Q4 2021 NetApp Inc Earnings Call
Good afternoon, ladies and gentlemen, welcome to the NAV at Q4 and fiscal year 2021 earnings call. At this time, all participants are in a listen only mode.
Later, we will conduct the question and answer session and instructions will be given at that time I would now like to turn the call over to Kris Newton Vice President Investor Relations.
Thank you for joining us with me today are CEO, George Kurian, and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at net dot com.
On today's call, we will make forward looking statements and projections with respect to our financial outlook and future prospects such as our guidance for the first quarter and fiscal year 2022 of our expectations regarding future revenue profitability and shareholder returns and our ability to continue overall growth gain market share.
And scale, our cloud business, all of which involve risk and uncertainty we disclaim any obligation to update our forward looking statements and projections actual results may differ materially for a variety of reasons, including macroeconomic and market conditions, such as the continuing impact and uneven recovery of the COVID-19 pandemic.
Nick and the I T capital spending environment as well as our ability to gain share and the storage market grow our cloud business and generate greater cash flow.
Please also refer to the documents we file from time to time with the SEC and available on our website specifically our most recent forms 10-Q and 10-K, including in the management's discussion and analysis of financial condition and results of operations and risk factors sections.
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 I'll now turn the call over to George.
Thanks, Kris good afternoon, everyone. Thank you for joining us today before.
Before we get started I wanted to take a minute to acknowledge that it's been over a year that we have all been working remotely I'm encouraged by the public health and economic improvements in many parts of the world, but the recoveries on the EBIT as you know we of a large steam and India, our thoughts are with them as the D.
And with the distressing surge and Covid cases and thank.
Thank you to the entire Netapp team for your dedication focus and execution throughout this challenging year.
Now to the results of the quarter.
We delivered strong fourth quarter results capping off a solid year of growth.
Our results were all above our Q4 guidance ranges I am most excited by the return of product revenue to growth the strength of our public cloud E. R R and and all time high free cash flow.
Our performance was broad based as certain vertical and the U S and parts of Europe, and Asia are recovering faster than many expected.
Cloud and digital transformation initiatives have been accelerated by the pandemic and companies look to net up to support the ski initiative.
Going into FY 'twenty, 1 we had 2 clear priorities returning to growth and our storage business.
Howard by share gains from our industry, leading file block and object software and scaling our highly differentiated public cloud services business.
As I reflect on the past year I'm proud of what we've achieved during a globally challenging period.
We remain focused and executing our strategy.
And extending our innovation.
In Q4 product revenue grew 6% and our all flash array business grew 11% year over year.
Based on our growth I'm confident that we have gained share in the storage and all flash market.
We advanced our hybrid cloud portfolio with the introduction of on cap 90 up 9 and Astra.
And this innovation will support continued product revenue growth and share gains through fiscal year 'twenty 2.
Additionally, we continued to make good progress with Keystone with many new wins, including our largest ever Keystone deal.
We are reaching more customers than ever before with our public cloud business.
Over the course of fiscal year 'twenty, 1 we added approximately 1500, new to Netapp customers with public cloud services and grew our total cloud customer count by 137% from Q4 fiscal year 'twenty.
In addition to adding new cloud customers existing cloud customers are expanding their spend with us our dollar based net revenue retention rate increased to 252% in the fourth quarter cloud.
Cloud volumes cloud insights and spot all performed well in the quarter driving our public cloud services E. R. R. $2.301 million exiting fiscal year, 'twenty, 1 and increase of 171% year over year.
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As we have said repeatedly our cloud strategy strongly advantages net out and I.
I've used the customer examples to illustrate how cloud helps us to acquire new customers and drive growth in our on premises solutions.
As the part of its digital transformation strategy of leading car manufacturer decided to migrate workloads from its on premises data centers to the Azure cloud.
Despite never having us net of previously the.
Customer chose Netapp cloud volumes to host its file based data.
And the net up cloud zinc to rapidly move data from at Dell EMC systems to the cloud.
In addition to delivering a high performance data store and the cloud cloud volumes provide out of the box Cross region replication of production data do of secondary cloud environment.
Hi availability to meet the service level requirements of critical applications.
And cost savings through automatic hearing to Azure blob storage.
Because of the breadth and depth of the value Netapp delivered.
And the customer is now looking to deploy a hybrid cloud environment and plans to use net app on premises as well as increases net app usage in the public cloud.
As I noted earlier, the pandemic accelerated and elevated the importance of customers cloud and digital transformation initiatives.
We expect that this strength will be ongoing and that net app will continue to benefit from it.
Customers appreciate the value we bring as the cloud led data centric software company.
To simplify and modernize the existing data centers to.
And so quickly and confidently deploy applications and to securely manage data on the public cloud.
We have long been recognized for our industry, leading enterprise data management technology.
Cloud solutions drive further differentiation expand our addressable market and enable us to reach new customers.
We began our cloud journey 7 years ago with the introduction of cloud on tap now cloud volumes on that.
Our initial focus was to leverage the cloud to deliver backup and disaster recovery services to our installed base.
We saw that enterprises want her to move workloads to the cloud.
To address that need we began working with the leading cloud providers to deliver cloud volume service of fully managed service with the application and certifications required to support mission critical production workloads in the cloud.
We then recognize the opportunity to expand beyond storage management and optimization to infrastructure monitoring and compute management and optimization services, which led to the development of cloud insights and the acquisition of spot.
These services.
<unk> volumes cloud insights and spot are now the primary growth engines of our public cloud services business. They are well established for enterprise applications and.
And we are taking each of them into the cloud native world.
Further expanding our market opportunity.
Net of Astra offers application of where data management that protects moves and manages data rich kubernetes workloads spa.
Spot Ocean automates, the cloud infrastructure for containers automatically scaling compute resources to maximize utilization and availability while minimizing costs.
Cloud insights for Kubernetes provides simplified infrastructure monitoring to quickly identify performance issues and resource constraints.
Together, our public cloud services give our customers and.
And especially the of cloud ops, and Dev ops teams and robust suite of multi cloud infrastructure management services.
We plan to press our advantage here by focusing our efforts on enhancing our go to market activities.
Deepening our cloud partnerships and delivering best in class organic and inorganic innovation.
We intend to leverage our deep infrastructure expertise and.
And our credibility with the cloud providers to expand our multi cloud infrastructure management services.
My confidence in our ability to reach our goal of $1 billion in public cloud are art in fiscal year 'twenty..5 is further enhanced by the strength and uniqueness of our cloud services position.
Our focused execution last year has set us up well for fiscal year 'twenty 2.
We have returned to growth, we're gaining share and key storage markets and our public cloud services are at a scale, where they are positively impacting total company billings and revenue growth.
Our momentum underscores our value to customers in a hybrid multi cloud world.
In fiscal year 'twenty, 2 we plan to accelerate our public cloud services and continue to grow our hybrid cloud business I'm excited about the year ahead and confident in our ability to deliver top line growth by supporting our customers on their cloud and digital transformation journey.
Before I turn it over to Mike to walk through our financial results I wanted to take a moment to thank Brad Anderson, who let us know that he intends to retire at the end of fiscal year 'twenty 2.
Brad has been instrumental and leading the maturation of our hybrid cloud group and we will continue to leverage his leadership and expertise of this year.
We are actively engaged and identifying a successor to ensure a smooth transition.
With that I'll turn it over to Mike.
Thank you George Good afternoon, everyone and thank you for joining us as a reminder, I'll be referring to non-GAAP numbers unless otherwise noted.
As we look back on what was an unprecedented year I cannot help of being incredibly proud of the focus execution and commitment of the entire Netapp team, we delivered billings of $5.9 billion and increase of 9% year over year, while revenue of 5 point Sir.
And then billion dollars grew 6%.
We delivered free cash flow of $1.2 billion up 25% year over year, while continuing to aggressively invest in our public cloud franchise.
We finished the year strong with Q4 billings of $1.7 billion up 12% and year over year, while revenue of $1.6 billion was up 11% year over year. Both were solidly ahead of our expectations driven by accelerating enterprise demand throughout the quarter.
Gross margin operating margin and EPS all came in above the high end of guidance Q4 free cash flow of $521 million was an all time high for net out.
As George highlighted public cloud ALR of 300 of $1 million was up 171% year over year and.
And an impressive 27% sequentially and.
And in fiscal 'twenty, 1 and the scale of our cloud franchise really started to impact the overall growth profile of net app delivery.
Delivering 4 of the 9 points and billings growth and 3 of the 6 points and revenue growth.
In addition to the strong cloud a our performance we are excited that we exited the year with cloud gross margins near our overall corporate average given.
Given the growing impact on our total company performance, we anticipate sharing more detail on our public cloud business in fiscal 'twenty 2.
When combined software revenue recurring support and cloud revenue totaled $1.1 billion and increased 18% year over year, representing 72% of total revenue.
For the first time in company history, we ended Q4 with over $4 billion in deferred revenue and increase of 8% year over year deferred revenue continues to be a leading indicator for future recurring revenue growth.
Product revenue returned to growth and Q4 importantly, we expect this trend to continue throughout fiscal 'twenty 2.
Product revenue of $840 million increased 6% year over year.
Consistent with the trends we've seen throughout fiscal 'twenty, 1 software product revenue of $480 million increased 18% year over year, driven by the continued mix shift towards our all flash portfolio.
Recurring support and cloud revenue of $641 million was also an all time company high and was up 17% year over year constituting 41% of total revenue.
Gross margin of 67, 3% was at the high end of guidance.
Gross margin was 54, 3% and benefited from the higher all flash system mix on a recurring support cloud and other services business continues to be a very profitable and growing business for us with gross margin of 82%.
Operating margin of 23% was nicely ahead of our expectations, while EPS of $1.17 came in above the high end of guidance. Despite a 5 cent headwind from a higher than forecasted tax rate.
Cash flow from operations was $559 million and free cash flow was $521 million, representing 34% of revenue.
Cash flow came in higher than expected and part due to strong collections as evidenced by the DSO metric of 55 days.
Full year fiscal 'twenty, 1 free cash flow of $1.2 billion was up 25% year over year and represented 20% of revenue.
$6 billion and cash and short term investments.
Jim and recent developments and the broader technology supply chain I want to reiterate our confidence and our ability to meet and demand as we head into Q1, we.
We have and excellent supply chain team and they have been working closely with our partner ecosystem to ensure of backlog and customer lead times remain at normal levels throughout fiscal 'twenty 2.
Towards this goal, we will be investing incremental dollars and the inventory and longer term commitments to help mitigate risk on the supply shortages, given our strong balance sheet and low cost of capital we feel good about this investment.
Now to guidance.
In fiscal 'twenty, 2 we expect revenues to grow 6% to 7% year over year with billings expected to outpace revenue given the continued strength and recurring support contracts and cloud services.
And fiscal 'twenty, 2 we expect continued momentum and share gains in our cloud connected all flash portfolio.
We will also continue to grow and invest and our diversified public cloud services portfolio.
We are raising the low end of our fiscal 'twenty 2 guide and now expect to exit fiscal 'twenty, 2 with public cloud era of <unk>.
$425 million to $500 million driven by enhanced go to market activities deeper cloud partnerships and continued product innovation.
Similar to the seasonal pattern, we experienced in fiscal 'twenty, 1 we anticipate Q2 and Q4 to be our strongest quarters for net new public cloud or on the seasonal cadence is driven mainly by our semiannual sales compensation plans and as George noted, we have increased confidence and our ability.
80 to eclipse $1 billion and public cloud <unk> in fiscal 'twenty 5.
In fiscal 'twenty, 2 we expect gross margin to be roughly flat year over year at 67% to 68% as improving cloud margins are balanced with strong demand for our hybrid cloud products we.
We anticipate operating margin to range between 21, and 22% as we continue to invest and our growth initiatives, while delivering strong operating leverage.
Implied and this guidance is our expectation that operating expenses will be between 2.75 and $2.8 billion.
The year over year increase and our expense base is being driven by continued investment and revenue generating activities, including expanding our cloud portfolio targeted investments and sales resources and continued investment in our customer success sales team.
Moving down the P&L, we expect interest expense to be 65, the $70 million and our effective tax rate to be approximately 19%, while we get a bit of delevering below the operating income line as a result of the higher interest expense and tax rate.
We are committed to delivering $4.45 to $4.65 in fiscal 'twenty, 2 EPS, representing 12% year over year growth at the midpoint.
We expect to again generate over $1.1 billion and free cash flow in fiscal 'twenty 2 as our hybrid cloud business continues to fund the growth and our cloud services franchise fat.
Factored into the year over year of free cash flow generation is the step up and capex to $225 million to $235 million, our public cloud partners in particular of Azure are driving us hard to build out of additional global capacity for our cloud offerings.
Even with the sad and investment we expect cloud gross margins to become accretive to our corporate average and as we move through fiscal 'twenty 2.
Generating over $1.1 billion and free cash flow will allow us to continue to deliver on our capital allocation commitments, while also investing in our key strategic areas. The.
And the Devin and will remain the first call on capital as you saw today, we raised our quarterly dividend to <unk> 50 cents per share.
Share repurchases will also continue to play a key role and our capital allocation strategy towards this goal our board approved an additional $500 million and buyback authorization.
In fiscal 'twenty, 2 we expect buybacks to offset dilution from our equity plans for.
For modeling purposes, we expect share count to remain flat at 229 million shares exiting fiscal 'twenty 2.
Consistent with net apps long history of disciplined M&A, the remaining 30% of free cash flow generation will go towards our acquisition strategy, which will remain focused on bolstering our strategic cloud services roadmap.
Now onto Q1 guidance.
We expect Q1 net revenues to range between $1.37 billion and $1.47 billion, which at the midpoint implies a 9% increase and revenues year over year.
We expect consolidated gross margin to be approximately 68% and operating margin to range between 19 and 20%.
And this guidance, our Q1 operating expenses of $680 million to $690 million.
We anticipate our tax rate to be approximately 19%.
And we expect earnings per share for Q1 to range between 89, and 97 cents per share.
The assumed in our Q1 guidance is interest expense of $15 million to $20 million.
In closing I want to thank our partners customers and investors for their unwavering support this past year and most importantly, a huge shout out to the entire net app employee base for redefining what it means to work as a team during what was a challenging year and so many ways.
We are more confident than ever and our ability to capitalize on the industry transitions and market opportunity ahead.
I'll now hand, the call back to Chris the open the call for Q&A Kris. Thanks.
Thanks, Mike, Let's open the call for Q&A. Please keep to just 1 question. So we can get to as many people as possible operator.
Thank you as airline day.
And that's asked the question you and need to press Star 1 on your telephone.
So, let's try and question Pester Pankey, please stand by while we compile the Q&A roster.
The first question comes from and then Terry and Andy with Evercore. Your line is now open.
Thanks for taking my question Congrats on the nice strength all the I was hoping you could just talk a little bit more on the cloud data services business, and I guess, I'd love them and sort of.
What really drove the upside in the quarter worse of the $2.60 to 290 million guide that you'll be had out there and then moving on I think about the full year number you provided of 425 to 500, the low end and I think it's picking up by 20 million $25 million.
What is driving the confidence and this business as you go into next year and how important is it for you the skilled beyond the yard to achieve.
And the fiscal year targets you laid out.
And thank you for the question.
<unk> been working on multiple innovation parts of our portfolio all of which performed extremely strongly cloud volumes for storage cloud insights for monitoring.
And for compute management, all had really strong Q4s and overall really strong years, we saw good expansion in the number of customers.
And strong growth and the number of new to Netapp customers, we saw customers.
Pending against their digital transformation and their cloud programs throughout the quarter, so with the smooth trajectory through the quarter and I think that sets us up well for next year.
If you look at our dollar based net retention rate you can see that our organic business grew strongly this year.
And we had about 60 million of this year, the inorganic from acquisitions of spot talent and cloud jumper. So when you back that out we expect next year's growth rate to also continue the acceleration of our organic portfolio and continued strength of our inorganic.
Portfolio, we have a really good and differentiated portfolio of services, we have deep partnerships and are expanding the range of things, we do with the hyper scaler and.
And we are growing our customer base of people, who are doing many business critical projects on the public clouds with us. So I'm really excited with every confidence we'll tell you more about our cloud business as Mike indicated as we go through the year of giving you more details on it.
Alright, Thanks, Amit next question.
Thank you and our next question comes from Rod Hall with Goldman Sachs. Your line is now open.
Yeah. Thanks, guys.
I'm going to do the old question and clarification thing if I can the <unk>.
And as on a R R and what the ceiling on that and obviously you've done very well there and I'm curious if you could George maybe just give us some idea of what the you know what you think the head room and there could clearly theres a lot of growth coming through and then the clarification just on the on the EPS calculations for the full year guide.
We're getting a number lower than the range you guys are giving so I'm not sure of.
Using all the inputs you are talking about we get something like $4.41, and so I'm not sure.
You know if you add all of that up why we would be ending up on a different place than maybe your and your guidance. So I don't know, Mike or if you could clarify that that would be helpful. Thanks.
Thanks Rod.
With regard to the cloud portfolio listen I think the heavy lift in terms of getting the innovation portfolio to be and really good shape and behind US I think we have as I said 3 really strong innovation engines, and we are bringing out cloud native innovations across those line.
Ups as well through the course of the summer we are making investments as we indicated last quarter to accelerate and expand the range of things we're doing in the cloud portfolio with regard to what's it going to take to further accelerate the course of the business. It's all of the things that burden.
And right we are expanding the number of sellers and revenue generating P teams facing customers. We've seen really good success with Microsoft in terms of their route to market. We're working with the other hyper scaler store also train and expand the range of ways, we take our products to market with them.
And we're building our customer service and customer success teams I feel even more confident that we have the range of capabilities to achieve the $1 billion target in the yard that we indicated and the customer use cases that we're deploying on a public cloud.
Folios and these are run the business.
Applications mission critical highly differentiated business value, creating applications. So I feel really really good about where we are at the year.
Mike do you want to take the other part of the question sure. Thanks George.
So I just want to make sure we could go through and separately with you and the team want to make sure of that the.
The gross interest is not the.
There could be and the Hawaii calculation as well, so and you know theres a lot of sensitivity obviously to the calc. So it's probably below operating income and it's a little bit different and the models. We're happy to walk you through this.
Thanks, Mike just first of all could you maybe say what that Hawaii and the number is and then people can just plug that in.
Yes.
Yeah, So we sort of 65 to 74 part of the.
For the Amtrust.
Tom.
Okay.
Yeah, that's the interest that's what we did on the <unk>.
And my script.
Okay, great. Thank you very much.
And as you know the hey that number jumps around quite a bit there was more than just obviously interested in that and that alignment.
Sure.
And thanks Ron.
Okay.
Our next question comes from and make Us where the Wells Fargo. Your line is now open.
Yeah. Thanks for taking the question and congratulations on the quarter clearly confident.
And how the story is progressing.
And I know you touched on this and in your prepared remarks of little bit, but I. Just wanted to go back the kind of the component environment. There's a lot of discussion out there around ssds and some controller constraints and you know.
Pricing moving upward on on flash and Ssds and general.
Just help us on you know maybe appreciate the confidence that you have and and component supply and how you're reacting to any kind of inflationary pricing dynamic. Thank you.
Sure.
It's my pleasure of the caution and so we are certainly contemplated the challenges and the supply chain.
Our gross margin guidance for Q1 fiscal 'twenty 2.
And by changing the they've really performed well all year long working most of our suppliers and all we have.
And as we can continue that performance of this coming year as you know all of the software company on product margins. We continue the benefit from the higher margin software rich configurations, and we continue to do a lot of her.
Hard work on the services margin as we talked about cloud margin should continue to improve as we go through the year as well as you'll see the benefits of the consumption of employees and system and more increase and our outwards of service.
Always unforeseen circumstances and the come into play, but as we sit here today, we feel good about it and when he talked of total.
Our total component of course, we expect it to be a little bit of a tailwind and the first half and then based on prices that we have today and you know.
Those things change potentially a little bit of a head wound and then.
Second half of it.
Of our guidance.
With regard to art and technology portfolio as Mike said, you know we have a range of configurations that we can support our customers with all of the way from 900 gig to 16 terabyte and so we have plenty of capability to given the flexibility and our software operating system.
And to qualify the right components to meet customer needs.
And support them with regard to the demand environment and gross margins listen as Mike said, we've operated through a tough year and done a really good job I think that you'll see us continue to remain prudent balancing and user demand with margin management as we go on through the year.
Perfect. Thank you guys.
Thank you and.
Thank you and our next question comes on and Nick Todorov with Longbow Research. Your line is now open.
Yes, thanks, and congrats on the thing as well on the great results.
Georgia I do appreciate the full year guide I just wondering if we can double click maybe on the revenue outlook, 6% to 7% growth and.
Can you give us some more color around the assumptions there maybe you can talk how much of that comes from share gains versus the market or any of the breakdown between the drivers of product or Cts are software and thank you.
Okay.
And as we go through the year, we see of continuing improvement and public health and the overall demand environment, we have been benefiting from cloud and digital transformation projects through the course of the year, we have not seen any major so we don't see some.
Unique snapped back or something like that and government spending or in enterprise spending we see us benefiting from long term trends and projects that are strategic to customers, we see more countries, especially the U S and parts of Western Europe come on line and the more significant way.
And through the course of our fiscal year, the U S more likely and the first part of the fiscal year Europe coming on line more strongly and the second half of our fiscal year, we have every confidence that our product portfolio and the differentiate it and we'll continue to see product revenue grow faster than services revenue.
And the strength of our cloud portfolio, we have a much bigger base of customers now and the cloud business. We have a much broader range of application certification that'd be winter last year, and so we feel really really good about the year ahead.
Great. Thank you. Thanks.
Thanks, Nick next question.
Thank you and your next question comes from and that Cobalt with Credit Suisse. Your line is now open.
Yeah. Thank you I was wondering if you can give an update on the the ramp of the 200 quota bearing heads and that you've added over the past I think of it 18 months or so just where they are and the ramps relative to <unk>.
Full productivity and as we're heading into fiscal 'twenty, 2 just how you're thinking about our investments and sales capacity for the for the next fiscal year and beyond.
And I think as we said the typical sales productivity ramp happens over the course of <unk>.
4 quarters. We are you know the the 200 reps that we started adding and fiscal year 'twenty of fully productive they're part of Netapp teams you saw some of the benefit from their performance and additions to our teams, particularly in the Americas business, which was really strong and it sets us up well.
Well for what we think will be of strong American recovery over the course of the next 12 months with regard to continue the additions.
As Mike has said and what we have said before we continue to be prudent about where we add those teams we will do so where we see demand and.
Environments being strong and we'll tell you more about the of course of that we added some head count in our customer success teams and in our cloud team. This past quarter, you should anticipate us continuing to do that to support the growth of the cloud portfolio.
Mike If you want to add any other color yeah. Thanks, George So I would just underline the additions that we talked about last quarter and this quarter as well in the specific areas of our cloud and then the customer success team, which is as you all know manner and the cloud business Super important and in terms of upsell cross sell and renewals. So we do continue to make it.
And it's there and I think you've seen some of the results and the R. R.
Sure.
The results this quarter.
Thank you.
Thank you Matt next question.
Thank you. Your next question comes from Katy Huberty with Morgan Stanley. Your line is now open.
Public cloud profitability is ramping faster alongside the better revenue performance is that purely due to revenue scale or have you tune the business model and any way to capture cost efficiencies and then Mike just as a follow up to that can you clarify whether we should expect cloud margins for the.
The full year, 2020, 2 to be dilutive neutral or accretive to the model. Thank you.
Sure. Thanks for the question.
Katy let me do the last 1 first so we said as we go through the year, we expect the cloud margins to be accretive to the total company average.
As we get through the year and certainly ending the year and then yes, we have seen a much bigger increase in our cloud margins and then we had originally expected and certainly scale revenue scale matters. I would also give a lot of kudos to the team for being really efficient in terms of how they use not only the <unk>.
Hardware, but also all of the stuff that goes to support those businesses as it relates to the people and processes. So it's all of the above and certainly growth and <unk> is the key driver of bottle necks by of a really good job by that team in terms of managing the margins.
So for the key.
And here I think we have many avenues as we have described the continued to drive the gross margins and our cloud business.
There's a growing.
Portfolio of software only offerings in the cloud business spark cloud inside of <unk>.
Several versions of our cloud volumes offerings are all software.
And Mike mentioned the Rd of utilization, we have brought out new versions of our on tap of operating systems that continue to be more efficient in terms of data management and storage efficiency and so we feel very good about our path to continue to improve cloud gross margins and.
And the direction that Mike articulated.
Great. Thank you.
Thanks, Katy next question.
Our next question comes from the Onesie Monahan with Bank of America. Your line is now open.
Yes. Thank you you noted some seasonality and and cloudy IRR to the of course of the year, where Q2 Q4 are typically higher.
And I was wondering.
Is it would it be accurate to think that the net organic growth sequentially. It should be at least at a higher level relative to last year, even though we look at Tom.
And maybe some seasonality going into Q1, and and can you give us any color on on these cloud deals how much of those were net app generated versus versus partner generated thank you.
Yes, so on the organic growth. This is Mike by the way I would point you to the dollar.
The base net retention of number and as you saw in the quarter and actually accelerated quarter over quarter. So you can assume if you take a look at that the organic business is doing all of the organic business is doing very very well and then.
And as George talked about a lot of those offerings.
Or is that organic business and we're not we don't break out the.
And the contribution from the Hyperscale is versus the core business or the net.
That business, what I would say is a lot of the seasonal pickup that you're seeing in Q2, and Q4 is driven by our sales teams and.
In addition, obviously with the Hyperscale and I just want to underline that please with the pain. When you guys do your models for next year.
Please make sure that you take the seasonality into account they'll just take the increase of IRR and divide by 4 there is absolutely seasonality and that business and you've seen and the last 2 years.
Alright, Thank fonzie next question.
Our next question comes from Steven Fox of Fox Advisors. Your line is now open.
Hi, Good afternoon, George I was just wondering when I listen to everything that you said you talked about improving market share.
It sounds like a better mix as you go through the year, you had accelerating our digital transformation.
Engagements during the quarter and into this quarter and then when I look at the full year guidance. It seems to imply when I look at the market you're expecting some sort of deceleration as you go throughout the year, even when I take a net count some of the tougher comparisons and my thinking about that conservatism right or is there anything else you would say on the markets. Thanks.
And I think when we look at the full year guidance for next year, we've guided 6% to 7% in terms of revenue growth.
Think that what you see for amongst the real confidence and the business. The second half of the year is on a compare basis compared to a stronger second half of this year as enterprise spending came back on line through Covid right. So it isn't day.
And expectation of us having a deceleration in terms of our ability to grow cloud or gained share. It is just you.
You know kind of a realization that the second half of this year is the strongest compare than the first half of this year.
Okay. Thank you very much.
Thanks, Steve next question.
The next question comes on Jim Suva with Citigroup. Your line is now open.
Thank you my question and it's kind of a clarification, but also related forward looking is can you clarify for this quarter how much of the revenues war organic versus acquisition and then the outlook, Georgia now you've mentioned the $1 billion run rate is that based upon all organic I assume that's the case, but I just wanted to clear.
And I think Mike mentioned about 30% of cash flow could be used for M&A, but I kind of wanted to clarify organic versus M&A as we as you sit today reported and as you look out and again congratulations on the great results and outlook.
Hey, Jim and Mike on the first 1 from the organic.
Contribution of revenue it was very small it was less than half a percentage point of growth. It was really it was really not much at all in terms of and keep in mind that that is related to the cloud acquisitions earlier in the year not much of an impact at all and in the quarter. It was very little.
And I think Jim you know when we look at the business, we feel very good about our portfolio of capabilities that we have today getting us to that $1 billion E. R. R number and fiscal year 'twenty 5.
And not going to break out organic versus inorganic I think we feel that.
Achieved the full year of integration of our core acquisition spark cloud jumper and talent. So we feel that.
You know the core.
That's our in place for this year, we will continue to look at inorganic acquisitions to fill out our portfolio right. So we.
We think that we have a strong path too.
A differentiated position and the cloud market, we feel really strong about the capabilities that we have we will tell you more about it through the course of the business through the course of you know as we expand the cloud business and I'll just hit on 3 things right.
We are growing our cloud business, while growing our core business.
We are acquiring a lot of net new customers, we are accelerating our organic business growth.
And our inorganic acquisitions, and so I feel really really good about our business overall cloud gross margins as Mike said on near the corporate average and as we go through next year will be accretive to company gross margin. So I'm just feel very very good about our opportunity and the cloud and the work that our team has been doing with the cloud providers and working.
On a couple of down on line.
Congratulations.
Thanks, Jeff next question.
The next question comes from Shannon Cross with Cross Research. Your line is now open.
Thank you very much I had a question on cash flow I understand that you got it and over $1.1 billion and and this fiscal 2020.2 it's going to have pressure from inventory and higher capex, but you know.
How did you think about the model on of our longer term basis should we expect that you know when you know.
And I'd have to buy excess inventory will start to see cash flow growth that maybe more closely mirrors. What you are able to do in terms of earnings or will the increased capex be a drag for a longer period of time, Thank you and Asia.
And as Mike and thanks for the question on cash flow and happy to do that.
So a couple of things if you look over the last 4 years, the operating cash flow results of net assets.
And really mirrored the operating non-GAAP operating income and it's like a 107% of that number. So we do expect over time, and we'll see operating cash flow mirror operating income growth.
Now there is it's kind of bump around a little bit and I'm Gonna do operating and then I will take care of free cash flow next year for instance, and fiscal 'twenty..2 we would expect to see operating cash flow growth be a little bit more than earnings just because of the working capital impact of some of the of.
The expenses in 'twenty, 1 and we.
And we put that in the script from a free cash flow perspective, we really look at next year Capex is hopefully the high watermark a couple of pieces. There..1 is the we are certainly continuing to.
To install hardware and some of the data centers to support the cloud business and as George talked about we're super excited about some of the software options there as well and as we have more software defined that will help also on next year and that number there is about $50 million and capex related to <unk>.
Facilities projects related to our Wichita site into a lesser extent, our new building and San Jose, we always have a little bit of facilities capex, but that's a big number of next year. That's why we feel comfortable going forward that we can have capex below the 200 that I discussed in the script. So just wanted to walk you through those puts and takes but over.
Yes, I do expect operating cash flow to pretty much near operating income with some bumping around every year largely due to working capital.
Okay. Thank you.
Thank you. Thank you Shannon and the next question.
The next question comes from Ananda Baruah with loop capital. Your line is now open.
Hey, guys congrats.
Congrats on the strong result, thanks.
And just taking the question.
I guess just going back yes.
And you'll see the George and Mike Q on 2 new sales force that is is there any I guess is.
Sort of the go forward on that the Incrementals, there anything meaningfully incremental.
And that that collectively those does add initiatives, Ken can contribute and and not just with the guy in the end of it.
And I did where I sort of across the portfolio, So I'm really thinking.
In totality and that not just on the cloud side, but also on the on the new customer side and that and with regards to how you are.
Yeah repositioning the beginning of the customer from a solution perspective.
And why that's it thanks.
I think we will continue to be.
Careful about where we add sales teams I think we constantly re balance to areas of opportunity. Both in terms of the composition of the sales force and.
And the locations, where we put the head count I think as I've said before the recovery will be at different rates and different geographies and I think as you know the public data indicates the Americas is the place where we expect the recovery to be more pronounced in this coming year.
Europe lagging 6 to 9 months thereafter, and the rest of the developing economies, maybe 6 to 9 months after that so we'll prioritize any additions in accordance with how we see the end user demand with cloud we have been adding you know step wise I think 1 of the important things that we're focused on this.
This year is to get our frontline sales teams to be balanced with selling cloud and our systems and customers' data centers and so I feel like.
And we're not going to have a step wise you know addition, and our investment we'll do it as the business comes and beef.
Feel very good about the disciplined approach, we've taken and the payoff of those investments in fairly short order.
And George of the or the current AD or the AD. So far the fully fully optimized at this point.
I think on the 200 and as we've said they are fully productive fully part of the net of sales teams. We are adding some we added some cloud head count and last quarter. We let we anticipate to add some more of this year you know alongside of the course of the business day will take some time to get productive, but those are in the same.
The range of productivity ramps as our traditional sales head count.
I think what you see from this coming year from our guidance to the coming year is that revenue outpaces the growth and operating expense leading to additional leverage and our business model that reflects our disciplined approach to investing where we see the opportunities.
Okay. That's great. Thank you.
Thanks, Amanda next question.
Thank you. Our next question comes from Mehdi Hosseini with S. I G. Your line is now open.
Yeah. Thanks for taking my question and Im joined the call is sort of policies. If I'm repeating the question I notice your inventories are the 2 year low and I wanted to see what's your strategy there and how it goes.
There's going to be out there.
Buying.
The key components, especially of storage and I have a quick follow up.
Sure.
So yes, we had a very good inventory turns at the end of Q4 as I mentioned and the script, we and we've already started and we will expect to continue a couple of different programs 1 is too.
The double down on some of the key components related to our to our storage products and make sure that we have enough inventory volume.
On that and we will.
We'll continue to do that we will also.
Some safety stock so that if there are issues throughout the world and hopefully we're able to respond to that in addition, we've also.
<unk> have longer I'll call. It purchase order that we will extend through the year. So we're doing everything that we can and make sure that we have enough of inventory I would expect in Q1, you should see those turns probably go back to the 12% 14 number and again and given the low cost of capital of our goal to make sure that we always have product and we can be.
Customer requirement, we think thats a very good investment. So thanks for the question and yes, you should see a build of inventories increase and the inventory turns go down and Q1 and likely through the rest of the fiscal 'twenty 2.
Great and just a quick follow up.
Youre close services margins is becoming accretive but is it.
Are you cause the component that is capping the gross margin.
And so and I think with regard to component costs as Mike said as we look out the next year, we see that the component costs in the aggregate for the full year is going to be relatively flat to this year with some puts and takes in terms of the mix.
And that are with regard to cloud gross margins, it's really reflecting the balance of certain regions getting more heavily utilized and you know seeing.
No customer you do of consumption of the installed footprint, while we make investments and other regions to continue to expand our business and that tradeoff between investing to continue to expand the business with the growth in the E. R. R is the balance we walk I think as I also mentioned.
We have several other avenues to continue to drive gross margins and cloud the.
Software mix and the portfolio is growing with solutions like spot and cloud insights and some versions of our cloud volumes of products being software only the.
Second is we continue to drive efficiency in the software and on tap operating system software and so there are lots of avenues to continue to accelerate cloud gross margins. The team's done a good job this year and we expect it to be accretive to company gross margins as the go through next fiscal year.
Got it that's very clear thank you.
Thank you Manny next question.
Our next question comes from Sidney Ho with Deutsche Bank. Your line is now open.
Thanks for taking my question, maybe 1 more question on gross margin and the past you talked about a target to get the product gross margin back to the mid 50. You said you are at 54 and change the range. This quarter should we expect this gross margin to continue to improve over the next few quarters, given the mix shift towards the software herbicide product.
How should we think about hardware and south point margins still have room to grow and it sounds like high and component costs may not have an impact and the near term, but just wanted to confirm that thanks.
Yeah, So Jason it's Mike we have we have guided in our and our fiscal 'twenty, 1 and are and our Q1 number of product gross margins to be relatively consistent with how we exited Q4 again component cost over the full year at this point as we sit here today relatively flat and it'll move around a little bit by.
Quarter, but keep in mind, as well and mix matters, a lot and that as well also in Q1, we talked to about 68% gross margins keep in mind that there is a much bigger component of revenue in Q1 net services versus product. So you also get that bump and margin you saw that the last couple of coupons as well so as we sit and.
And today, we don't see a lot of movement and the and the gross margin numbers again, that's based on the component cost of it we see today mix does matter in the quarter, but we've largest and relatively consistent with our exiting Q4.
Okay. Thank you.
Thank you Sydney. Thank you next question and.
Next question comes from the how Chuck Schumer and Northland Capital markets. Your line is now open.
Thank you and congrats on a great quarter, great guidance and.
And also thank you for the providing of the extra visibility and P. C. S. In terms of the profitability with the gross margin comment.
And there's actually quite impressive that the scale.
I always want more so my question here is the.
The what about the operating income profitability of the Pizza Hut division and or maybe you can comment on where on the rule of 40 is P. C. As the operating at right now.
So I want to make sure I understand the question and you're not talking about gross margins Youre talking about operating margins correct.
Correct correct and then maybe if you want to put that into context of the rule of 40.
Yes. So at this point as you said you always want more and we feel good about talking about on gross margins were not going to vote on the operating margins of that business that gets into a lot of the allocations and things. So what we're going to do is we're going to focus the business on the gross margin do we certainly look at Opex and where we spend the money, yes, we do so.
In terms of the rule of 40 again, we'd have to go down the operating income we won't do that we will keep it at the gross margin percentage.
And the future do you expect to.
Be able to break this out or do you expect that the there's just too much of cross selling going on too that would prevent the kind of breakout to happen.
What I would say and as a 2 day after the Q on call and we'll talk about what we're going to dispose going on in 'twenty 2.
Okay, great. Thank you congratulations.
Thanks, and the ha.
Thank you our last question comes from Karl Ackerman with Cowen. Your line is now open.
Yes. Thank you.
Your your latest run rate all flash array revenues are near a record of $2.9 billion and your.
Your year over year of growth exceeded most peers and so I was hoping you could provide some parameters.
And at least qualitatively.
Round your fiscal 'twenty, 2 expectations for all flash array growth and maybe how the mix of your installed base plays into those expectations. Thank you.
Listen I feel really good about our flash business, we are focused differentiate it and executing and the market I think our strong position in the sweet spot of the storage industry, which is the mid range.
And part of the market.
And is clearly evident and it is affecting the growth rates of our competitors. We have taken share for the last several quarters and we see every confidence that we will continue to do that going forward.
And we said at the analyst day was that over the next few years the.
And all flash array market will grow at about 7.5% CAGR and we expect to outpace that this coming year, we expect that the storage industry will grow around 4% and our revenue picture I expect us to outpace the growth of the storage industry. Overall, so we feel really good and.
And the on tap $9.9 coming out gives us even more confidence and our differentiation.
Alright, well, thank you call and that's our final question, so I'll hand, it over to George for some closing remarks.
Thanks, Kris and closing, we delivered a great and to a strong year and we are well positioned as we move into fiscal year 'twenty 2.
I wanted to reiterate that our public cloud business is that of scale. When it is contributing meaningfully to revenue and billings growth and the innovations we deliver to our hybrid cloud business will support continued product revenue growth in fiscal year 'twenty, 2 we expect to grow the top line.
Deliver operating leverage and generate significant free cash flow.
All while investing in growth initiatives I am excited by and confident in our ability to capitalize on the industry transitions and the market opportunities ahead I look forward to speaking with you again next quarter. Thank you for joining us and the special Thank you to our Netapp team.
This concludes today's conference call. Thank you for participating you may now disconnect.
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