The News: NetApp released Q3 results, reporting net revenues of $1.53 billion, billings of $1.57 billion, non-GAAP net incomeof $301 million. Read the NetApp press release here.

NetApp Q3 2023: Concentrating on Factors Under its Control During Weak IT Spending

Analyst Take: Like other U.S. technology companies, NetApp’s Q3 2023 earnings were impacted by unfavorable macroeconomic conditions. These include longer sales cycles, cloud costs optimizations and foreign currency exchange rates. While NetApp’s revenues and income declined in almost all areas, the company has taken actions to strengthen its financial position. The storage and cloud vendor in January said it would reduce its workforce by approximately 8%, launched a new capacity all-flash product that will address an underserved commercial market, and re-aligned its CloudOps sales teams.

NetApp’s Q3 results are as follows:

Net revenues: $1.53 billion, compared to $1.61 billion in the third quarter of fiscal year 2022; a year-over-year decrease of 5% (2% in constant currency.)
Hybrid Cloud segment revenue: $1.38 billion, compared to $1.50 billion in the third quarter of fiscal year 2022.
Public Cloud segment revenue: $150 million, compared to $110 million in the third quarter of fiscal year 2022.
NetApp Public Cloud annualized revenue run rate (ARR) $605 million, compared to $469 million in the third quarter of fiscal year 2022; a healthy year-over-year increase of 29%.
All-flash array ARR $2.8 billion, compared to $3.2 billion in the third quarter of fiscal year 2022; a year-over-year decrease of 12%.
Net income: non-GAAP net incomeof $301 million, compared to $330 million in the third quarter of fiscal year 2022. Net income includes an unfavorable impact of approximately $30 million from foreign currency exchange rate changes.
Cash, cash equivalents and investments: $3.1 billion at the end of the third quarter of fiscal year 2023.
Cash provided by operations: $377 million, compared to $260 million in the third quarter of fiscal year 2022.

NetApp Q3 2023 Key Takeaways

While the current quarter may not yield better sales the midpoint of NetApp’s guidance range of 1.475 billion to $1.625 billion – is an 8% year-over-year decrease we believe NetApp has a clear strategy for weathering the technology spending slowdown. It has done a good job in dealing with factors it can control in the face of a weak IT spending environment. The company remains profitable and CEO George Kurian promises NetApp will be “prudent stewards of the business” to keep expenses under control

We believe that conservative spending and NetApp’s product strategy will put it in a good position when IT budgets pick up, possibly in the second half of the year. NetApp’s all-flash C Series will bring lower-cost QLC flash to smaller enterprises and commercial markets that did not fully embrace more expensive performance-centric flash storage. Its new BlueXP unified control plane can help manage resources across on-premises sites and public clouds. BlueXP also includes a dashboard for customers to gauge their data center carbon footprint and help sustainability goals. Another new program, NetApp Advance, provides perpetual upgrades and cost reduction guarantees.

After making a series of CloudOps acquisitions in recent years, NetApp is re-aligning its go-to-market model for flash and cloud services. NetApp’s strong Public Cloud Services and relationship with hyperscalers will also serve it well when IT spending rebounds.

NetApp is also looking at improved margins in the coming quarters. That is due to a combination of moving more customers from hybrid arrays to all-flash with the new C Series, lower NAND prices, and an easing of supply chain restraints. Those factors will complement NetApp’s strong Public Cloud gross margin, which was a 69% last quarter with a goal of eventually moving to 75% to 80%.

More insights from Evaluator Group:

NetApp Demonstrates Commitment to Sustainability

NetApp has new approach to data reduction guarantees

NetApp’s new consumption model for perpetual tech refresh

Disclosure: Evaluator Group, wholly owned by The Futurum Group, is a research and analyst firm that engages or has engaged in research, analysis and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article. Analysis and opinions expressed herein are specific to the analyst individually.