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Will Weak Storage Business Hurt NetApp's (NTAP) Q1 Earnings?

Zacks Equity Research

NetApp NTAP is scheduled to release first-quarter fiscal 2020 earnings results on Aug 14.

Notably, the company has surpassed the Zacks Consensus Estimate in three of the trailing four quarters while missing the remaining one, with an average positive earnings surprise of 9.76%.

Post the dismal preliminary results provided by the company on Aug 1, shares declined almost 17.2%.

Markedly, the stock has shed 18.4% year to date, against the industry’s return of 5.9%.

Q1 Preliminary Results and Estimates

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 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.

Following this, Zacks Consensus Estimates have been revised downward considerably. The Zacks Consensus Estimate for revenues is currently pegged at $1.23 billion, suggesting year-over-year decline of 16.6%.

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.

The current Zacks Consensus Estimate for earnings is pegged at 60 cents, indicating year-over-year decline of 42.3%. Notably, the consensus has declined 27.7% over the past 30 days.

Let’s see how things are shaping up prior to this announcement.

Factors Likely to Influence Q1 Results

During the quarter under review, broader weakness in macroeconomic environment compelled the company’s enterprise customers to trim capital expenditure. This negatively impacted NetApp’s storage business, which compelled the company to provide bleak first-quarter results.

Moreover, per management Enterprise License Agreement (ELA) agreements worth $90 million from the year-ago quarter did not get repeated in the to-be-reported quarter, which remains a concern.

Further, currency headwinds, high tariffs owing to trade war between the U.S. and China are likely to weigh on revenue growth and margin expansion.

NetApp, Inc. Price and EPS Surprise


NetApp, Inc. Price and EPS Surprise

NetApp, Inc. price-eps-surprise | NetApp, Inc. Quote


Also, intense competition from fellow storage peers including Pure Storage PSTG is likely to create pricing pressure, which might impact profitability.

In a bid to sustain competitive position, NetApp is introducing new products with updated capabilities. Increasing spend on portfolio expansion is likely to weigh on margin expansion at least in the near term.

Notably, during the quarter under review, NetApp rolled out AFF C190 cloud-capable all-flash storage solution, NetApp ONTAP 9.6, comprehensive NVMe-based storage solution, among others.

Nonetheless, strengthening hybrid cloud business and deal wins in cloud data services are likely to aid the company in this difficult time.

Coming to the segmental revenues, the Zacks Consensus Estimate for Product revenues and Hardware Maintenance and Other Services revenues, for first quarter are pegged at $800 million and 338 million, respectively, indicating year-over-year decline of 8.6% and 8.6%, each.

Notably, the Zacks Consensus Estimate for Software Subscriptions revenues is estimated to be $234 million, up 2.2% from the year-ago reported figure of $229 million.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

NetApp has a Zacks Rank #5 (Strong Sell) and an Earnings ESP of -4.26%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks that Warrant a Look

Here are some stocks you may consider, as our proven model shows that these have the right combination of elements to post an earnings beat this quarter.

CACI International CACI has an Earnings ESP of +4.02% and a Zacks Rank #2. The company is scheduled to report fourth-quarter fiscal 2019 results on Aug 14. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ciena Corporation CIEN has an Earnings ESP of +5.26% and a Zacks Rank #2.

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NetApp, Inc. (NTAP) : Free Stock Analysis Report
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