Editor’s note: A review of NetApp’s financial results shows that years of effort produce positive, but tenuous financial improvement, says Technology Business Research Analyst Stephanie Long. NetApp has a major presence in RTP.

HAMPTON, N.H. – NetApp’s C4Q16 revenue results were more than a year in the making

NetApp, one of the few major pureplay storage vendors remaining in the industry, sharpened its focus throughout CY2016 on strategic growth markets, such as flash and cloud-based storage, in an effort to offset ongoing challenges to its legacy storage businesses.

Following near-term challenges due to executive turnover, CEO George Kurian’s approximately one and a half year tenure at NetApp has enabled the company to execute on longer-term strategies. Among these strategies included the February 2016 acquisition of SolidFire to rapidly improve NetApp’s position in the flash storage market, which was soon followed by some headcount rationalization efforts, and NetApp’s ongoing efforts to address modern workload demands, such as in the cloud space.

NetApp’s core OPTAP operating system is another integral piece of its modernization strategy, as it is an enabler of many of the modernization efforts NetApp has sought to capitalize on during 2016.

Despite ending three years of revenue declines, NetApp’s financial performance remains tenuous

As a result of NetApp’s ongoing restructuring efforts, and its continued focus on key portfolio assets, including its flash storage capabilities and its data fabric solution, NetApp achieved year-to-year revenue growth for the first time in nearly three years, growing 1.3% year-to-year to $1.4 billion in CY4Q16.

TBR notes revenue gains were achieved in part at the expense of gross margin, which declined 110 basis points year-to-year in 4Q16 to 60.6% of revenue. However, NetApp also achieved operating margin gains in 4Q16, increasing 110 basis points year-to-year to 13% of revenue.

TBR believes NetApp’s (Nasdaq: NTAP) 4Q16 performance indicates that it has the strategic pieces in place to continue improving performance, but that its restructuring efforts are not quite over. NetApp’s ongoing commitment to improve its cost structure, as well as market shifts toward software-defined capabilities will improve gross margins in the long-term, but there is a delicate balance NetApp must find, as storage hardware is still a key piece of its portfolio and subsequent success.

Meanwhile, we believe operating margins will continue improving in the near-term, but only marginally, as R&D investments will likely remain fairly consistent to support NetApp’s portfolio modernization efforts to address evolving customer demands, such as with its cloud-integrated and flash capabilities.

(C) TBR