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NetApp sells more flash, spends less

NetApp made great progress last quarter with its sales of all-flash storage, Clustered Data OnTap (CDOT) and cost-cutting measures.

NetApp Wednesday reported better revenue and income results than expected, although its sales continued to slide on a year-over-year comparison.

Overall revenue of $1.29 billion was down around three percent from last year but within NetApp’s guidance and higher than financial analysts expected. Product revenue of $660 million dropped 1% from last year, after a string of steeper declines.

NetApp’s income of $64 million reversed a loss of $30 million in the same quarter last year, with the turnaround achieved mainly by trimming operating expenses 13% to $652 million.

Despite beating expectations, NetApp remains a ways from reversing year-over-year revenue declines. Its revenue forecast of between $1.265 billion and $1.415 billion for this quarter was more than expected, but even at the high end would be a year-over-year decrease.

“We’re clearly making progress, but still have work to do as we operate in the low growth IT spending environment,” NetApp CEO George Kurian said. “We are controlling what we can and are increasingly confident in our ability to execute as we streamline the business and pivot to the growth areas of the market.”

NetApp reported all-flash revenue grew approximately 385% from last year, mainly from All-Flash FAS sales. All-flash array sales came to around $194 million, around 30% of product revenue.

“Customers are replacing hard disk installations with flash, making flash the de facto standard for new on-premise deployments,” Kurian said.

He added that sales from SolidFire, the all-flash vendor NetApp acquired in February, remained “immaterial.” NetApp also sells an EF Series of all-flash arrays for high performance computing, but that made up only a small amount of the vendor’s overall flash sales.

Kurian said CDOT sales increased 35% from last year, with 82% of FAS arrays shipped last quarter including CDOT compared to 65% last year. CDOT is now running on 32% of NetApp’s installed base. NetApp struggled early on with CDOT conversions because it required a disruptive upgrade from its previous version of OnTap, but CDOT installations have grown steadily over the last nine months or so.

There is a possibility that NetApp’s spending cuts could hurt its long-term success, though. While the company returned $228 million to shareholders through share repurchases and a cash dividend last quarter, it cut year-over-year research and development for the third straight quarter. NetApp spent $192 million on R&D, down from $218 million a year ago.

With the storage industry more competitive than ever and newer technologies potentially more disruptive, lack of R&D spending could put NetApp at a disadvantage. It was slow moving into the all-flash array market, and still hasn’t come up with a product in the fast-growing hyper-converged market.

Krista Macomber, senior analyst for Technology Business Research (TBR), predicted the cut in R&D will make it tougher for NetApp to keep up with new developments and grow revenue.

“This is a threat, as agile and cutting-edge innovation increasingly influences storage vendors’ ability to differentiate,” Macomber wrote in a research note on NetApp. “Long-standing architectures and purchase models become massively disrupted by customers’ need to serve rising, data-centric demands from lines of business with greater efficiency and agility. As a result, TBR believes it will become more challenging for NetApp to sustain bottom-line improvements as it seeks to remain aligned with customers’ evolving workload requirements.”

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