At NetApp's analyst meeting today, CEO George Kurian sees opportunity in selling HCI (introduced F2Q18, 4-5 months ago), AFA, share-taking in SAN, and public cloud software and services.  Every large customer NetApp talks to, according to Kurian, is using multiple cloud service providers and/or SaaS services and most are using the hybrid cloud, which means using workloads both on the customer premises and public cloud.  According the company's marketing and sales executives, the company's sales and marketing strategy is focused on leveraging the company's entrance to the cloud services software market.

Substantial future announcements that were made by NetApp:

• In its nascent cloud-services software business, now being run by Anthony Lye, SVP Cloud Data services BU, the company set a target of reaching $400-600M of recurring revenue exiting its FY21 year - this effort to target cloud started over five years ago.    Additionally, this software is available at Microsoft Azure, Amazon Web Services and the company expects to announce other cloud service provider customers in the future.  Mr. Richard explains that the company's cloud software is "soon to be GA (general availability)."  Mr. Pasek guided that FY19 cloud data services is expected to reach $60M (see calculations below).
• NetApp will add NVMe and storage-class memory products in the future.  The company expects to disaggregate storage from the controller to build capable high performance systems using NVMe.

Summary of presentations
Joel Reich, EVP Products and Operations discussed trends in data center flash:
•             NVMe over Fabrics
•             Storage-class memory as cache
•             Persistent memory in server
•             Quad level cell NAND

Reich made some interesting comments:

• NetApp will add NVMe and storage-class memory in the future  
• Quad level cell NAND could spell the end of spinning disks
• In its most recent year, it had a 75% win rate versus DELL EMC

Brad Anderson, SVP and GM, Cloud Infrastructure BU, said that NetApp’s “Converged” (selling NetApp storage with non-NetApp servers) FlexPod business is now at a $2B run rate and >4,000+PB shipped.  The company recently initiated a Fujitsu partnership on March 26, 2018.  Anderson also said that NetApp’s Hyperconverged product, which has only been selling for the past 4-5 months, hit its financial targets in the first full quarter of shipments.  He also said that the HCI product is based upon on recently-acquired SolidFire technology and conceded that the company is hiring people with virtualization capabilities to further augment the product line.  HCI customers that were discussed during this presentation were:  ConsultelCloud (Austrialian SaaS company) and Imperva (security company).  

Anthony Lye, SVP Cloud Data services BU, joined a year ago and is responsible for the company’s efforts to build software that runs on and with public cloud services.  He describes this software as one that operates above the storage layer, to allow customers to manage their data, whether in cloud, SaaS applications or on premises.  It offers backup, disaster recovery, and for securing data, and then binds those services and data in context of applications and business policy using the orchestration Engine.  OnCommand is product name.  The underlying technology NetApp uses is called ONTAP Data Management, which Mr Lye explained was separated from its engineered systems (hardware) and port it to public clouds five years ago.  We remember when NetApp announced its plans to separate ONTAP as a software for the cloud at its analyst meeting a few years ago when Kurian took over as CEO.

Lye explained that “later this year,” NetApp will release cloud-based OnCommand performance management/monitoring tool to manage workloads in hybrid cloud environment. 

• Azure.  Microsoft Azure selected NetApp to become basis for its storage (in Azure console).  Lye says NetApp built Azure Microsoft files for them and we run it for them, paying on traditional subscription and consumption model.  Microsoft will include it in every enterprise service agreement and customer take-up has been beyond NetApp expectations.  Of multiple 100’s of preview customers, >70% are considered non-NetApp strategic customers (eg they are new customers).  NetApp software software royalties show up as an Azure line item in Azure bill. 
• AWS.  Available from NetApp on AWS services.  Shows up as AWS bill as NetApp billable item.
• Other Cloud Service Providers.  Expect to announce other relationships with other public clouds.

Lye said that NetApp’s cloud software business is expected to reach $400-600M of recurring revenue by end of FY21.

Henri Richard, EVP Worldwide Field and Customer Operations said "Cloud is soon to be GA.”  Richard explains this as its “Cloud Volume” product.  Richard explained that what is new this year is the hyperscaler relationships, starts a demand creation engine for the sales organization.  

Jean English, SVP Chief Marketing Officer said the company will focus on “cloud first” to reach new “global” buyers (e.g. multinational organizations), will lead with HCI and Cloud to enterprises.

Ron Pasek, EVP and CFO explains that FY18 is almost over and the company is beating FY18 plans (low-single digits growth), driven by flash.  The CFO said that the new accounting rule, ASC 606 impact to guidance will be immaterial to the P&L , though will result in slightly higher product revenue recognition.
Additionally, Pasek said that a year ago, he said revenue growth will be “low-single digit growth” (FY18-20) and now he is saying “mid-single digit growth,” driven by Flash, HCI, cloud data services.  Pasek said that in FY19 cloud data services will represents one point of growth.  (As an aside, we calculate FY19 cloud data services revenue, using the “one point of growth” metric at $60M, based on the latest quarter of total revenues, F3Q18 which was $1.52B, multiplied by 4, then multiplied by 1%).  So, cloud services revenue is expected to grow to FY19 of $60M and reach FY21 targets of $400-600M.  The company declined to state its FY18 cloud data services revenue when asked by the audience, so we take it that it is small.

The OCP Summit 2018 hit record attendance and we can can summarize the theme as that of continued disaggregation of network/server functions.  Examples of demonstrations, presentations and proposals associated with disaggregation are as follows:

Apple Inc. announced plans to accelerate spending in the United States, citing $350 billion of spending over the next five years.  The company has cited recent tax rules and its status as being the largest US taxpayer.  The company specifically earmarked "over $10 billion" for "investments in data centers across the US."  We estimate that this will add about $2 billion more per year than the company was already spending, which the company says has resulted in datacenters in seven US states, including North Carolina, Oregon, Nevada, Arizona and a planned project in Iowa.  Based on these estimates, we believe Apple's US datacenter spending rate will now challenge the capital spending rates of Facebook.  The company also announced plans to build a Reno, Nevada datacenter.

This capital spending acceleration on datacenters has been timed with the completion of its Cupertino-based mega-campus, which was a significant capital expenditure.  

With Apple's datacenter plans are clearly accelerating, it is poised to tap suppliers for more datacenter equipment.  We expect that the main suppliers of network equipment will be fighting hard for Apple's business. Examples of such suppliers competing for the new capital spending plan will likely be, in optical equipment, Nokia, Ciena, Finisar, in routing, Nokia, Cisco, and in switching, Cisco, Broadcom, and Arista.  It is possible that with Apple's increasing scope of datcenter building, it may seek to bring more equipment design in-house, more similar to larger datacenters, including Facebook, Microsoft, Amazon and Google.  Additionally, as the datacenters become more numerous and larger, it will almost certainly require that Apple will implement different network architectures.

The market is in a period of rapid adoption of higher speeds led by the hypserscalers.  The industry used 2016 and 2017 to adopt 25 Gbps and 100 Gbps port speeds based on 25 Gbps SERDES technology.  As we enter 2018, those same hyperscalers are about to adopt 50 Gbps, 200 Gbps, and 400 Gbps port speeds based on 50 Gbps SERDES at a record shattering pace.  In the data center alone, there are now eight unique port speeds, with countless more unique variations of form factor and pluggable distance.
 
The market will need additional bandwidth beyond what is currently available today.  Several of these technologies were highlighted at the OIF Forum conference.  100 Gbps SERDES will help drive the industry towards that goal.  Looking forward, 100 Gbps SERDES will help drive wave two of 400 Gbps, which will help enable Ethernet to extend its reach well outside of short reach data center distances.  At the same time, it will also have a long life, with use cases ranging from enterprise to service provider.
 
The big question often asked is why after so many years for the market to adopt 10 Gbps, will we suddenly see a more rapid pace of adoption going forward?
 
There are many reason why, but we should look at a few things are different this time.  First, the hyperscalers are a new type of customer.  Hyperscalers truly bring a new scale to networking and compute in a way that makes the traditional SPs look small.  Second, SDN, the hyperscalers have done something unique here that often gets overlooked that is occurring right now, in the second half of this decade.  Hyperscalers are increasing the utilization rate of their compute and networking resources.  For compute, this is approaching 100% utilization so the industry is in a period where hyperscalers, using SDN are able to grow network bandwidth at a pace faster than what the CPU is scaling.
 
This more rapid pace will not continue forever, but is one of the reasons why innovation over the next several years will occur more rapidly than historic norms and why it will be important for the industry to think about how to invest across speeds and technologies in order to better leverage existing investments.  If not, the pace of innovation will simply be too much to recoup investment in the compresses timelines we are currently in.

Broadcom joined both Innovium and Nephos by publicly announcing 12.8 Tbps fabrics with its Tomahawk 3 product line.  We love new data center silicon from all vendors, it is something we track closely and we see these as a disruptive technologies to the networking ecosystem and an enabler of next generation cloud architectures.  There will be many more such announcements in 2018.  Here are some of our takeaways as we enter 2018.
 
More rapid innovation cycle – Even noted in the Broadcom's Tomahawk 3 press release, we see the demand requirements of the hyperscalers as driving a more rapid cycle of silicon over the next couple generations.  Tomahawk 3 is being introduced less than the typical 24 months we see separating prior between generations of data center fabric semiconductors.  This will put significant pressure on parts of the supply chain, especially on optics vendors.  Optics vendors are still ramping for 100 Gbps and now must support both OSFP and DD-QSFP for 400 Gbps, essentially doubling their product diversity needs.  Not only are there more form factors, but there are also different variations of distance and specifications that increase the complexity.
 
What next – We see two waves of 400 Gbps, the first being based on 56 Gbps SERDES, the second coming in the 2020 timeframe based on 112 Gbps SERDES.  We believe 800 Gbps is not that far off in the horizon as hyperscalers like Amazon and Google continue to grow.  We note that the hyperscalers are about to be 3-4 generations ahead of the enterprise.  This type of lead and technology expertise really changes the conversation around Cloud.  We saw this at Amazon re:Invent with their Annapurna NIC, the Cloud is doing things that just aren’t possible in the enterprise, especially around AI, machine learning, and other new applications that take advantage of the hyperscalers size. 
 
2018, the Year of 200 Gbps and 400 Gbps – In 2018 we will see commercial shipments of both 200 Gbps and 400 Gbps switch ports.  We see significant vendor share changes because of this.  Simply put the Cloud, especially the hyperscalers will be that much bigger by the end of 2018 and they buy a different class of equipment then everyone else.  This will continue to cause the vendor landscape to evolve.