NetApp NTAP recently provided preliminary results for the first quarter of fiscal 2020. The company also revised guidance for fiscal 2020.
In the conference call, management noted that broader weakness in macroeconomic environment compelled the company’s enterprise customers to trim capital expenditure. This negatively impacted NetApp’s storage business.
Markedly, adoption of hybrid multi-cloud offerings, Cloud Data Services and Private Cloud increased year over year in the first quarter, but couldn’t mitigate the decline in storage business.
Following the bleak preliminary first-quarter results and trimmed outlook for fiscal 2020, NetApp shares are down 18% in the pre-market. Notably, NetApp stock has lost 1.3% year to date, compared with the industry’s rally of 13.3%.
The company intends to announce first-quarter fiscal 2020 results and issue second-quarter fiscal 2020 guidance on Aug 14, 2019.
Bleak Preliminary Q1 Fiscal 2020 Results
For first-quarter fiscal 2020, NetApp anticipates revenues in the range of $1.22 billion to $1.23 billion (mid-point of $1.225 billion), indicating year-over-year decline of approximately 17%. Earlier, management had anticipated net revenues for first quarter to be in the range of $1.315-$1.465 billion (mid-point of $1.39 billion). The preliminary results reflect decline of approximately 11.9% considering the mid-point.
Moreover, the preliminary results miss the Zacks Consensus Estimate of revenues pegged at $1.39 billion.
Management notes that Enterprise License Agreement (ELA) agreements worth $90 million from the year-ago quarter did not get repeated in the to-be-reported quarter. Excluding the decline in ELA, preliminary first quarter net revenues would have registered decline of 12% on a year-over-year basis.
NetApp now anticipates non-GAAP earnings for first-quarter 2020 between 55 cents and 60 cents per share (mid-point of almost 58 cents). The preliminary results are significantly below the earlier guided range of 78-86 cents (mid-point of 82 cents), reflecting decline of approximately 29% considering the mid-point.
Markedly, the low end of the range lags the current Zacks Consensus Estimate for earnings of 83 cents.
Nonetheless, management anticipates preliminary non-GAAP gross margin to be above the guided figure of 65%, on account of favorable mix with higher margin products and maintenance revenues offsetting weakness in product revenues.
The company didn’t provide any update on operating margin, which was earlier guided in the range of 17-18%.
Slashed Fiscal 2020 Guidance
NetApp now anticipates fiscal 2020 net revenues to decline 5-10% over fiscal 2019. Earlier, management had anticipated net revenues to grow at the low end of mid-single digit range.
The new guidance misses the consensus. Markedly, the Zacks Consensus Estimate for fiscal 2020 revenues is currently pegged at $6.31 billion, which indicates year-over-year growth of 2.6%.
The company provided no update on margins for fiscal 2020. Earlier, gross margin was anticipated to be in the range of 64-65%% and operating margin to be approximately in the band of 23-24%. However, management noted that earlier guidance should not be relied upon.
The company is expected to reveal further details on margin expectations in the upcoming first quarter earnings conference.
NetApp is anticipated to benefit from strengthening hybrid cloud business and deal wins in cloud data services.
However, uncertain macroeconomic environment and currency headwinds remain deterrents to revenue growth and margin expansion.
Further, intense competition from fellow storage peers including Pure Storage PSTG is likely to create pricing pressure, which might impact profitability.
Zacks Rank & Stocks to Consider
NetApp currently carries a Zacks Rank #3 (Hold), which might change as the latest development impacts growth prospects, at least in the near term.
Some better-ranked stocks in the broader technology sector worth considering are Rosetta Stone RST and Anixter International AXE. Both the stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for Rosetta Stone and Anixter is currently pegged at 12.5% and 8%, respectively.
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