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What Will Drive NetApp’s Revenue in the Future?

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Revenue by segment

In the previous part of this series, we saw that NetApp’s (NTAP) fiscal 2Q16 earnings topped analysts’ estimates as the company’s transition to cloud started showing results. Let’s now look at the key growth drivers of the company’s revenue. The company earns ~56% of its revenue by selling data storage hardware and ~44% by providing hardware and software maintenance services.

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Product

Revenue from the product segment fell 12% YoY (year-over-year) to $819 million in fiscal 2Q16. The rise in clustered ONTAP sales was offset by foreign exchange headwinds and falls in NetApp’s 7-Mode sales and OEM (original equipment manufacturer) product sales. NetApp’s 7-Mode accounted for 30% of the total FAS[1. This stands for Fabric-Attached Storage] systems sales, down from 65% in fiscal 2Q15. Clustered ONTAP accounted for the remaining 70%.

All-flash storage array shipments rose 485% YoY in fiscal 2Q16, marking the sixth consecutive quarter of growth. The company’s sales of FlexPod architecture, developed in collaboration with Cisco (CSCO), also grew during the quarter.

Software and hardware maintenance

Revenue from software maintenance services fell 1% YoY to $223 million while revenue from hardware maintenance services rose 2% YoY to $397 million in fiscal 2Q16.

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Sales channel

The company generated 77% sales from indirect channels and 23% from direct channels.

Revenue by geography

The uncertain global macroeconomic environment impacted the company’s revenues across various geographies. In fiscal 2Q16, revenue from the US public sector business fell 22% YoY while that from EMEA (Europe, Middle East, and Africa) rose 8% YoY. Meanwhile, Asia-Pacific’s revenue rose 3% YoY.

The Dell–EMC (EMC) merger worked in the favor of NetApp as customers looked for more stable storage providers. Competitors like IBM (IBM) also reported falling revenues during the September 2015 quarter, as the shift towards the cloud affected sales of traditional storage systems.

The iShares Core S&P 500 ETF (IVV) has a 0.05% holding in NetApp’s stock.

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