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NetApp (NTAP) Up 4.2% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for NetApp (NTAP). Shares have added about 4.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is NetApp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

NetApp’s Q4 Earnings And Revenues Surpass Estimates

NetApp reported fourth-quarter fiscal 2021 non-GAAP earnings of $1.17 per share, which surpassed the Zacks Consensus Estimate by 4.5%. The company had anticipated non-GAAP earnings between $1.06 and $1.14 per share. However, the bottom line declined 1.7% from the year-ago quarter’s levels.

Revenues of $1.555 billion increased 11% year over year, outpacing the Zacks Consensus Estimate by 3.8%. The company had projected revenues in the range of $1.44-$1.54 billion. The upside was driven by improvement in enterprise demand.

Region wise, the Americas, EMEA and Asia Pacific contributed 53%, 32% and 15% to total revenues, respectively.

Direct and Indirect revenues contributed 23% and 77%, respectively, to total revenues.

Top Line Details

Product revenues (54% of total revenues) increased 6% year over year to $840 million. The company witnessed gains from momentum in digital transformation and hybrid cloud projects across enterprise end-markets, particularly from strength in the Americas.

In a bid to provide more visibility in high-margined software business, the company is now breaking up product revenues into software and hardware.

Revenues from products under Hardware grouping were $360 million, down 6.7% year over year. Revenues from products under Software grouping amounted to $480 million, up 18% year over year driven by solid mix of All-flash FAS products.

Software Maintenance revenues (22%) were $343 million, up 28.5% year over year.

Hardware Maintenance and Other Services revenues (24%) were $372 million, up 9.1% year over year. Revenues from Hardware Maintenance Support Contracts totaled $299 million, up 7.2% year over year. Revenues from Professional and Other Services were $73 million, up 17.7% year over year.

Key Metrics

During the fiscal fourth quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $2.9 billion, up 11% year over year.

Public Cloud Services recorded annualized recurring revenues (ARR) of $301 million, up 171% year over year and 27% quarter over quarter. The company is witnessing solid momentum across customer cohorts with fiscal fourth-quarter dollar-based net retention rate of 252%.

Management is optimistic on strong sales pipeline and revised its projection on Cloud ARR. The company expects to deliver $425-$500 million in fiscal 2022 in Cloud ARR. Management continues to expect to cross $1-billion mark in Cloud ARR in fiscal 2025.

Software and recurring maintenance and cloud revenues of $1.121 billion were up 18% on a year-over-year basis, contributing 72% to total net revenues.

Operating Details

Non-GAAP gross margin was 67.3%, which contracted 70 basis points (bps) from the year-ago quarter’s levels.

On a non-GAAP basis, Product gross margin of 54.3% contracted 210 bps year over year. Sequential improvement of 90 bps can be attributed to higher-margined all-flash mix. Meanwhile, Software Maintenance gross margin of 93.3% contracted 110 bps. Hardware Maintenance and Other Services gross margin shrunk 190 bps to 72.6% year over year.

Further, management noted that recurring support, cloud and other services business is a growth driver with gross margin coming in at 82%.

Non-GAAP operating expenses climbed 9.4% year over year to $688 million. As a percentage of net revenues, the figure contracted 70 bps on a year-over-year basis to 44.2%.

Non-GAAP operating income increased 10.5% year over year to $358 million. Non-GAAP operating margin dropped 10 bps to 23%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Apr 30, 2021, with $4.596 billion in cash, cash equivalents and investments compared with $3.894 billion as of Jan 29, 2021. Long-term debt was $2.632 billion as of Apr 30, 2021, unchanged as of Jan 29, 2021.

The company generated net cash from operations of $559 million during the reported quarter compared with $373 million in the prior quarter.

Free cash flow was $521 million (free cash flow margin of 33.5%) compared with $341 million in the previous quarter (free cash flow margin of 23.2%).

Further, the company paid out $106 million worth dividends. The company repurchased shares worth $75 million. In total, the company returned $181 million to shareholders.

NetApp also announced an additional $500-million worth of share buyback program under its current share repurchase authorization.

Fiscal 2021 Performance

For fiscal 2021, NetApp reported revenues of $5.74 billion, up 6% from fiscal 2020 tally. The Zacks Consensus Estimate was pegged at $5.69 billion.

Non-GAAP earnings per share were $4.06 against earnings per share of $4.05 reported in fiscal 2020.

The company generated net cash from operations of $1.33 billion compared with $1.06 billion in fiscal 2020.

Free cash flow was $1.171 million (free cash flow margin of 20.4%) compared with $936 million in the previous fiscal year (free cash flow margin of 17.3%).

Further, the company returned $552 million to shareholders in form of dividend and share repurchases.

Guidance

NetApp is banking on improvement in adoption of Public Cloud Services offerings as well as All-Flash business and strength in recurring support contracts to drive the top line, going ahead.

The company anticipates non-GAAP earnings for first-quarter fiscal 2022 between 89 cents and 97 cents per share.

Net revenues are anticipated to be $1.37-$1.47 billion, indicating year-over-year growth of 9%..

For first-quarter fiscal 2022, NetApp expects non-GAAP gross margin to be 68% and non-GAAP operating margin in the 19-20% range.

For fiscal 2022, NetApp projects revenue growth in 6-7% range. Public cloud ARR is expected between $425 million and $500 million.

For fiscal 2022, NetApp expects non-GAAP gross margin to be 67-68% and non-GAAP operating margin in the range of 21-22%.

The company anticipates non-GAAP earnings for fiscal 2022 between $4.45 and $4.65 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 14.77% due to these changes.

VGM Scores

At this time, NetApp has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, NetApp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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