NetApp Doubles Public Cloud Services Revenue In Q3

“[Cloud services are] expanding our addressable market and opening opportunities with new buyers at existing customers and with new customers as we help them reduce the cost and complexity of managing their rapidly growing cloud environments,” says NetApp CEO George Kurian.

A combination of a fast-growing public cloud services business and solid all-flash storage array sales growth led the way for NetApp to report a very good fiscal 2022 third quarter.

NetApp CEO George Kurian, during his prepared remarks to financial analysts during Wednesday’s financial conference call, said NetApp in the quarter enjoyed double-digit revenue growth lead by the company’s public cloud services and all-flash array businesses.

“We delivered another outstanding quarter, building on the momentum we’ve had in recent periods,” Kurian said. “Demand for our solutions is strong and powered by the alignment of our differentiated technology portfolio with customer priorities. ... NetApp plays a critical role in helping customers achieve their business and cloud transformation goals.”

[Related: 5 Keys To Understanding NetApp’s Second-Quarter Financials]

For NetApp, the quarter was one characterized by significant growth in the company’s public cloud business. Kurian said public cloud annual recurring revenue, or ARR, grew by 98 percent year-over-year to $469 million, which included solid results from the company’s acquisition in October of CloudCheckr, which offers complete AWS cloud management in one platform, proactive security monitoring across AWS services, as well as cost allocation tools and support for channel partners looking to grow their AWS business.

Excluding the $35 million in ARR from CloudCheckr, NetApp still enjoyed 83 percent organic ARR growth.

Public cloud dollar-based net revenue retention rate remains healthy at 169 percent, as customers increased their usage of NetApp’s public cloud services and adopted new products, Kurian said.

“The expanded market reach from our cloud partners and the broadening participation of our field sales organization has delivered outstanding performance in our public cloud segment this year, which puts us well ahead of our plan to achieve $1 billion in ARR in FY ’25,” he said.

NetApp is unique in that it has fully integrated services with all the major public cloud providers, including Azure NetApp Files, Cloud Volumes Service for Google Cloud, and AWS FSx for NetApp ONTAP, Kurian said.

NetApp also offers a differentiated CloudOps portfolio for multi-cloud infrastructure management led by its Spot portfolio, which allows clients to manage a wide range of cloud-native services including spot compute instances, Kubernetes and container storage, virtual desktop infrastructure, and more, as well as Cloud Insights, which helps clients monitor and optimize hybrid cloud infrastructures, Kurian said.

“[Cloud services are] expanding our addressable market and opening opportunities with new buyers at existing customers and with new customers as we help them reduce the cost and complexity of managing their rapidly growing cloud environments,” he said.

Kurian also called out NetApp’s acquisition of Fylamynt, which was unveiled Wednesday. Fylamynt brings CloudOps automation to NetApp’s Spot portfolio, he said.

“Adding Fylamynt’s cloud automation technology to the Spot platform will make it easy for customers to integrate Spot’s solutions with their existing tools, processes, and infrastructure code,” he said. “This will accelerate their ability to take advantage of Spot’s suite of capabilities for understanding and optimizing their cloud infrastructure.”

When asked by an analyst about NetApp’s cloud services on AWS versus those on Google Cloud Platform and Microsoft Azure, Kurian said that Google and Azure are not yet material contributors yet.

“We are excited about the potential, but you should see that potential realized over the next few years,” he said. “I think that in the past quarter, the vast majority of the acceleration comes from both new customer additions as well as when you see a really strong dollar-based net retention rate. It shows that once a customer uses one of these cloud portfolios, they expand their use quite substantially. So I think that‘s where the vast majority of the progress has been.”

When asked by another analyst whether NetApp is seeing customer spending behavior on the cloud, Kurian said there is nothing significant.

“While we haven‘t any sort of radical shift in behavior, the long-term trends around cloud and the use of as-a-service models, broadly defined, continue to be playing out for us,” he said. “Our cloud portfolio continues to be really, really strong, and we are able to help customers deploy workloads very quickly on public cloud environments, if they aren’t able to build and deploy an environment in their data center.”

Kurian, during his prepared remarks, said NetApp also saw solid growth in its hybrid cloud segment driven by continued strength in object storage and all-flash arrays.

NetApp’s all-flash array business in the third quarter hit a record high annualized run rate of $3.2 billion, which was up 23 percent over last year, he said.

“All-flash array penetration of our installed base ticked up another point to 31 percent of installed base systems, giving us substantial headroom to continue to help existing and new customers modernize their storage environments with cloud-connected flash arrays,” he said.

When asked by an analyst about NetApp’s product mix, Kurian said the company’s sales of all-flash arrays continue to be well ahead of market growth rates.

“[This] is a clear indication that we are gaining share,” he said. “And we are doing that by both winning new workloads in existing customers, as well as new customers.”

When asked by another analyst about NetApp’s object storage business, Kurian said NetApp is the strongest vendor in the midrange systems, and that midrange storage is displacing traditional high-end systems.

“So we are in more and more and more customers, winning the really high end of the market as well,” he said. “So really strong, broad-based distribution of our portfolio. Our hybrid flash systems have done really well in the entry market. If you look at the entry price bands‘ growth rates, those are much more hybrid flash business than all-flash business. And so the combination of those two gives us the ability to cover a broad range of use cases with the right form factor.”

Object storage is another extension of NetApp’s unstructured data portfolio, Kurian said.

“We have a really good, cost-effective, highly scalable, centrally-managed object storage solution,” he said. “And even in the object world, we have unique integrations with the public cloud that allows us to build a truly hybrid object environment, combining some parts of the environment being in customers centers and some parts being in true public cloud under one policy framework.”

For its third fiscal quarter 2022, which ended January 28, NetApp reported net revenue of $1.61 billion, up 9.5 percent over the $1.47 billion the company reported for its fiscal 2021 third quarter.

This included product revenue of $846 million, up from last year’s $775 million; support revenue of $586 million, up from $571 million; and professional and other services revenue of $72 million, up from $69 million. The company also reported public cloud segment revenue of $110 million, up from last year’s $55 million.

About 47 percent of the company ‘s total revenue came from commercial sales in the Americas, 9 percent from U.S. public sales, 32 percent from EMEA (Europe, Middle East, and Africa), and 12 percent from Asia Pacific.

About 79 percent of total revenue came from indirect channels, up from last year’s 76 percent.

NetApp reported GAAP net income of $252 million, or $1.10 per share, up from last year’s $182 million, or 80 cents per share. On a non-GAAP basis, the company reported net income of $330 million, or $1.44 per share, up from $250 million, or $1.10 per share.

Looking forward, NetApp expects fourth fiscal quarter 2022 revenue to be in the range of $1.635 billion to $1.735 billion. That implies an 8-percent growth over last year.

The company also expects earnings of 90 cents to $1.00 per share on a GAAP basis, or $1.21 to $1.31 per share on a non-GAAP basis.