Some business segments under pressure
Last month, NetApp (NTAP) announced its fiscal 3Q16 results. Although the company achieved its margin and EPS (earnings per share) targets, it recorded lower-than-expected revenue. These results reflected the impact of an uncertain and volatile macroeconomic environment that has caused a slowdown in spending.
Meanwhile, as customers have shifted spending toward the cloud, growth rates for enterprise IT continue have remained under pressure. But despite these headwinds, NetApp’s data fabric strategy and its pivot toward growth segments in the market—for example, scale-out, flash, converged, and hybrid cloud—have yielded positive results.
Focus on revenue growth, profitability, and shareholder returns
NetApp has stated that it has industry-leading products, strong customer and partner relationships, and a growing installed base. According to NetApp CEO George Kurian, “NetApp does not need to completely reinvent itself, but we do need to execute comprehensive and sustained transformation to deliver on our commitment to return to revenue growth and enhanced profitability and shareholder returns.” Kurian added that the company “will take significant steps to streamline the business and further advance our pivot to the growth areas of the market in order to capture the full potential of NetApp.”
In order to accomplish the transformation, NetApp has adopted a plan with a number of key priorities. It will now focus on strategic solutions that represent a pivot to growth segments. NetApp will also look to substantially reduce cost and streamline its business while “investing for the future.”
NetApp will now aim for greater visibility in its business and revenue mix in an effort to demonstrate the firm’s ability to capitalize on strategic solutions. NetApp will also remain committed to its capital allocation strategy, which includes a combination of share repurchases, dividends, and investing for long-term growth.
NetApp has a market capitalization of over $7.3 billion. Its peer companies in the storage space include Seagate Technologies (STX), EMC (EMC), and HP (HPQ), which have market capitalizations of ~$10 billion, $50.9 billion, and $19.3 billion, respectively. These four companies together account for 2.1% of the Technology Select Sector SPDR Fund (XLK).
In this series, we’ll take an up-to-date tour of NetApp’s business, including the company’s focus on strategic solutions, cost reduction aims, restructuring initiatives, outlook going forward, and approach to increasing shareholder value.
Let’s start with NetApp’s latest strategic solutions.