Strong Growth In Product Adoption Drives A Beat For NetApp

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NetApp (NASDAQ: NTAP) reported strong fiscal first-quarter results, as both its revenue and earnings per share beat market expectations. The stock price, however, dipped slightly after the earnings release. This is not a surprise given that the company rarely sees positive earnings reactions, as it has a history of posting conservative guidance. Furthermore, investors are wary about the pricing of NAND and DRAM chips and fear that it will likely come on account of supply outpacing the demand. That said, we continue to focus more on the company’s strengths. Its revenues grew by 11.6% year-over-year to $1.53 billion, largely driven by an impressive 20.4% growth in products revenue. Moreover, despite the negative reaction from investors, the company’s EPS increased by 67.7% year-over-year to $1.04.

Our interactive dashboard on key takeaways from NetApp’s Q2 earnings details our forecasts and estimates for the company. Below we discuss our expectations for the upcoming quarter.

Strategic Products To Drive Top Line

NetApp continues to see growth in all-flash array (AFA) business. The company’s decision to transition to flash storage arrays has led to momentum, with this part of the business seeing around 50% year-on-year run-rate growth in the recently announced quarter. As a result of increased product sales, NetApp’s share in the external enterprise storage systems market has been on the rise, and we expect this to continue in the upcoming quarter due to the growing flash market. Demand for all-flash arrays (AFA) is growing as enterprises are looking to upgrade their data centers to fulfill the requirements of modern-day business applications that require higher speed and responsiveness. The success of flash products has also impacted the Storage Area Network (SAN) and converged infrastructure markets positively. This has resulted in new customer acquisitions and wallet share gains with existing customers. While the company’s strategic products should continue to drive growth, pricing pressure and lower contract renewal rates will likely drive modest growth in other parts of the company’s business. Meanwhile, the company’s recently launched product, AFF A800, is one of the fastest solutions in the market, which will likely generate interest from the enterprises that are involved in artificial intelligence and machine learning.

Sound Product Evolution And Evolution Of Customer Solutions

Over the past few years, the company has landed quite a few high profile deals. The deal to power Microsoft’s Azure Enterprise NFS service, the launch of NFLEX converged infrastructure with Fujitsu, and the deal with Google to integrate its services into the Google Cloud platform have helped the company to gain momentum. More recently, the company collaborated with Nvidia to develop NetApp ONTAP AI, which will enhance the distributed data stores of AI companies. The product utilizes Nvidia DGX supercomputers and the aforementioned AFF A800 all-flash storage to help the companies scale their machine learning infrastructures. We are optimistic about this product, as apart from delivering high-performance, the deployment time of this product is low. Moreover, the company continues to enhance its Data Fabric solution. As a result, enterprises are making long-term investments, which bodes well for the company.

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