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NetApp (NTAP) Q3 Earnings Beat, Shares Down on Soft Outlook

Zacks Equity Research

NetApp Inc. NTAP delivered fiscal third-quarter 2019 non-GAAP earnings of $1.20 per share, beating the Zacks Consensus Estimate by 5 cents. The figure also advanced 14.3% from the year-ago period and came in higher than management’s guided range of $1.12-$1.18.

However, shares are down almost 8% in pre-market trading which can be attributed to soft guidance issued for the fourth quarter fiscal 2019.

NetApp expects non-GAAP earnings between $1.22 and $1.28 per share. At mid-point the figure lags the Zacks Consensus Estimate of $1.26.

Moreover, net revenues are anticipated to be in the range of $1.59-$1.69 billion, which also misses the consensus mark of $1.71 billion. Management anticipates revenues to be flat at mid-point year over year, including 200 basis points (bps) impact of exchange rate fluctuations.






Notably, NetApp stock has returned 13.4% in the past year, against the industry’s decline of 15.8%.

Quarter in Detail

Revenues of $1.563 billion inched up1.6% from the year-ago quarter but lagged the Zacks Consensus Estimate of $1.602 billion. The reported figure was near the lower end of the guided range of $1.55-$1.65 billion.

Product revenues (61.9% of total revenues) inched up 1.6% year over year to $967 million. Strength in company’s all-flash array business and adoption of private cloud solutions aided growth. In the reported quarter, management noted that there was no contribution from strategic Enterprise License Agreement (“ELA”) agreements.

Strategic solutions comprised around 69.7% of net product revenues. It inched up2.6% on a year-over-year basis to $674 million. Mature solutions contributed 30.3% to net product, down 0.7% year over year. The figure came in at $293 million.

Management noted that the combination of Software maintenance revenues and Hardware maintenance and support contracts revenues of $531 million increased 2% from the year-ago quarter.

Individually, software maintenance revenues (15.3%) came in at $239 million, up 8.1% year over year due to growth in its installed base and sturdy performance of the company’s cloud data services portfolio. Hardware maintenance and other services revenues (22.8%) were $357 million, declining 2.5% from the year-ago quarter.

Geographically, Americas, EMEA and Asia Pacific accounted for 52%, 33% and 14% of total revenues, respectively.

It is to be noted that uncertain macroeconomic environment and currency headwinds limited revenue growth and margin expansion. However, sturdy product adoption, increasing deal wins, and expanding customer base across varied geographies drove year-over-year increase in revenues.

Moreover, the company is benefiting from transition to data fabric strategy (a software-defined approach to data management).

Further, NetApp witnessed increased momentum of its hyper-converged infrastructure (HCI) solutions from enterprises undergoing digital transformation. In fact, the company’s HCI is anticipated to be a positive for the top line in the long run. Expanded new cloud partnerships and open source projects were other notable factors.

Management notes three key trends to be long-term drivers. Firstly, the market transition from NAND to all-flash solutions amid declining NAND prices. NetApp anticipates benefiting from increasing adoption of all-flash arrays, which carry higher ASPs, consequently aiding product revenues and recurring services revenue growth.  Notably, 15% of the company’s installed base supports all-flash arrays.

Secondly, NetApp expects to benefit from the market transition from traditional IT infrastructure to private cloud architecture on the back of NetApp ACI and SolidFire.

Thirdly, increasing allegiance to adoption of hybrid cloud from an on-premises infrastructure is expected to favor NetApp’s financial performance, going ahead.

NetApp, Inc. Revenue (TTM)

 

NetApp, Inc. Revenue (TTM) | NetApp, Inc. Quote

Operating Details

Non-GAAP gross margin was 63.7%, which expanded 70 basis points (bps) from the year-ago quarter. The higher-than-expected gross margin expansion came on the back of higher product gross margin of 52.6% which expanded 80 bps.

Software maintenance gross margin of 95.8% contracted 150 bps on a year-over-year basis. Meanwhile, Hardware maintenance and other services gross margin expanded 100 bps to 72.3%.

Non-GAAP operating expenses declined 1.7% from the year-ago quarter to $629 million.

Consequently, non-GAAP operating margin expanded 210 bps on a year-over-year basis to 23.5%.
 
Balance Sheet & Cash Flow

NetApp exited the quarter ending Jan 25, 2019, with $4.05 billion in cash, cash equivalents and investments compared with previous quarter of $4.3 billion.

The company generated net cash from operations of $451 million during the reported quarter compared with $165 million in the previous quarter.

Free cash flow during the third quarter came in at $420 million compared with $122 million in the previous quarter.

Further, the company repurchased shares worth $550 million and paid $99 million as dividends in the reported quarter.

NetApp announced quarterly cash dividend of 40 cents per share payable on Apr 24, 2019.

Long-term debt (including current portion) came in at $1.543 billion compared with $1.542 billion in the previous quarter.

Notable Developments

During the third quarter, the company’s all-flash array business surged 19% on a year-over-year basis. Its annualized net revenue run rate was $2.4 billion. The cloud data services recorded a run-rate of $33 million.

The company’s expertise in the flash array market is aiding its popularity in storage area network (SAN) and converged infrastructure markets.

NetApp is increasingly focused on strengthening its hybrid cloud domain with new capabilities. In fact, the company recently unveiled new data offerings including expanded availability of NetApp Cloud Volumes for Google Cloud Platform (“GCP”), Microsoft Azure NetApp Files preview and NetApp SaaS Backup for Salesforce enabling users innovate in the robust cloud platforms, at NetApp Insight Barcelona 2018 event.

In an effort to extend the utilization of NetApp Data Fabric, the company also announced ONTAP 9.5, MAX Data, Storage GRID SG6060, NetApp Solution Support for FlexPod, and Flash Performance Guarantee solutions.

Moreover, in the reported quarter, NetApp announced latest solutions to enable customers to deliver data-driven business outcomes for applications across hybrid cloud and multicloud environments. These include NetApp Cloud Insights, Azure NetApp Files, Cloud Volumes Service, Cloud Volumes ONTAP, NetApp HCI, SaaS Backup for Microsoft Office 365, and NetApp Data Availability Services.

In the third quarter, the company strengthened alliances with the likes of VMware, NVDIA, among others, by introducing VMware Validated Design for Private Cloud, NetApp HCI and NVIDIA GPUs, to mention a few.

 

NetApp, Inc. Price, Consensus and EPS Surprise

 

NetApp, Inc. Price, Consensus and EPS Surprise | NetApp, Inc. Quote

Guidance

For fourth quarter of fiscal 2019, NetApp expects non-GAAP gross margin to be in the range of 62-63% and non-GAAP operating margin to be in the range of 23-23.5%.

For fiscal year 2019, NetApp anticipates net revenues to grow 4.6%, considering the mid-point of the guided fourth-quarter revenues.

NetApp anticipates gross margin to be around 64.3% and operating margin to be approximately 22.7%. In fiscal 2019, the company anticipates earnings to grow around 28% year over year.

Conclusion

NetApp is anticipated to benefit from ongoing transition to all-flash array solutions, strengthening hybrid cloud based solutions and synergies from SolidFire.

However, declining OEM revenues, overall tough macroeconomic scenario and competition from bellwethers such as HP Inc., and IBM in the SAN market remain concerns.

Zacks Rank & Stocks to Consider

NetApp carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same sector include MeetMe, Inc. MEET, Jabil, Inc. JBL and Twilio Inc. TWLO. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for MeetMe, Jabil and Twilio is projected to be 20%, 12%, and 9%, respectively.

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