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Behind NetApp’s Cost-Reduction Strategy in Fiscal 2018

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Nov. 20 2020, Updated 5:22 p.m. ET

NetApp’s gross margin in fiscal 4Q17

NetApp (NTAP) has reduced its cost base so far in fiscal 2017. In order to offset declining revenues, NetApp had outlined a comprehensive program to reduce its cost base by $400 million in fiscal 2017.

The company’s gross margin in fiscal 4Q17 rose by one percentage point QoQ (quarter-over-quarter) to 62.5%, which was above the firm’s guidance range. Its product gross margin rose two percentage points YoY (year-over-year) to 48.9%, driven by sales discipline and fewer promotions.

By comparison, NetApp’s gross margin was 64% in fiscal 4Q15 and 62.5% in fiscal 4Q16. NetApp’s gross margin of 62.3% in fiscal 2017 was higher than its guidance of 60.5%. The firm also expects a gross margin between 62% and 64% from fiscal 2018 to fiscal 2020.

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Rising operating expenses

NetApp’s operating expenses rose 7% QoQ, “reflecting higher variable compensation due to the higher than expected revenue growth,” according to the company’s management. Its operating margin rose from 15.6% in fiscal 4Q15 and 13.4% in fiscal 4Q16 to 20.7% in fiscal 4Q17.

To improve its operating margins, NetApp aims to cut SG&A (selling, general, and administrative) expenses from 35% of revenues in fiscal 2016 to ~32% of revenues in fiscal 2017.

Notably, storage companies Western Digital (WDC), Hewlett Packard Enterprise (HPE), and IBM (IBM) are also looking to cut costs and improve profit margins to offset declining revenues.

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