Leeza, I took a few notes from the conference call also. If I may add to your discussion, here they are:
International revenues account for about 22% of sales (Q1), up from 20% in the previous quarter (Q4). Gross margin was steady at 59.5% and the tax rate is unchanged at 37.5%. G&A dropped to 3.3%. DSO is 52 days, and inventory turns are 9.6 vs. 9.4 in the previous quarter. Indirect channels account for 20% of the revenues (13% of domestic sales are indirect and about 50% of foreign sales are indirect), with domestic indirect % going up and foreign indirect % going down.
30% of revenues are associated with fibre channel technology, and 40% of revenues are associated with two or more protocols. Shipment numbers (units) were up 20% over the previous quarter. In the previous quarter (Q4), shipments of larger systems were unusually high, while this last quarter (Q1) returned to a more even mix. Fastest growth appears now to be in the smaller systems.
NetCache saw 20% revenue growth from the previous quarter, and the revenue mix of systems was about half big systems (C630) and half small systems (C230). The big units go into data systems and the small units typically into POP's. The number of units sold was up 60% from the previous quarter, reflecting an increase in the sales of the smaller systems (C230). They expect to see the mix shift even more to the smaller systems as ISP's move data ever closer to the users.
NetCache accounted for about 4% of total NetApp revenues (i.e., about $2 million for the quarter). NetCache has sold to about 25 ISP's - mostly international - including the UK, France, Germany, Italy, Ireland, Netherlands, Scandinavia, Israel, South Africa, Hong Kong, Singapore, Korea, and Australia. NetCache has also sold to such multi-national corporations as Ericsson, Alcatel, SAAB, and Siemens.
The new product line (the F700 series) is the fifth generation introduced by NetApp since incorporation. At the top end, the new system does over 7,500 NFS operations per second on a single file system.
Then questions were asked by the analysts. The first question concerned caching. Basically he asked why the caching sales were primarily foreign. The answer was that trunking costs are so much higher outside the U.S. that payback is only about 10 to 14 weeks, while domestically it is typically a year or more. So, foreign ISP's have a strong incentive to cache, while domestic ISP's are in more of an evaluation mode.
Warmenhoven touted the advantages of NetCache as both an appliance and a multiple appliance. He emphasized the scalable solution, and said it was unique. He also said that the recent shift to new boxes will soon be reflected in the caching appliances, which will give them a "price-performance advantage."
Kim Alexy of Lehman Brothers asked about sales reps. NetApp added 26 sales people during the quarter, including 10 sales engineers and 9 direct sales reps. They ended the quarter with 78 direct selling people.
Another question was asked about the competitive landscape in the core product, filers (vis a vis Sun, for example). The answer was that things "are getting easier" because of product improvements. Win rates are holding steady.
A question was asked about how the sale of high-end systems affects margins and the answer was that there is a lower gross margin on high-end systems because they have relatively more hardware than software.
A question was asked about the book-to-bill ratio. The answer was that NetApp does not announce the numbers, except to say that it was above one. Also, the backlog has grown, but specifics will not be given.
A question was asked about the F6300. NetApp has over 20 orders but they have shipped only a few and none have been recognized as revenue yet.
Then, they discussed the new product line. The F700 series is based on the Alpha chip. The F720 replaces the F230 at the low end, the F740 replaces the F520 in the mid-range, and the F760 replaces the F630 at the high end. Price points have been maintained (about $40K, for example, for both the F520 and F740 which replaces it).
F720 about 200 GB capacity
F740 450 GB
F760 1.4 terrabytes
Their strategy for introducing a new product series is to:
1. NOT pre-sell the line, so there isn't a problem of inventory overhang
2. field-test the new line with a few, select customers
3. clear out the old inventory
4. announce the new line near the start of quarter, with enough inventory of the new line to maintain sales volume.
Question: any constraints on production of the new line (based on Alpha chip)?
A: No problem. They can obtain enough Alpha chips and boards, and can ramp up quickly.
Q: Any customer resistance to reliance on the Alpha chip?
A: A lot of customers have asked about this. NetApp is using the Alpha 21-164 for this generation and there is another generation (21-264) coming. They may have to switch to something else in a few years, but the software is highly portable. Intel is commited to producing the Alpha chip and Samsung is a second source.
Q: What are the advantages of caching?
A: Bandwidth savings, faster response time, and filtering/security. Some foreign ISP's (Singapore, for example) want to deny access to "inappropriate" sites. The caching appliance may be used to do this.
Q: What is the item on the balance sheet listed as "Deposits $9.5 million"?
A: NetApp has made an escrow deposit on property in Sunnyvale for a new location. They hope to find a separate entity to purchase the site and lease it back to NetApp.
Leeza, I'm not sure these are all accurate numbers - I may have mis-transcribed some details. But I hope this helps.
Also, I would not characterize NetApp as a "slow steady grower" - steady, yes, but I don't think of these growth rates as "slow." Sure, I'd like them to be faster - and I think they could be - but this is still p.d.q. growth.
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