Conf Call notes:
124% increase in revenue.
Proforma net income 140% = $.09 compared to $.04.
Completed ORCA with amort of 27M.
Additional Info:
16% sequential increase
Book to bill less than 1, but above last quarters 200M rev.
GM = 61.3 up 1.5 points. Software = 16% with growth in SNAP software products.
Costs lower on disks and other materials.
Payoff improving service margins.
Sales exp- = 27.4% of revenue
R/D = 10% revenue
G/A= 3.9%
Expect continued investment pace with sales and prod development.
19% net revenue up from last.
Pro forma increase from $.07 to $.09/sh
Actual $.01/sh.
Going forward, goodwill amortization = $.005/sh each quarter.
Investments cash flow = $437M
DSO = 54 days up from 50 from last quarter, within target range
Inventory. Turn = 15.7 times
DW:
Accellerating growth rate for 4th consecutive quarter.
400 new accounts = 35% of total in NA
Channel mix = 23% indirect, OEM (Dell and Fujitsu) = 4%.
Application Mix:
40% = 2 protocols
19% = “windows only” from 15% Q4
16% = database from 18%
Bank of America; SW Air; Continental Air
Clustered failover >30% up from 25%..
Even distribution from low/mid/high systems
NetCache = 4% “unpredictable” down from 8% Q4.
E-commerce business <40% of filer system bookings
Mix of NetCache filers shifting to low end esp new C1100
Netcache units up 10 % representing 19%.
Added BT and DT ISPs.
Encouraged by move from caching to content distribution allowing filers and caches to be sold as integrated solutions. End to end solution with filers at the core and cache at the edges. No other vendor offers this.
New Product Program:
This week new ONTAP release software expanding 760 to 3TB non-clustered and 6TB Clustered failover 4x increase).
Adjusted pricing= clear leadership in TCO.
New high end on schedule in production and in beta. Meeting expectations for reliability and performance. Announced and Shipping this quarter. First member of new family Expanding down and up the family.
New software= enterprise sys mgt frameworks and on-demand streaming media in NetCache products.
Q and A:
Expand on Ent Sys Mgt Software:
Dave Hitz: 3 focuses a) memory efficiency, how effectively system uses memory in accessing discs b) SNAPSHOT/SNAPMIRROR more efficient so that they are quicker (faster performance. c) Improved reliability
With regard to DAFS: Leverages Virtual Interface technology (VI), moves data directly from memory of one system to memory of another with no TCP/IP stack, thus no TCP/IP fragmentation, overhead, etc. Strong for local clustering of filers for database and e-mail servers.
With regard to synchronous mirroring: Expect to be middle of next year.
Cache business going forward:
DW: Lumpy, large deal business. $2M-$3M deals are the norm. Encouraged looking forward. This quarter already equal to last quarter’s deals. Caching market dominated by large ISPs and multinationals. Content delivery is becoming important, rather than bandwidth reduction. NTAP is uniquely positioned.
Component supply:
Jeff: Overall relationship with suppliers is improving. In every quarter we have a material issue that we must solve. Disk drive transition is frequently an issue. Little issues in connectors and memory occur, but don’t see anything significant at this point.
Gross Margins:
DW: Are in wait and see for margins at this level. Installed base may start adding storage, which will cause overall margins to decline. Gross margins may be higher than I would have guided you in the past.
Competition:
EMC, SUNW, and everyone. Talk about competitive framework. Is caching a critical part of your market.
Tom: (Cocky remark about Kruschev and “we will bury you”.) Good news is that others are saying we have a big market and are going to take it rather than saying there is no market. Very well placed against our competitors.
WRT to caching, 2 largest deals ever closed this quarter with caching and content distribution. Entire focus is more end-to-end than before. And that’s the future of NetApp.
DW: We need system management services for synchronization and updating of content, but that software will come along soon.
Book/bill less than 1. What does that mean? Is backlog to next quarter sales more in line to normal expectation than it was last quarter?
Jeff: We are in good balance. Lead time and backlog are very much in alignment.
New Low end in 2nd half—what target markets?
High end targeted at same markets, especially multinationals.
New price point for entry level, but not after consumer and small business market. After ISPs and large businesses and other multi-site customers.
When does new VI/DAFS start to appear?
First stuff partners outside of NTAP (3rd party) early next calendar. In new NTAP products 1H next calendar year.
Demand strong enough to see triple digit growth?
Jeff: Never give forecasts, but backlog issue is solved.
DW: Demand remains very, very strong.
Any change in ASP trends?
DW: ASPs consistent q to q. Slight uptrend at high end, down in low end, but not significant. New high end will cause ASPs to go up at the high end.
Are OEM partners going to be a key channel?
DW: OEM not expanding at the rate we hoped, but I don’t see it changing. OEMs are private label (Dell, Fujitusu). Storage Networks is a marketing partnership. Futjitsu Siemens is marketing partnership. This is indirect channel revenue.
WRT EMC, they expect to squeeze you from top and bottom. Comments? What are issues in managing growth?
Tom: Enormous advantage over EMC. Win rate is very high. EMC should focus on it, but from product point of view we have advantage. Broadening of NTAP product line makes it difficult for EMC to squeeze from any direction. Ideal of “open storage networking” is catching on. Y! continues to buy aggressively. Deutsche Telecom growing for consolidation of 152,000 PCs, (other examples cited for large scale customers.)
DW: NTAP is focused on beating the computer mfgs such as CPQ, SUNW, HWP, not just beating EMC.
Biggest problems is recruiting sales, engineering and building infrastructure.
Database business? Primary growth drivers?
Database business is not down. A fluctuation of 2% is not significant in any direction. Pushing all segments—database, windows only, caching. We are trying to solve the customers business problems, not pushing a particular solution.
WRT book/bill, it is typically higher than 1 in quarters 2-4 and lower than 1 in quarter 1.
Expect NetCache to be up next quarter.
See same seasonal factors?
Jeff: No new or different seasonal factors at this point.
New features stimulating new demand from new customers?
Expanded storage capacities will broaden appeal.
DW: Bookings exceed revenue through Q4, but build backlog in Q4, then ship the backlog in Q1. This is typical.
On Demand video of TB storage on the edge of the network looks promising.
Detail on pricing actions:
Jeff: Passed along lower disk drive prices.
GM improvement, how much from higher software content versus component pricing advantages?
Jeff: half from software mix, remainder from component pricing and improved service margins.
Smaller end of market?
DW: 10K entry price with 15K ASP 2nd half of this year.
Expand on larger capacities in context of how it will broaden your market.
Dave: Enterprise class customers care about safety and scalability. Thinking in terms of 10’s and 100’s of TB for 2-3 year plans. Deployment strategy is for many boxes. More scalability makes them more comfortable with NTAP.
DW: There is no reason why current technology cannot be used in 20-50TB environments. Problem is customers look at datasheet level and don’t understand how systems are aggregated for larger solution. Its an issue of lack of familiarity or a change in buying habit because they are used to buying one set of covers. Therefore, new scalabilty does not open new markets, just makes customers feel more comfortable with our boxes.
Expand on vision with Giganet and issues with FC
Dave: Relationship with Giganet is part of DAFS proposal, based on VI an NUMA. What’s important to know about VI is that it can run VI, E-net, Infiniband. So NTAP can remain neutral to networks with VI.
DW: WRT latency objections, they are specious. NTAP beats SAN in benchmarks. Latency issues are for accessing a large file, but NTAP caching, read aheads give NTAP the performance advantage in the overall application profile.
MS Exchange is a real pain point, what has NTAP learned with its solutions for Exchange:
Tom: Starting to get real penetration to Exchange market. Especially since IBM Global Services agreement.
Capital Spending during the quarter and cash from operations?
Jeff: Cash flow in excess of $30M
New version of ONTAP, is there more opportunity to capture software upgrades from installed base?
Almost all customers are software subscription customers, so no incremental revenue for software, but incremental for new storage upgrades.
Growth of sales force and productivity?
DW: Growth from partnership channels, faster productivity from new people, and more productivity from experienced sales people.
Tom: Recruiting is not a problem at NetApp. The market is stronger than ever and we are getting involved at higher levels.
Any change in below the line expenses?
Jeff: Tax rate trending down and we expect to get to world class tax rate. Currently 34%. 3-5M share increase per quarter. We are going to keep investing in the business. Still see a moderate decline in GM, but slower and more moderately. |
