NetApp results for the third FY 2025 quarter disappointed with a 2 percent year-over-year rise to $1.64 billion following the prior quarter’s guidance-beating 6.1 percent rise to $1.66 billion.
The previous quarter’s revenue outlook was 1.68 billion ± $75 million, a 4 percent year-over-year rise at the midpoint, and NetApp was inside that range. There was a GAAP profit of $299 million, down 4.5 percent year-over-year. Billings increased 2 percent to $1.71 billion. The all-flash array (AFA) run rate was up 10 percent at $3.8 billion, the same amount as the last quarter, with a 43 percent penetration of NetApp’s installed base. The company said most of its AFA business was to net new logos. Product revenue was $758 million, up 1.5 percent year-over-year.
CEO George Kurian stated that the Q3 top line performance was “below our standards” and “we are taking action to enhance our execution and improve our momentum.” What happened?
Although there were foreign exchange headwinds, it was mostly a sales close problem with several seven and eight-figure deals slipping late in the third quarter. Kurian said: “We had line of sight to achieve our sales targets until the end of Q3 when inconsistent execution resulted in some deals slipping out of the quarter.”
“We have instituted a higher level of scrutiny on deal progression through the pipeline with tighter controls on closing plans. We expect these actions will enhance our execution and improve our momentum. Already, a number of the slipped deals have closed.” There is now a “more detailed inspection of exactly who in the customer has approved and the various steps that a transaction typically takes to get to closure.”
Its hybrid cloud (basically on-premises kit) revenue was $1.47 billion, up just 0.7 percent, while the much lower-value public cloud segment grew its revenues 15 percent to $174 million, with said first-party and marketplace cloud storage services revenue growing more than 40 percent year-over-year. The Keystone storage-as-a-service offering grew around 60 percent.
Quarterly financial summary:
- Gross margin: 70.7 percent, up 0.2 percent year-over-year
- Operating cash flow: $385 million vs $105 million in Q2
- Free cash flow: $338 million vs $448 million a year ago
- Cash, cash equivalents, and investments: $1.52 billion vs year-ago $1.83 billion
- EPS: $1.91 down 1.5 percent year-over-year
- Share repurchases and dividends: $306 million
Wedbush analyst Matt Bryson said: “After several quarters of strong execution, NTAP unexpectedly stumbled on several fronts.” These included deal slippage with management suggesting “some European customers elongated closures because of political/economic uncertainty.” Another problem was product gross margins slipping.
NetApp is confident it can profit from the boom in AI workloads, saying it had more than 100 AI and data lake modernization deals in the quarter, with a number of AI-as-a-Service wins. Kurian said in the earnings call: ”We are seeing clients stand up AI centers of excellence with AI infrastructures that combine GPU-based compute with high-performance storage infrastructures. We had several large wins in that category … We are also seeing a growing number of wins in AI service providers who are building as a service infrastructure for enterprise AI.”
Progress on its ONTAP for AI project is good, with Kurian saying: “We made good progress on disaggregated storage. It is for high-performance unstructured data use cases. And you’ll hear more as we get towards Insight.” He added: ”This opens up our ability to attack the other players in the NAS market, particularly the large other NAS incumbent Dell. And so we feel good about our opportunity there.”
The Spot divestiture will have an adverse $15 million impact on the current quarter’s earnings, as will near-term headwinds to global public sector sales. With these points in mind, the outlook for the final FY 2025 quarter is for revenues of $1.725 billion ± $75 million, a 3.3 percent uplift on the year-ago Q4 at the midpoint and producing a $6.57 billion FY 2025 revenue result, a 5 percent year-over-year increase.
Bryson reckons that any rebound expectation in the final quarter should be “muted” and “it’s difficult to view NetApp’s outlook without a modicum of skepticism.”
