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Layoffs put damper on positive NetApp storage earnings

NetApp storage growth was modest last quarter, despite the pandemic, but not sufficient to forestall layoffs. The cuts include engineers and sales professionals at SolidFire.

NetApp has slashed its workforce by nearly 6%, with its SolidFire all-flash division bearing the brunt of the cuts. The storage vendor on Wednesday confirmed reports of the layoffs during its quarterly earnings call.

According to its annual security filing, NetApp in April employed 10,800 people globally. The layoffs directly affect about 580 employees. CEO George Kurian defended the move as a way to jumpstart the NetApp storage and cloud businesses, which have been hurt by fluctuating flash prices in the aftermath of COVID-19.

George KurianGeorge Kurian

NetApp is the second major storage vendor to cut jobs this year. All-flash rival Pure Storage trimmed 100 positions, or roughly 3% of its workforce, in March.

Kurian said jobs in all functions of NetApp's business were eliminated that don't "particularly align" with its technology strategies. That reportedly includes some SolidFire engineers and sales teams. The SolidFire arrays provide all-flash storage for NetApp HCI, the vendor's hyper-converged infrastructure product.

"We are narrowing our focus with SolidFire HCI to the high-margin parts of the market," Kurian said.

NetApp recently added support for two-node NetApp HCI storage clusters. The platform previously required a minimum of three nodes.

NetApp bought SolidFire in 2015 after scrapping plans for its much-hyped but long-delayed FlashRay system, which never reached general availability. NetApp SolidFire was built as an all-flash system from the ground up. NetApp all sells all-flash versions of its FAS and EFF Series legacy disk arrays.

Although vowing to merge the SolidFire Element OS with its OnTap flagship storage operating system, NetApp never completed the integration.

Severance details for the affected employees were not immediately available. Kurian said jobs cuts are "never easy to make," but were driven by the need to prioritize core NetApp storage systems and accelerate public cloud services.

Several moves this year suggested a reshuffling was coming. NetApp in April quietly pulled the plug on NetApp Kubernetes Service (NKS), which enabled users to launch Kubernetes clusters with federated clusters that consumed persistent NetApp OnTap storage. NKS was short-lived: NetApp acquired startup Stackpoint.io in 2018 for its Kubernetes control plane, but NKS did not gain traction.

NetApp also discontinued its NetApp Cloud Volumes (NCV) on NetApp HCI and NetApp FlexPod. That stack allowed NetApp file storage to be used in containers.

All-flash, cloud lift NetApp

On the earnings front, NetApp reported $1.3 billion in net revenue for the quarter that ended July 31, up 5% from the same period a year ago. Product revenue accounted for $627 million, an increase of about 3%.

NetApp now breaks out product revenue by software and hardware. Software product increased slightly (2%) to $311 million, fueled largely by All Flash FAS. The vendor's $316 million in hardware sales marks a 7% year-over-year decline.

"The engineering DNA of NetApp and the value we provide to customers and shareholders is grounded in software -- we will continue to highlight and invest in this innovation engine," newly appointed NetApp CFO Mike Berry said.

NetApp captured $375 million from hardware-related maintenance and $301 million in license revenue for software maintenance. Sales of NetApp all-flash systems generated $567 million, with an annual rate of $2.3 billion. That's an increase of 34% year over year. NetApp claims that all-flash storage accounts for nearly one-quarter of its installed base.

Revenue from NetApp's public cloud services surged to $178 million, up nearly 200% year over year. The cloud revenue includes combined contributions of $44 million from recent acquisitions of CloudJumper, Spot and Talon Storage.

For next quarter, NetApp said it expects net revenue between $1.225 billion and $1.375 million. That implies a 5% drop in net revenue at the midpoint ($1.3 billion).

NetApp Keystone gives customers flexible ways to buy and manage NetApp storage products. NetApp Keystone has so far been limited to a select set of customers, but Kurian said the offering will be more broadly available this quarter. In response to the global pandemic, Kurian said IT organizations are adjusting their buying habits in anticipation of a long-range trend of having employees work remotely. For its part, NetApp has told employees to continue to work from home through July 2021.

Berry said higher NAND costs and pandemic-related pricing pressures contributed to a 2% drop in product gross margin to 51%.

"We believe both of those trends are transitory," but NetApp plans to proceed cautiously on the expectation they could persist the rest of the year.

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