It has been about a month since the last earnings report for NetApp (NTAP). Shares have added about 10.3% 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 the most recent earnings report in order to get a better handle on the important catalysts.
NetApp Q2 Earnings & Revenues Beat Estimates
NetApp reported second-quarter fiscal 2021 non-GAAP earnings of $1.05 per share, which surpassed the Zacks Consensus Estimate by 45.83%. However, the bottom line declined 3.7% from the year-ago quarter.
Revenues of $1.416 billion increased 3.3% year over year, outpacing the Zacks Consensus Estimate by 8%. The improvement was driven by strength in all-flash storage business, and Public Cloud Services, which per management “outperformed the expectations.” Nevertheless, unfavorable foreign exchange movement limited growth by “one point.”
Region wise, the Americas, EMEA and Asia Pacific accounted for 55%, 30% and 15% of total revenues, respectively.
Direct and Indirect revenues represented 25% and 75%, respectively, of total revenues.
Top Line Details
Product revenues (52.9% of total revenues) decreased 3% year over year to $749 million. The decline can be attributed to coronavirus crisis-induced macroeconomic headwinds. Nevertheless, the company witnessed gains from momentum in digital transformation and hybrid cloud projects across enterprise and public sector end-markets.
In a bid to provide more visibility in to high-margined software business, the company is now breaking up product revenues into software and hardware. Revenues from products under Hardware grouping were $332 million, down 18% year over year. Revenues from products under Software grouping amounted to $417 million, up 14% year over year driven by solid traction witnessed by All-flash FAS products.
Software Maintenance revenues (21.4%) were $303 million, up 19.3% year over year.
Hardware Maintenance and Other Services revenues (25.7%) were $364 million, up 5.2% year over year. Revenues from Hardware Maintenance Support Contracts totaled $296 million, up 3.5% year over year. Revenues from Professional and Other Services were $68 million, up 13.3% year over year.
During the fiscal second quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $2.5 billion, up 15% year over year. Moreover, all-flash revenues totaled $632 million, up 15% on a year-over-year basis.
Public Cloud Services recorded annualized recurring revenues (ARR) of $216 million, up 200% year over year and 21% on a quarter-over-quarter basis. The company is witnessing solid momentum across customer cohorts with fiscal second-quarter dollar-based net retention rate of 207%. Management is optimistic and noted that the company is on track to deliver $250-$300 million in fiscal 2021 in Cloud ARR and cross $1 billion mark in Cloud ARR in fiscal 2025. Moreover, its partnerships with Microsoft’s Azure, Google Cloud platform, Amazon Web Services, are expected to aid it in expanding customer base.
Recurring maintenance and cloud revenues of $599 million were up 11% on a year-over-year basis, accounting for 42% of total net revenues.
Non-GAAP gross margin was 66.9%, which contracted 160 basis points (bps) from the year-ago quarter.
On a non-GAAP basis, Product gross margin of 53% contracted 430 bps year over year. Management noted sequential improvement of 160 bps was driven by higher-margined all-flash mix. Meanwhile, Software Maintenance gross margin of 93.7% contracted 200 bps, and Hardware Maintenance and Other Services gross margin shrunk 30 bps to 73.4% year over year.
Further, management noted that recurring maintenance, cloud and other services business is a growth driver, with gross margin coming in at 82.6%.
Non-GAAP operating expenses climbed 4.1% year over year to $657 million. As a percentage of net revenues, the figure expanded 40 bps on a year-over-year basis to 46.4%.
Non-GAAP operating margin contracted 200 bps to 20.6%.
Balance Sheet & Cash Flow
NetApp exited the quarter ending Oct 30, 2020, with $3.646 billion in cash, cash equivalents and investments compared with $3.773 billion as of Jul 31, 2020. Long-term debt (including current portion) was $2.63 billion as of Oct 30, 2020, unchanged compared with the tally as of Jul 31, 2020.
The company generated net cash from operations of $161 million during the reported quarter compared with $240 million in the fiscal first quarter.
Free cash flow was $121 million compared with $188 million in the previous quarter.
Further, the company returned $107 million to shareholders through dividend payouts. The company has paused share buybacks and did not make any share repurchases during the reported quarter due to coronavirus crisis-induced business uncertainty and limited visibility.
Management is encouraged by the stability in business, owing to positive trends in broader macro trends and optimism regarding COVID-19 vaccine trials, on the basis of which the company intends to reinitiate share repurchase program during the fiscal third quarter.
NetApp is banking on improvement in adoption of Public Cloud Services offerings.
The company anticipates non-GAAP earnings for third-quarter fiscal 2021 between 94 cents and $1.02 per share. Moreover, net revenues are anticipated to be $1.34-$1.49 billion.
Notably, for third-quarter fiscal 2021, NetApp expects non-GAAP gross margin and non-GAAP operating margin to be 67% and 20%, respectively.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 19.13% due to these changes.
At this time, NetApp has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise NetApp has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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