Q4 2020 Earnings Call
Good day, ladies and gentlemen, and welcome to <unk> fourth quarter fiscal year 2020 conference call.
My name is lists and I'll be your conference call coordinator for today.
At this time, all participants are in listen only mode.
Later, we will conduct a question answer session and instructions will be given at that time.
I'll now turn the call over to Chris Newton, Vice President Corporate Communications and Investor Relations. Please proceed as needed.
Thank you for joining us with me today, our CEO, George Korean and CFO, Mike Berry. This call is being webcast slide and will be available for replay on our website at <unk> Dot com. During today's call. We will make forward looking statements and projections with respect to our financial outlook in future prospects such as our guidance for the.
First quarter fiscal year 2021, our expectations regarding future revenue profitability and shareholder returns and our ability to improve execution gainshare grow our cloud business and evolve our go to market strategy and organization all of which involve risk and uncertainty we disclaim any obligation.
<unk> update or forward looking statements and projections.
Actual results may differ materially for a variety of reasons, including macroeconomic and market conditions, including the continuing impact of the Kobin 19 pandemic, the I.T. capital spending environment and our ability to expand our total available market acquire new accounts.
Expand in existing account capitalize on or data fabric strategy generate cash flow and execute our capital allocation strategy.
Please also refer to the documents we filed from time to time with the FCC and available on our website specifically our most recent form 10-K for fiscal year 2019, including the management's discussion and analysis of financial condition and results of operations and risk factor section on our current reports on form 8-K.
During the call all financial measures presented will be non-GAAP, unless otherwise indicated reconciliations of GAAP to non-GAAP estimates are posted on our website.
Now I'll turn the call over to George.
Thanks, Chris Good afternoon, everyone. Thank you for joining us today.
Before we get into the results of the quarter I want to take a moment to acknowledge the young precedented situation. We are all experiencing.
First and foremost I want to express my sympathy for those who have been impacted by Qubits 19.
My gratitude to those frontline workers, whose efforts helps to keep its healthy insane.
I also want to acknowledge the tremendous amount of work that's enough team has done to core be efforts around the globe to keep our team C.
Well going above and beyond to be a strong partner to our customers.
No not this is an essential business, providing critical infrastructure to Michael public health and safety services first responders in public sector institutions in battleground city.
We've increased our level of support for them. So that they can stay focused on their critical missions.
In partnership with core scientific we are giving corporate 19 researchers.
Yes, that's true.
So the powered by on top line and video.
We're also helping customers rapidly bill virtual desktop infrastructure environments.
To support their growing remote workforce.
Well continue the educational for younger generation, our cloud solutions have been rapidly adopted in the last few weeks alone by many new state local and education customers to support VDI, whatever work and remote classroom.
I'm so proud of the commitments encouraged enough steam as demonstrated through each other to up blockers and customers into our community.
My sincere thanks for all these fantastic efforts.
They are representative of net up and I've noted that.
Now, let's turn to the results of the corner.
We could you make progress in improving our operational execution.
My focusing on what we can control we delivered strong gross margin.
No no operating leverage in Q4, despite the challenging environment.
The cornerstone of though well and we were tracking to our target onto countries around the globe began going you to lock down.
In April the piece of business slowed significantly.
No visibility was reduced we saw delays and some large deal.
Well, let's see sign some company accelerated orders to get ahead of shutdown and others. Initially you transaction to address the demands of removed working and digital business.
Over the course of this waste Wendy I've outlined our plan to get in front of more buyers and more accounts.
Our industry, leading portfolio, where we know we can win.
Our continued success in our dedicated acquired district reinforced our decision to maintain the investment to extend our reach despite the car market uncertainty.
In Q4, we achieved our target I'm, adding 200 primary sales headcount one quarter ahead of schedule.
This additional sales capacity has enabled us to blues coverage gap asked to dedicate resources focused on new customer acquisition.
As a reminder, we funded the said count by making Threed Austin the business.
Not my out into the company's total operating expenses.
Additionally.
We continued to sharpen our focus in markets, where we have boots is significant presence.
And your competitive advantage, our storage and cloud data services businesses.
Our final block in object storage systems, how strong industrial market endorsement from customers partners and analysts.
We meet our solutions easier to consume with Keystone odd reinvention of the customer experience.
Keystone gifts company, a real to hybrid multi cloud I T by delivering a consistent experience on subscription business model in both the biggest opic loan.
In the company's data center.
We made tremendous progress in our cloud business you know like 20.
As I noted last quarter, we achieved general availability on all the leading cloud providers.
They're not lock volume is the number one share file storage platform available.
The public clouds.
Our intellectual property is embedded in every region and data center that Microsoft Google and Amazon Web services remain online.
We were against me, Google Cloud technology partner of the year for infrastructure.
I'm sure no that's fine it's Microsoft's shared storage platform for primary workloads.
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High performance computing due to be.
Windows virtual desktop and be as your B.M. where service.
As you continues to be a good source for new customer acquisition.
More than 40% Badger Nineth files customers the new Internet.
Our cloud partners.
Our asking huh.
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Brought him workloads certification.
Andy Best in go to market activities to support this rapidly growing businesses.
Based on the last month of Q4, our annualized recurring revenue for cloud data services increased to $111 million.
We saw growth silvery water and we could you scale offload volumes service.
Yes, more companies started to cloud to rapidly meets the requirements of remote working on digital business.
We are already U club customers and additional data services.
Such as cloud backup and loved compliance, which are helping to drive new workloads.
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We continue to bring more value to the plot volumes platform.
In the past two months, we acquired Alan.
Viral final cashing software for remote and branch office workload.
Lot of jumper, a provider of a virtual desktop in the public Wow.
We bought a de services through our cloud offering to delivery comprehensive modern workplace Foundation for long company.
From born into gloves startups, and small businesses the largest global enterprises. We're excited to include the talented team in the Nineth family.
I'd be answering to with my 21, we will continue to manage the business efficiently.
While focusing on to clear priority.
Turning to grow would share gains in our storage business.
By our industry, leading filed lock in object software.
And skewing, our highly differentiated cloud data services business.
We will look like compared to transition.
And the acceleration shift to cloud to expand the usage of our products and services.
We look at you seem to find the customer experience by bringing cloud like flexibility to one premises environments and deepening the connection between on premises and cloud.
And we will continue to strengthen our partnerships with the cloud providers and add value to our cloud data services.
All of which will make it easier for customers to manage data in a hybrid multi cloud environment and dry preference for our technology.
We will also continue to do involved and aligned our sales and marketing.
To capture the opportunity ahead.
We recently announced that sees us there's no doubt will join Ninep in July and President, leading CRM marketing services and support.
These are has an impressive track record in leading transformations building diverse high performing team I'm, writing a successful cloud business.
He will continue to evolve our go to market strategy and operations.
To transform how we capitalized on the changing customer lansky to drive growth, particularly in cloud.
Entering if were 21, we created a separate globally integrated structure for our cloud data. So this is Steve Steve.
The some focus.
Scaling our cloud services business.
By maximizing our partnership with the World biggest public clouds.
Helping our customers and partners accelerate their public cloud journey.
And as I noted earlier, we have closed coverage gaps with expanded at a price seal and dedicated customer acquisition team.
To further strengthen our position in the storage market.
Data has always been central to the work we do.
And the role of data is more important now than ever before.
The resilience of our society.
So far financial governmental educational and healthcare system.
Depends on the reliable safe and flexible assets.
Storage and management Oh data.
That is our ambition.
Ceos are prioritizing the ability to deliver services and products in a more please.
The reach customers through digital me I'm to optimize remote operations and collaboration.
It is critical to have an even greater Nike architecture.
Absolutely for data.
With our data fabric strategy, we help customers Taco these challenges by modernizing legacy infrastructure and simplifying the integration and orchestration of data services. So that they can rapidly respond to a changing environment and fuel innovation.
While we cannot predict when the world would return to normal.
The enduring importance of data it's clear.
We are confident that the demand for our products and services will be strong it'd be emerged from this crisis.
The strength and resiliency of our business model enables us to continue to execute on strategy, while navigating a range of demand environment.
We will continue to make prudent decision in the face of the current reality.
Focusing on the priorities that will enable us to return to growth.
We will also me see operational discipline.
And ensure that our strong balance sheet will support our ability to create long term shareholder value through a wide range of scenario.
We are focusing our resources on the solutions that lead to the highest returns storage and cloud data services.
We are broadening our reach with a dedicated cloud sales focus.
And it enterprise sales coverage and dedicated customer acquisition resources.
I'm confident that these actions position that have to emerge from the current prices stronger than ever.
We will host an analyst day on September 16, where we will share more information on our plan.
For the continued evolution of net out.
Good day multiyear business outlook, we hope that you'll be able to join us.
Finally, I'm happy to introduce Mike Berry.
You Chief Financial Officer.
I'm excited to have Mike.
Deep knowledge of the technology and softening to see on the team.
He will be a key partner and strengthen our leadership position in hybrid cloud data services and deliver long term shareholder value.
My first day coincided with our local shufflers lease order.
Hi unique start he's quickly if you dig into the company and is already making an impact my welcome.
Thank you George and thanks for that waterfall introduction.
First I also want to express my sympathy.
To all those who have been impacted by the current health crisis and extend my sincere gratitude to the selfless frontline workers, we put themselves in harm's way to help keep us all safe.
The told at 19 pandemic has made for a very interesting for 60 days for me at that out.
But the unusual circumstances have only reinforced my initial views of the strong that out culture.
I have been very impressed with the quality of the team and the level of collaboration and commitment across the entire organization.
From day, one it has been clear that this team is all pulling in the same direction for the high level of transparency and accountability and a tireless determination to continue serving our customers across the globe.
When you couple this with net apps business model loyal customer base.
Go to market engine and product development, we are positioned to do great things in the future.
Let me start by expressing by deep appreciation to George and the entire board for giving me this opportunity and a run for has helped during my unusual onboarding.
Hi, I'm extremely excited about joining that up and look forward to working alongside George and the rest of the talented team as we continue to drive innovation and data management.
And the current environment and it's important to highlight that up solid liquidity position and business model.
Netapps healthy balance sheet and considerable free cash flow generation provide us the ability to make strategic decisions that are best Allied with long term shareholder value.
Since particularly critical in times of uncertainty.
We close Q4 with $2.9 billion and cash and short term investments.
As of yearend, we also had approximately $500 million available through our credit facility.
And we are confident we have access to the corporate debt market.
If needed.
Our strong liquidity position has allowed us to provide extended credit programs to our channel partners during the health crisis.
Given this is my first call as net up CFO I wanted to walk through how I view capital allocation.
Our strong liquidity position and the fact that we generated roughly a billion dollars free cash flow last year.
Allow us to remain committed to our dividend, which now carries more than a 4% yield.
In fiscal 20, we paid out nearly 50% of our free cash flow to dividends.
In the current environment, we believe it is prudent the pause our share repurchase program, which we did in late March.
So we have a better sense for the timing and magnitude of the broader economic recovery.
Longer term share repurchases will play a key role and our capital allocation strategy.
With the goal to help buybacks at least offset dilution from our equity plans.
Consistent with that apps long history of disciplined M&A.
Our acquisition strategy, we'll remain focused on bolstering our strategic roadmap, particularly within our cloud data services business.
Of course, all of these uses of capital will be balanced against reinvesting in the business for future growth.
Before going through our Q4 in fiscal 2020 results I would like to remind you that I will be referring to non-GAAP numbers unless otherwise noted.
Despite the demand weakness logistical challenges and minor supply constraints as a result of covert 19, we delivered strong gross margins.
Healthy operating leverage and substantial free cash flow in the fourth quarter.
In Q4, net revenue of $1.4 billion decreased 12% year over year, including nearly a point of currency headwind.
It is worth highlighting that our two key strategic focus areas.
Our storage business.
Howard by our industry, leading file block and object software.
And cloud data services.
Outperform considerably better than the rest of the business.
Our all flash revenue of $656 million was down 3% year over year.
We continue to believe that there is a very healthy runway for all flash adoption as only 24% of our installed systems are all flash.
Cloud data services delivered $111 billion and they are.
Growing 113% year over year at an impressive 34% sequentially.
Cloud data services customer count now exceeds 3500 more than doubling from Q4 of last year.
Total product revenue of $793 million decreased approximately 21% year over year.
Yeah lay revenue in Q4 was less than $10 million.
Given that L.A.'s represent such a small portion of our business, we will not be breaking out the L.A. revenue in future quarters.
As you know.
Over the last year, the timing and magnitude of the L.A.'s has proven extremely difficult to predict.
In an effort to have a more predictable forecast.
The more conservative.
And reduce confusion, we will not be including delays and guidance going forward.
Software maintenance and hardware maintenance revenue of $546 million was up nearly 4% year over here.
These two recurring revenue lines comprise roughly 40% of total net revenue.
Going forward, we will focus a lot more on our high margin recurring revenue streams wherever renewals play a big role and growth.
I have been incredibly impressed with the work the team has done a route renewals.
Lamenting a much more rigorous sales motion and simplify quoting system.
We ended Q4 with $3.7 billion in deferred revenue, an increase of 1% year over year.
Gross margin of 68% was up nearly three points year over year.
Product gross margin was 56.4% an increase of over a point year over year.
The year over year improvement was largely driven by an increase in all flash product mix.
The combination of software and hardware maintenance and other services.
He has to be an incredibly profitable business for us.
With gross margin of 83.2%, which was up a point year over year.
The margin expansion was mainly driven by continued leverage in our support model.
Q4, operating expenses of $629 million decreased approximately 8% year over year.
Driven by lower variable compensation associated with the shortfall in revenue.
Operating margin was 23.1% up more than a half a point from Q4 of last year.
EPS of $1.19 was down 2%.
Year over year.
Cash flow from operations was $383 million and free cash flow was $359 million, representing 26% of revenue.
During Q4, we repurchased 3.3 million shares at an average price of $49.50 for a total of $161 million.
As of the end of Q4.
We had $478 million remaining on our original 4 billion dollar buyback authorization.
Weighted average diluted shares outstanding were 222 million down 27 million shares year on year.
Representing an 11% decrease.
During the quarter, we paid out $105 million in cash dividends.
We will maintain our cash dividend of 48 cents per share in Q1.
Turning to our full year 2020 results.
Net revenues of $5.4 billion decreased 12% year over year.
Including a half a point of currency headwind.
Gross margin of 67.9% was up nearly three points compared to fiscal 2019.
Operating margin of 20.8% decrease nearly two points versus fiscal 2019 due to lower than anticipated revenues.
S $4.05 decreased 10% year over year.
We generated free cash flow of $936 million in fiscal 2020.
Which represented 17%.
Net revenues.
We completed $1.4 billion and share repurchases.
And $439 million and dividends.
In the fiscal year.
And over the last three years, we have returned $5.4 billion to shareholders.
Now onto guidance.
As you all know demand visibility has been significantly impacted by cold and 19.
As a result.
We're not guiding the full year at this time.
We will reassess our ability to provide fiscal 2021 guidance after Q1.
With that as a backdrop, we did think it was important to provide boundaries to the demand scenarios. We are seeing in the near term.
We expect Q1 net revenues to range between one point, all $9 billion and $1.24 billion.
Which at the midpoint implies a 6% decline in revenues year over year.
Including 1.5 points of currency headwind.
We expect consolidated gross margin to range between 67 and 68%.
And operating margin to be approximately 10%.
Assumed in this guidance, our Q1 operating expenses.
$660 million to $670 million.
We anticipate our non-GAAP tax rate to be approximately 19%.
And expect earnings per share for Q1 to range between 36, and 44 cents per share.
As a reminder, Q1 has an extra week this year.
Which adds approximately $30 million to $35 million to both our recurring revenues.
Had total operating expenses for the quarter.
The incremental revenue and expenses largely offset each other at the operating income level and thus have minimal impact to EPS.
A quick comment at our go forward expense structure.
As George highlighted.
We invested in our go to market engine by adding 200 primary sales resources over the last three quarters.
And we did this without adding incremental dollars to our operating expense I belong.
At this time, we have decided not to make any significant structural changes to our expense base.
Until we have better visibility into the duration and magnitude of the current downturn.
We continue to closely monitor the situation.
You will likely remain very fluid over the next two to three quarters.
As we look forward to fiscal 2021.
I did want to highlight two key strategic goals for the year.
Our cloud connected all flash portfolio continues to offer customers a unique architecture.
Bridges on Prem and public cloud environments.
Under a singular ONTAP software platform.
Well the shape of the economic recovery will largely determine the overall growth rate for the storage industry.
Our goal for fiscal 2021 is to reestablish share gains in the storage market.
In the coming here, we will also continue to grow and invest in our cloud data services business.
Fiscal 2020 was a foundational year and lodging both cloud volumes ONTAP.
And cloud volume service across eight Ws.
Sure and Google Cloud.
We also acquired two great assets and talent in cloud jumper.
Expanding the breadth of our cloud data services platform and adding nicely to our overall cloud tail.
We remain confident and cloud data services unique market position.
Our new customer feedback has only reaffirmed our competence and the size of the opportunity.
But to be prudent.
We thought best to reset expectations around the our ramp.
So we are moving the fiscal 2021 target for cloud data services A.R.R. of $400 million to $600 million.
We will provide new guidance and trackable metrics for our cloud data services business at our analyst day in September.
Fiscal 2021 will serve as a critical growth year for the cloud data services franchise.
Which will be aided by a new dedicated cloud data services sales force.
In closing I want to thank our partners customers and investors for their continued support.
And especial. Thank you to the net up employees for stepping up during this global crisis.
It is clearly a unique time to be joining that out.
I see real opportunity to add value as our business continues to evolve.
Would declare goal of driving significant long term value for our shareholders.
As George noted we are planning to host in analyst day in September.
Which will provide a great overview of our strategic initiatives.
And include an update to our long term financial model.
I'll now hand, it back to Chris to open the call for Q1 day.
Chris.
Thanks, Mike well now open the call for Q inane, please be respectful of your peers and limit yourself to just one question. So he can get to as many people it's possible operator.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your touched on telephone.
To withdraw your question press the pound tea.
Our first question comes from Rod Hall with Goldman Sachs. Your line is now open.
Hi, Thank you for taking my question has been annuity and honestly rock.
Could you give us some kind of on demand trends that youre seeing across different geographies and maybe color on how the order trends how to be in D.
Absolutely weeks in this month.
Good day.
Thank you if you look across the geographies the order trends.
You know somewhat followed the impact of coal based across the World I think our Asia Pacific business was first impacted by coal that.
Particularly in the areas surrounding.
China I think we've seen that part of the business come back online through the course of the quarter as we said in our prepared remarks, we felt that people are on target until the impact of coal that started to broaden across the globe and we saw several different things going on some key.
Customers pulled forward.
Ends action, so that they could deploy and be ready before the shelter in place took full impact our that's clearly.
They're different transactions are down sized transactions our supply chain performance was strong thanks to some really good work done by our supply chain team and so we weren't able to meet most of the orders that customers want it you didnt.
Of course of their requirements from a vertical market perspective, as I said, you know we cover a broad range of industry and so there's no single geography or industry that has a material part of our business I think that when you look at that results from the quarter.
Financial services and health care were strong performers automotive retail.
In traditional retail and oil and gas were weaker through the course of the quarter and similarly oil dependent economies were challenged through the course of the quarter.
Thanks, Josh.
And maybe some color on how the trends have been be asked for me you can this month.
I think as I said, you know the where we had less visibility into order trajectory in the last four weeks then in the first couple of months the apparent though.
Cool couple of months of the quarter I think as we look into.
Look at where we are today isn't material change from that which is why we're being cautious about providing guidance a quarter at a time I'm trying to be cautious and that you know commentary around our guidance itself.
Mike you want to add any that's adult ticket.
Thank you next question.
Our next question comes from Simon Leopold with Raymond James Your line is now open [noise].
Thank you for taking my question I wanted to see if maybe you could help bridge the gross margin guidance and maybe there's a a volume assets or cost aspect, but.
I guess fundamentally I would believe that we'd see services increasing in the mix. They have good gross margin and maybe that's what's throwing me.
Premise is the mix shift should help gross margin so I'm wondering what the offsetting.
Yes, I mean, it's Mike Berry. So if you look year over year, that's exactly what you do see I would always encourage you because of seasonality talk year over year as it relates to gross margin. So when you look at total the slight increase we get on you get a little benefit in Q1 year over year from the 14th week.
So you have take that into account, but then the higher mix of services at 80% plus drives to total gross margin up.
As it relates to year over year end again seasonality will have a significant influence if you look sequentially and that's just not as applicable as the year over year numbers.
Great and then just as a follow up you.
You did mention financing available for some of your partners.
And I I had the perception netapps been less vocal on financing for customers than some of the large I keep peers. Just wondering if maybe you could elaborate on how you maybe adjusting your financing program to help customers and not just your channel partners. Thank you.
We have a broad range of capabilities to meet customers' needs for you know opex kinds of business models and cash preservation concerns. The range of course from cloud data services, which are available in all the leading public cloud platforms and we saw seven.
A little customers take advantage not only of the flexibility that the cloud data services portfolio had but also the rapid time to provision.
We have introduced a program called Keystone, which is a subscription offering for enterprise data centers and we saw some strong wins in that part of our business as well as a healthy pipeline and then clearly be worked with partners through managed service offerings, which are.
Typically on a monthly basis payment model and we have third parties, we work with our on traditional leasing models for customers I'm happy to have might comment further yeah. I think there's two parts what George walk through as well as just giving extended terms to some of our channel partners as they deal.
With our end users.
And our financial flexibility also helps us their assignment.
Great. Thank you for taking the questions.
Alright. Thank you finance next question.
Our next question comes from 10 long with Barclays. Your line is now open.
Thank you I was hoping to talk about the cloud data services a little bit.
<unk> numbers do a looked like some acceleration in the quarter just curious about the kind of the pulling the longer term guidance. If we could just get some color around why maybe the uptake has been a little bit slower. It does seem like you've hit most of the G.A. targets at the big.
Players and the move to cloud, obviously is accelerating as Joe highlighted in the quarter. So maybe just give us a little bit of color as to why you think that interest to more difficult sell.
So customers are harder for the Salesforce. If you can just give us some color on.
What's affected the slope of that curve. Thank you.
First of all we feel even more bullish today about the demand for our offerings. Then we did a year ago I think that over the last year as Mike mentioned, we have added a substantial number of customers more than doubled our customer base and there are a lot of net new custom.
Immerse coming to net App.
We have as we mentioned being a year behind where we needed to be in terms of getting the services to general availability and we still have we're still working to get through a completely friction less sales model together with Microsoft for example.
So there is really good work being done we're expanding the number of use cases, we've got more data centers being deployed but we had about a year behind where be felt to be would be if thats been consistent commentary even in the last quarter I, let my comment with regard to be.
The guide.
Tim saw as George mentioned I wish that we feel really good about the business nice growth in Q4 sequential growth. So it doesn't reflect us not our covenants level as imagine there were a little bit behind where we were in the original guide was done and I would like to be able to address that as wallets kinda below.
Long term model all at once and September hence, we didn't want to update at now it not through the rest of the business. So that's why we said hey, we will address all of that as it relates to the business when we get together hopefully a percent of virtually in September.
Okay. Thanks, I'll just keep it at the one.
Hi, Thank you Kim next question.
Your next question comes from Matt Sheerin with Stifel. Your line is now open.
Yes. Thank you I just following up on on the either the cloud data services.
And the fact that you saw a fairly big chunk of new customers.
Adopting.
That platform is there a cross selling opportunity in terms of those customers.
Adopting on premise hardware and services from you or is that a different customer base.
It's clearly you know a set of those customers who have never bought anything from that at some of those customers are truly digital natives, meaning they don't have the concept of an enterprise data center and that the cross sell an upscale is for the vast majority of those customers we have.
Sorry, narrow slice today of the total cloud wallet.
Meaning in terms of workloads and beacon expand their.
Many of the customers also have enterprise data centers and so our discussions with them are obviously, hey, if you're going to use us on the public cloud why wouldn't you be able to deploy us in your data Center I'll give you US you know one example, there are several large global.
Companies, who have offset the second vendor knocked the primary vendor in there you know enterprise data center, but we are their primary shared platform in the public cloud. They are now, giving us a broader range of opportunities in the enterprise data center. So as the Kobe. It you know crisis abate.
And we see enterprise Datacenters.
Being more being expanded we'll see more share of footprints at least that's our confidence belief.
Okay. Thank you that's it for me.
Hi, Thanks next question.
Next question comes from Katy Huberty with Morgan Stanley. Your line is now open.
Thank you George we're obviously, an unprecedented period of disruption at the macro level, but you are advantage by a strong balance sheet. So would love to get your thoughts as to whether there's an opportunity for you to press your advantage and perhaps make some larger.
Investment answered or do you more M&A then you have it in the past it kind of out of this period stronger.
Thanks, Katy I think when we look at you know the overall profile of our business. We have as you mentioned, a really strong margin profile in terms of gross margins, reflecting the rich software contribution to our business.
I think as.
You know Mike mentioned in terms of capital allocation, we are going to continue to support that dividend at the current level.
Going forward the the place where we will have to evaluate that is if we see some structural impair bend to our free cash flow, which we don't see at the moment. So we're going to computers statement. The dividend we have hit pause on the buybacks we've done a lot of buybacks over the last.
You know couple of years, almost three and a half billion and so we're going to pause that until we have better visibility into the overall landscape and we are going to be selective, but we continue to see opportunities to expand our strategic relevance and the portfolio. Like you mentioned, so we're going to continue to balance all of these.
You know.
Cases, I would tell you that as we think about the go forward strategic roadmap, it's much more pipe to software and cloud services were not leaning towards doing horizontal consolidations for scale I think that that would not be a primary focus for us.
Thank you.
Thanks, Katy next question.
Our next question comes from Steven Fox The Fox Advisors. Your line is open.
Hi, Good afternoon, George I was wondering if he could just sort of talk about how you're going to approach some of the vendor incentives you're providing against the backdrop of having so many industries with uncertain demand how do you sort of make sure you're deploying that capital correctly without maybe unnaturally pulling forward.
Revenues thanks.
No I think we have a good handle on the customer discussions that we are engaged in as I mentioned one of the areas that we invested in without raising the overall operating expense level of the company wants to put primary demand generation.
You know account executives facing customers. So we have a good close dialogue with these customers for those that want to be able to take advantage of technology without having to deploy a large amounts of cash we are uniquely positioned in the market because so far cloud data service.
This portfolio.
They are instantly provisional they have the reach and scale of the world biggest hyperscale data centers and in many ways also allow customers to stock that journey on the cloud that would be our lead off our right I think with regard to subscription services and other use cases, we are selective.
I don't think we're trying to say that at this point in time that vehicle under transition our entire business over to a subscription model I think we need to have that in our portfolio and we'll habit, but we're selective about quantifying which customers be provide subscription offerings, though.
That's very helpful. Thank you very much thanks, Steve next question.
Our next question comes from George you want to put Oppenheimer. Your line is now open.
Thank you for taking my question George I expanding on your comments on that the sales additions you get a sense of.
The 200 additions, how they're ramping that productivity and maybe how trends have been in North America.
You know I'd tell you that as we said we were going to bring on 200 primary demand generation headcount starting from the beginning of Q2 was 520.
Through the end of Q1, OFAF White 21, which is the current quarter. We we have accomplished that objective a little bit ahead of plan.
We are in the process of enabling those sales headcount I would tell you that they typically as we've said before take three to four quarters to get up to full productivity and we feel good about you know the work they're doing so far I think that we've also said that we would focus them on new customer.
Acquisition.
I'm on cloud and purely on the strongest places in our portfolio, which is our all flash arrays that our object storage and they have seen good results in the second half of this year. So as we have started to deploy and focus. These resources. We are starting to see some good underlying trends in this into business.
Thank you.
Thanks, George next question.
Our next question comes from Eric Martinuzzi with Lake Street. Your line is now open.
Yes, I wanted to focus on public sector first just a clarification and then a question.
Public sector includes health care.
But just to clarify that and then secondly, what are you seeing in pipeline I'm, particularly interested health care with regards to elective procedures impacting their budgeting cycles and then within fled maybe tentative budgets with higher Ed government revenue issues.
Focused for a moment, if you would on public sector.
Not all of our health care business is categorized that public sector. Certainly there are pieces of it like University hospitals need University hospital in.
Public sector, but not the whole business. So I think if I look at health care. Overall. Therefore, you know we had a lot of customer wins because off you know the strength of our solutions for digital imaging the advancements that you're doing but then video around AI for imaging and then.
Lots of unique technologies into our ONTAP operating system that enables that type of work flow to be very successful.
The second is with regard to you know the healthcare customer base. We've also stepped up our support for them. I think you know they are highly stressed at the amount of work. So I don't think there was any sort of.
Budgetary issue. We saw it was really just the capacity of work they are doing to sustain their patient levels and the sort of the level of work that there you know sort of patient facing workforce has I think that's really about health care with regard to the public sector.
Again, we have a broad book of business covering you know both federal state and local government and education within education, we saw several customer wins around the rapid movement of that part of our you know world to a remote working remote education model.
And so both our private cloud solutions and certainly our public cloud modern workplace solutions benefited from that move I would tell you that.
Visibility.
Is you know it's choppy right it's across the board into little choppy I think in.
In our public sector business, we had a couple of you know deals that did not close within the quarter, just because of the logistics of being able to try to bring teams together to close the transaction.
And that as far as the guidance.
That's captured in the guidance across all three.
That's correct.
Thank you.
Thanks, Eric.
Our next question comes from Jim Suva with Citigroup. Your line is now open.
Thank you very much George you mentioned your sales force ramping which is quite impressive which is good you know I had a plant and such like that.
I'm just wondering in the cobot 19 environment, which nobody anticipated does it make it harder ore is still the same to regain share in the efforts I'm thinking about you have all the new persons Henderson hers in place are they able to start now there are cracking into some new.
Do.
You know companies a new market shares or does this congratulations you're ahead of plan, but the current a virus makes it a little harder to keep knocking on doors and get new design wins, just wondering about how we sort this all out because it seems like you're really ahead of plan out.
You know I think that.
If you think about the Corona virus as they as an opportunity to disrupt you can lean into these you know conversations with customers right. One of the things that we see when the use of remote working tools is that our sales teams can bring the best up net up to any customer anywhere in the guy.
Hello, meaning they can bring that CEO now on any given day to a discussion in Asia, Europe, and North America. All in the course of a single day that wasnt possible than the old World right. So you know we are trying to lean into the changes as I say, we feel good about the progress of our acquired.
Districts, which was a key place that people were targeting some of our headcount.
Even in Q4, they had good performance, we have been focused on the cloud business as a place to configure to ramp our success that had good results and you know I think that you should expect from us and as we have demonstrated over the past several years, we are disciplined operators right. So if we don't see.
A return on that investment, we'll certainly look to do something else, but and so you should expect might tonight to stay focused on the evolving nature of the market and we will adjust accordingly.
Thank you for the details an explanation is greatly appreciate it. Thank you.
Thank you Tim Thank you Jim next question.
Our next question comes from that coupled with credit Suisse. Your line is open.
Thank you very much.
Given the softer demand environment and I'm wondering if you're talking about if you've seen any changes in terms of pricing or other competitive behavior since the middle of March.
No I think that the.
Strong gross margin profile of our business is reflective of both their discipline off our salesforce as well as the differentiation of our products I think we have an extraordinarily good technology portfolio as I said in the storage business, we have the leadership position not second.
Third does leadership position in filed block object, our technologies, which is the full range and we have uniquely differentiated cloud data services. So yes, the markets always competitive, but I think that you know as we have demonstrated over several quarters now.
Product gross margins continued to be an area of focus for us we have incentive the sales force to stay disciplined around discounting and you saw that through the quarter and we're going to take it acquired a time and keep staying disciplined around that.
Thank you want to and no nothing more.
All right. Thanks, Matt next question.
Our next question comes from Leumi show with <unk>. Your line is now open.
Okay. Thank you as you look at how you've been able to get your people to work from home with Covidien Teen and you don't have to be giving guidance here, but do you see any long term changes that you will make this actually something more permanent and then in the long run would that actually change some of your cost structure either for some of your real estate for any.
Thing else and any thoughts here would just be interesting and helpful. Thank you.
No I think first of all I want to thank the Netapp team.
I am I could never have been more proud than what I saw from our team this past quarter.
Across the board, we started our planning to deal with the Colvin crisis in January when before saw the impact in in China.
And as a result are working from home has been pretty seamless you know everything from engineering deliverables to the incredible work that our support team and our supply chain teams have done we have for the most part being able to operate without disruption.
I think the place that we are continued to focusing on is the ability to engage customers through a digital mediums and I think that we are new to it just like everybody else right, but we see opportunity there I think with regard to the long to.
You know model you know, it's a little bit early to tell I think we are certainly cautious about returning our workforce to the office I think we're going to do it step wise with the priority, beating the being the safety if our employees in voice. So we see that it would be a hybrid model with a large for us.
Turning to far employees working in you know at home or other flexible locations of their choice and we'll factor that overtime as it settles into what the Neal normal looks like we're certainly going up factor that in overtime into what we can do to best serve our employees and customers and our that Louis Mike I would just.
Back to Georges point, it's all about making sure our employees are safe and dealing with it now as you look forward companies have a lot of.
Areas to look into bit real estate via travel marketing events, what does that mean for the sales team, but I think it's way too early for us to be able to tell that we need to figure out how this this goes over the next call. It several months or corridors and then a lot of companies will be asking those very questions.
Okay, and good luck with the new job.
Thank you thanks Les next question.
Our next question comes from Mehdi Hosseini with Fiveg. Your line is now open.
Yes. Thanks for taking my question two follow ups, George as we four consecutive quarters, though for a year over year declining old Flasharray do you think the worst is behind us and we should see a rebound and hopefully a year or your growth sooner than later and outlook.
<unk>.
You know it's difficult for me to give you specific guidance given the volatility of Kobe I would tell you that are all flash Fas business, which is the predominant part how far are flasharray business has started to perform much better as we have driven focus NFC of dividend.
Enterprise sales coverage that doesn't show the overall, all flash array number yet, but the trend underneath the all flash array numbers are much healthier than what the overall number shows. So we're encouraged by that and you know I think we're going to stay focused as we've said on exploiting our position there and getting it back to grow.
From an installed base perspective, it is still a small percentage right. So all flash installed bases that 24%. So we got a long way to go and so we're going to stay focused on using all the levers at our disposal to gain share.
Sure Great. Thanks would determine how to follow up.
It seems to me that certain aspects of work from home is going to be criminal and with us and in that context.
Birch virtualization VDI he is going to be in a secular demand you recently made an acquisition here how should I think there, but it's a specific sector and how do you.
Expect that to grow for you there has been a lot less emphasis on both Flasharray cloud services, but I think the doing something do VDI and I want to hear more maybe you can quantify for us. Thank you.
Yeah, It's part of our you know cloud data services portfolio. What he said consistently is we're going to get the fundamental infrastructure into the <unk> into all the major Hyperscalers, which is our cloud volumes platform. We would then go to add data services on top of that.
And we've added several you know organically built backup and data protection services.
We've done.
Governance and compliance services and now what we are doing in we are building out a modern workplace solution that combines a global filed consolidation solution that we acquired in Q4 called Talon.
And the virtual desktop infrastructure in desktop as a service solution provider called cloud jumper that we acquired in Q1 fiscal year 21.
Combination of cloud volumes talent and cloud jumper gives us an extremely strong offering in the market and its particularly suited to the broad transition of virtual desktop services to what we see as windows virtual desktop, which is a new offering created by micro.
Soft to enable customers to have.
I'm much more efficient virtual desktop infrastructures on the Azure cloud and so you'll see US 10, you more about that in the coming quarters, but we're really excited and we saw some significant customer wins cloud jump or had been a longstanding partner up net out and be at work together with them to do many cloud deals before and now.
Theory integrated Internet up we think that that should accelerate our business further.
Great. Thank you.
Somebody next question.
Your next question comes from me all traction with Northland Capital markets. Your line is now open.
Thank you.
And congrats on a what I think is a good quarter given the conditions.
On the high end of the guidance that appears rather bullish where product revenue goes from negative 20% in most recent quarter to probably around flattish year over year.
So what are you seeing that underpins the you know rather strong uptick and that you have your pro football.
Yeah. So it does that not all this is Mike So a couple of things on that keep in mind that that in revenue mix matters. A lot. We do get 30 to 35 from the extra week, that's in the <unk> and the revenue number. So if you look year over year take that into account.
And then in Q1, because the product revenue from a seasonal perspective is lower this is where the strength of our recurring revenue comes in as well. So that helps US also on that range. So that's really how we got to that call at high end of the guidance range really driven by the mix that's right the recurring rather.
The new and then the benefit from the 14th week.
Okay. So then the follow on there is on the a little under the Guy and does that.
And that a deterioration in the macro.
So as George talked about its really a continuation of what we saw and that's in the latter part call. It a bar Q4.
So it it assumes that what we saw in in April and later March continues into Q1.
Okay. Thank you.
Thanks next question.
Your next question comes from Nick tighter off with Longbow Research. Your line is open.
Thanks, Good afternoon, guys I'm on the cloud data services, what sort of incentives do you have for customers that have adopted cloud data services to increase their net up consumption on Prem. It also related to debt I think CBS an on prem buyers within the same customer two distinct department can you talk about.
How and if the sales cycle of cross selling on Prem systems to city its customers is different if at all.
I don't think first of all some of the CBS customers are acquired through Microsoft and so incentive dead.
Provided to those customers are really provided by Microsoft deal employees those workloads on the Azure cloud right. I think you know with regard to cross selling them to an on Prem environment. It really is more off a relationship and a customer confidence discussion.
Rather than.
You know specific kind of incentive commercial incentives I'll give you. An example, we are certified do Ron.
Sep on both the Google cloud as well as the Azure cloud and many customers use you know are starting to use F.C.P. on those cloud provider platform with net out they may not broaden their entire sep environment on those.
Clouds, they made Ron a portion of it for example, analytics or you know business intelligence or something like that and so we get to going tell them listen you're using sep on azure on net out and you liked the.
The technology and the benefits why wouldn't you use us for your you know transaction processing environment on premise. So it's more of a relationship and the current customer confidence in awareness benefit we get then specific incentives.
Okay, just spoken snake sneak one more can think it's important you talked about the moving to a frictionless sales model, especially with Microsoft can you. Please elaborate a little bit on that.
Today, we have given the importance of the workloads that we serve these off production environments that we supporting customers.
You know we have Uh huh.
What we call white listing requirement with Microsoft. So there is essentially the customer has to register with a Microsoft website that then creates a manual provisioning step where netapp has to call the customer and make sure that that's.
Customers ready to go lives I think as we have scaled the business. We are working closely with Microsoft to remove that requirement. So that we can automatically provision workloads onto that club volumes and we're looking forward to that when that happens there's still work to be done but both teams are working at.
Could lead to remove that requirement.
Got it. Thank you. Good luck guys. Thank you next next question.
Our next question comes from Shannon Cross with Cross Research. Your line is now open.
Hi, Thank you very much for taking my question I'm not to stay on the cloud topic, you much but I'm just curious given the focus how much are you thinking you know what you're going to be doing in the coming few quarters is gonna be acquisition versus partnerships versus internal development I'm just trying to get a handle on you know exactly how your ears.
Really thinking about expanding cloud or if it's more just taking what you've got now and you know expanding the sales of it minute falling thank you.
You know, we've always been pretty disciplined about be uses of cash we're going to continue to do that I think where we do acquisitions. We have very selective we spend a lot of time to make sure that both strategic and cultural fit as well as you know financial benefits to our shareholders overtime.
So we continue to stay disciplined on acquisitions, I think with regard to the cloud portfolio itself.
The vast majority of our cloud revenue today is through organic development. You know we feel that we have taken unlike anyone else in the industry taken the world's best storage and data management operating system.
Made it cloud enabled and integrated into every major data center of the World three biggest public clouds and not only that two of the big three are actually selling it as their own service and that's been the big amount of work we've done now that that founder.
Jason It is in play and starting to scale. We are following a pretty disciplined set of chess moves to add capabilities to it a large number of those capabilities our organic and then we'll be selective about inorganic.
Okay. Thank you that was helpful. And then I was just curious about the competitive landscape your air competitor launched a new midrange platform that they.
I believe will be a a fairly big game changer at least for their installed base and I'm curious when they obviously want to gain share sort of tower. How are you thinking about what's out there right now and what kind of the competitive environment do you expect can kind of quarters. Thank you.
It's always competitive to this particular platform. It is a long delayed and still very much incomplete and so we see it as complete opportunity for us now that they've announced it we're going after them stay tune.
Thank you.
Thank you Shannon next question.
Our last question comes from another borough with loop capital. Your line is now open.
Hi, George I might think you're taking the question Yeah. Just this one for me enjoy I apologize. If this was already asked.
Kind of moving between a couple of different calls I.
This afternoon, how are you sort of whats taken place.
Impact how you guys are approaching.
Your sales force initiatives and you hear your enterprise customer expansion initiative.
I would just love any context around that and how you got just thinking about that thanks.
We do you see Colby 19, accelerating a set of transitions in the market I think the most important one of those the digital transformation of our customers and that digital transformation is highly data driven right you cannot be successful in digital transformation we.
Modern data infrastructure and that creates opportunity for US then ari.
No market transitions that.
Follow from that corrected operating system transition there is no major database migrations going on and of course, there competitive product transitions in our technology transitions like the 10-K replacement cycle, we're going to attacking those transition will we be pretty laser focused on.
Getting our teams to focus on our strongest product offerings.
And we're working to attack those market transitions and be as productive as we can and we see good result from that in Q3 in Q4 around net new customer adds and we're going to continue to stay focus and you know will provide you an update at the next earnings call and our analyst day.
And that's helpful George and how about how about net new salespeople.
We're on track as I mentioned in my comments, we completed the 200 net new demand generation a headcount without increased two operating expenses.
By Q4, so we did Q4 one quarter ahead of schedule, we met or you know the commitments, we need to ourselves back to you.
And we are focused on getting that productive. The early cohorts are starting to show results and so we feel good about where they are.
So thank you for your questions all right. Thank you mentioned that I'll turn it over to George for some closing remarks.
In the face of the current healthcare crisis, we will continue to make strategic moves that position us to emerge stronger than before while maintaining the operational discipline you have come to expect from that.
Our storage system powered by our industry, leading filed block and objects software and cloud data services, we are compelling competitive advantages and significant market presence.
To further exploiting our leading position we are expanding our reach with a dedicated cloud sales focus greater enterprise sales coverage and dedicated customer acquisition resources.
In Q4, we could you just see progress in our cloud business.
And success with our dedicated acquired history.
Getting our industry, leading portfolio in front of more buyers will enable us to emerged from this crisis stronger than ever.
I will.
Thank you all stay safe and healthy.
In closing I believe that by working together with creatively and resilient.
We will find together a fast forward out of this crisis I wanted to thank you our investors our partners customers and then they're asking for the amazing work that you have done together. This past few months, we hope you at our analyst day in September. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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