NetApp (NTAP) shifts to restructuring mode to gain foothold in cloud market

In a sign that NetApp (NASDAQ: NTAP) is coming out of the virus-linked slowdown and treading on the recovery path, the tech firm brought cheer to shareholders this week by posting better-than-expected results for the last quarter. The market’s cautious response to the pandemic seems to be giving way to optimism and businesses are starting to spend on digital assets.

NetApp, a leading provider of data management software for enterprises, has a market cap of about $10 billion. Its FlexPod portfolio, developed jointly with Cisco (CSCO), is a widely used reference architecture for networking and storage infrastructure.

Wait and Watch

Unlike some of its peers, recovery of NetApp’s shares from the recent lows has been quite sluggish and they continue to languish near the three-year low seen in the early days of the virus outbreak. The uncertainty brought about by the pandemic weighs on investor sentiment amid fears that demand would remain under pressure due to low tech spending.

Nevertheless, the low valuation does not guarantee returns. As of now, the right strategy would be to remain patient and allow the full picture to emerge before buying or selling the stock. Most experts recommend holding NTAP though they see decent gains in the coming weeks.

Rightsizing

In an effort to streamline operations, the management has embarked on a rightsizing drive that is expected to pick up pace by next year. The estimated 5% workforce reduction will cost the company about $40 million in restructuring and employee compensation costs. The focus of the reorganization is on expanding the public cloud storage software business. The headcount reduction will mainly affect the SolidFire flash storage technology business. These measures are expected to ease the company’s underlying fiscal weakness.

These headcount reductions are never easy to make, and we take care and consideration when we decide to make those changes. Those changes were driven by the strategic alignment and focus that we have to prioritize our resources in the core storage systems and software business as well as accelerating our public cloud services business. We realigned about 5.5% of our workforce.

George Kurian, chief executive officer of NetApp

Q1 Numbers Beat

In the July quarter, a 3% revenue drop in the core product segment was offset by double-digit growth in maintenance revenues, which drove up total revenues to $1.3 billion. The positive top-line performance, supported by the widespread cloud migration — as enterprises positioned their businesses to stay relevant in the changing environment — resulted in a 12% growth in adjusted earnings to $0.73 per share. The results also came in above analysts’ forecast.

The shelter-in-place orders and shift to remote work have changed the way enterprises manage their operations, with more and more businesses shifting their IT workload to cloud platforms. Such initiatives require the services offered by tech companies like NetApp and the growing prevalence of digital transformation bodes well for them. NetApp has been aggressively ramping up its cloud capabilities. The recent acquisitions of Talon Storage, virtual desktop infrastructure player CloudJumper and Spot added steam to the cloud push.

Cost Management

The realignment of resources is expected to save costs in the coming quarters, thereby contributing to margin growth. However, that will be partially offset by acquisition-related costs. NetApp’s expanded portfolio and data-centric software innovation position the company to tap the unfolding opportunities in data management, in an environment where the scale and importance of data is rapidly increasing.

“We are seeing the use of cloud increasingly for disaster protection and business continuance purposes. We had several wins during the quarter where customers combined our on-premise all-flash array business with a flexible disaster protection copy in the cloud. So we’re very, very pleased with the progress in our cloud business,” said NetApp’s CEO George Kurian.

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Read management/analysts’ comments on NetApp’s Q1 2021 earnings report

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The company’s shares got a boost from this week’s earnings report. They opened Thursday’s session at $46.32 but lost momentum as trading progressed. The stock has dropped 8% since last year and 30% so far this year.