Service which dramatically simplifies the deployment of a Kubernetes cluster and applications to public and private clouds.

We also announced Trident, an open-source project which supports the entire NetApp storage portfolio, the combination of NKS and Trident enables application developers to consume high performance storage to build and deploy stateful applications on all of the world's leading clouds and on their private clouds.

To help customers monitor and cost optimize their hybrid cloud infrastructures, we introduced Cloud Insights, a hybrid multicloud infrastructure monitoring and management service. Cloud Insights quickly inventories resources, identifies interdependencies, and assembles the topology of public cloud and on-premises environments. By giving organizations a view into their complete hybrid infrastructure, it helps to reduce cloud infrastructure costs by an average of 33%, proactively identifying prevent failures and improve end-user satisfaction.

Fiscal 2019 is a foundational year for the SaaS part of our business. We are focused on operational readiness and deployment in the primary cloud data centers. While early, the customer response to and demand for these