Storage vendor’s strategy to shift more revenue to services pays off as legacy models decline
The revised guidance by NetApp on its first quarter’s financial performance came in right on the money, with net revenue tallying $1.24 billion for the first three months of its 2020 fiscal year. The real standout story, though, is the spike in recurring revenue, as service-based product sales jumped 189% year over year.
The Lowdown: The spike in recurring revenue comes as NetApp continues to shift more of its go-to-market emphasis – direct and with partners – to services and service-based businesses that generate annuity revenue. NetApp is banking that the shift to services and recurring revenue will offset the declines in legacy transactional product sales, which were off substantially in the first quarter.
The Details: NetApp built its recurring revenue strategy on the foundation of a multi-cloud world in which enterprises and service providers forge and operate hybrid infrastructure. Services that support that hybrid infrastructure drive recurring revenue to NetApp and its partners. NetApp is working with Google Cloud, Amazon Web Services, IBM’s Red Hat division, and Microsoft Azure to enable hybrid cloud storage systems for enterprises and midmarket companies. And NetApp is collaborating with cloud providers and partners to enable storage attached to Big Data systems.
While service-based sales are climbing, NetApp isn’t escaping the pain of transition from transactional to recurring revenue. For the first quarter, NetApp’s net revenue totaled $1.24 billion, down from $1.47 billion in the first quarter of fiscal-year 2019. Two weeks ago, NetApp had adjusted its forecast down from a range of $1.33 billion to $1.46 billion to a range of $1.22 billion to $1.24 billion. NetApp says full-year fiscal 2020 revenue will likely fall 12% as it continues to transition revenue models.
The Impact: Wall Street and critics may hammer NetApp for the sharp decline in net earnings, but history shows all legacy vendors go through a revenue trough when moving from transactional to recurring revenue. NetApp’s hybrid cloud strategy, the embracement of recurring revenue models, and the enablement of partners to capitalize on cloud services will likely pay dividends following the transition period. Historically, the process of moving to recurring revenue takes 18 to 24 months for a vendor.
Background: As part of its transition to recurring revenue, NetApp this year implemented changes to its partner program, including the consolidation of service providers and resellers into a single track, added incentives to re-engage with existing and dormant accounts, competitive displacement rebates, and a new focus on digital transformation.
The Buzz: “I’m clearly disappointed with our Q1 top-line results but remain confident in our strategy and the fundamentals of our business model,” said George Kurian, CEO of NetApp, in a statement on the quarterly earnings. “The gross margin and cost structure improvements we’ve made provide support for our free cash flow generation and enable us to navigate the ongoing macroeconomic headwinds while making the strategic moves that position us well to return to growth.”