Here are my notes from the conference call (but I don't claim they are 100% accurate):
Hosting the call were Dan Warmenhoven, CEO, and Jeff Allen, CFO. Jeff Allen read the earnings press release, and then the results were discussed by both Dan and Jeff, with several analysts asking questions
1. Good revenue growth was seen internationally, with 25% of revenues from international sales, up sequentially from 22% in the previous quarter. Europe accounted for about 19%, with the rest mainly from the Far East.
2. Gross Margin was 59%, the same as year ago Q2, but down 0.5% from Q1'99,
due to increased sales and admin. expenses.
3. Sales & Marketing at 26%, was up from 25.2% in 2Q'98.
4. R&D was steady at 10% of revenues, and General & Administrative
expenses, at 3.9%, were up from 3.3% for 2Q'98.
5. DSO, at 62, was up from 57.
6. Inventory turns, at 10, was up slightly from 9.6.
7. In North America, there were approximately 170 new accounts in the
recent quarter.
8. The new F700 product series accounted for over 50% of sales in this
quarter, and about 25% of the high-end sales had cluster fail-over systems.
About 60% had fibre-channel. Forty percent have two or more protocols.
9. NetCache sales grew about 50% sequentially.
10. Was demand linear in the quarter? No, August was weak -- as is typical
of this summer-vacation month -- particularly in Europe. Sales picked up
nicely after August
11. What are trends in competitive pricing and what were win rates?
Competition remains about the same as in the past and win rates are consistent
with historical norms.
12. What new products are planned for the future? You can expect to see
the product line "roll" in about a year, as has occured in the past. A push
will be made both upward and downward in the market (both larger and smaller
units).
13. Will NetApp use Fujitsu drives because of the Fujitsu deal? Not
necessarily. The Fujitsu deal is a straight re-sell deal, primarily into
Japan, and primarily for Windows. NetApp will use its normal drives, but
may re-open this question in about a year.
14. What is the ramp-up period for the Fujitsu (and Dell) deals to start
benefiting the bottom line? No volume of significance is expected for at
least two quarters from these new channels. Warmenhoven is taking a "wait
and see" attitude as to their ultimate benefit. Dell sales force is not
used to selling these products, and these products don't sell themselves.
There will be a training period.
15. Database units accounted for about 6 or 7% of sales, down a bit, but
still a very interesting market. Some database clients named included
Universal Studios, Deutsche Telekom, Daimler-Benz, Xerox, and the Motley
Fool.
16. Various vendors have announced "competing" products, particularly at the
low-end (under $2K), but nothing matches the appliance approach of NetApp.
The Dell deal should spur efforts to sell into the lower (and the higher) end of the market than now served by NetApp.
17. Approximately one-third of NetCache sales in the quarter were
from the C700 series, even though it was only available in the tail-end of
the quarter.
18. Veritas has announced a software approach to speed Sun Filers by about
2x. What impact? Not concerned with a 2x change; NetApp already has Sun
beat by 4x on price-performance. But haven't seen the Veritas product in
the market yet.
19. Cluster fail-over capability was sold in 25% of the high-end units.
We are seeing sales even in non-mission-critical environments.
The fail-over capability could become a standard.
(Note: F760 does not yet have fail-over capability.)
20. Question on NetCache sales. Domestic ISP's are moving slowly into this
market (big sales gains are international), but there is a promising
domestic segment: the use of a reverse proxy to accelerate a web service,
such as the Lycos-Tripod deal. They have found that one C760 could replace
8 Sun servers. This can concentrate traffic in a small package.
21. NetApp recently selected J.D.Edwards for ERP (the ERP deal is one
reason for increased G&A).
22. NetApp ended the quarter with about 570 employees.
23. Database sales enjoyed good growth in Germany due, in particular, to
one very good sales engineer. There have been sales wins against EMC.
NetApp is going to try to import the German methods back to this country, to
invigorate database sales.
24. In addition to
sales to ISP's, NetApp is selling to Intranets, such as JPL and Ericcson
(who has about 20 caches).
25. Book to bill is again above one, but details will not be released.
26. One cent eps, of the reported 22 cents, was due to currency translation
that can not be expected to re-occur. Steps are being taken to remove the currency risk.
27. Don Young asked if eventually some big player would not try to emulate
the NetApp approach. Warmenhoven said any discussion on his part would be "speculation," and
said that many had threatened -- including Zander of Sun -- to "eat NetApp's
lunch," but none had been able to master the true appliance approach. |
