A Look At NetApp’s Key Sources Of Value

NetApp (NASDAQ: NTAP) has three primary businesses – Product, Software Maintenance, and Hardware Maintenance & Other Services. Below we expand on these sources of revenue, their recent performance and what to expect going forward. You can see more on our interactive dashboard for NetApp’s key sources of value. You can adjust any of the company’s key drivers to see the impact of changes in the overall revenues, earnings, and valuation. In a subsequent note, we will discuss our detailed forecasts for each of these sources.

• The Product business is categorized into two solutions – strategic solutions and mature solutions. The solutions include configured systems (bundled hardware and software products), add-on drives (flash, disk, or hybrid), and original equipment manufacturer (OEM) products. Strategic solutions contribute about 71% to the product business’ revenue, and has been a strong performer over the last few years, with fiscal 2018 experiencing 24% revenue growth. This was on the back of 4% growth in unit volume of Clustered ONTAP systems and in sales of All-Flash FAS products. As a result, the average selling price of price of products increased, fueling the growth in revenues. However, mature solutions have been struggling in comparison, and 2018 was no different as it saw 2% decline in revenues. This was largely due to a unit volume decrease of 7-mode systems and dwindling OEM revenues. Given the strong performance of strategic solutions, we expect the company’s Product revenue to grow at a CAGR of over 10.9% over the next two years.
• The Software Maintenance business entails maintenance services and provides customers with product enhancements and upgrades, bug fixes and patch releases, as well as access to technical support. Furthermore, the business generates revenue from its cloud data services offerings. The Software Maintenance segment has remained fairly stable over the past few years, with 2018 experiencing a modest 0.7% decline in revenues. This is expected, given that revenue from this business is generated on a pro-rata contractual basis. Therefore, any deviation from the aggregate contract values results in slight revenue movement. For the next two years, we expect the revenue to remain stable.
• The Hardware Maintenance & Other Services business covers hardware maintenance, professional services, and educational and training services. Revenue from this business declined 3.6% year-over-year in 2018. Although the business saw an uptick in its installed base, lower average selling prices on the executed contracts pressured revenues. The decline was further exacerbated by lower contract renewal rates. This business will likely experience pricing pressure in coming years. Therefore, for the next two years, we expect the revenue to decline at a CAGR of over 4%

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