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Why Is NetApp (NTAP) Up 7.5% Since Last Earnings Report?

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It has been about a month since the last earnings report for NetApp (NTAP). Shares have added about 7.5% 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 drivers.

NetApp Inc. delivered fiscal first-quarter 2019 non-GAAP earnings of $1.04 per share, beating the Zacks Consensus Estimate of 80 cents per share. The figure surged from 62 cents per share reported in the year-ago period and was also above the guided range.

Revenues of $1.474 billion increased 12% from the year-ago quarter, surpassing the Zacks Consensus Estimate of $1.423 billion. The figure was well within the guided range.

The impressive first-quarter results were driven by strong product adoption, increasing deal wins, and expanding customer base across varied geographies. Moreover, the company’s transition to data fabric strategy (a software-defined approach to data management) is expanding business opportunities.

Further, the company increased momentum of its HCI and expanded new cloud partnerships, which contributed to overall revenue growth.

The company adopted the new accounting standard ASC 606, during the reported quarter.

Segment Details

Product revenues (49% of total revenues) increased 20% year over year to $875 million. This was the seventh consecutive quarter of product revenue growth, driven primarily by continuous strength in company’s all-flash array business coupled with approximately $16 million from strategic enterprise agreements.

Strategic solutions comprised around 70% of net product revenues. It increased 22.9% on a year-over-year basis. Mature solutions contributed 30% net product, up 14.8% year over year.

The combination of Software maintenance revenues, Hardware maintenance and other services revenues of $599 million were almost flat year over year. Management cited higher revenue generation from renewals and growth in product revenues as the primary reasons behind the increase.

Individually, software maintenance revenues came in at $229 million, up 3% year over year due to robust performance of the company’s cloud data services portfolio and growth in its installed base. Hardware maintenance and other services revenues were $370 million, flat year over year.

NetApp’s converged infrastructure capabilities continued to expand with the Data Fabric. Hyperscalers integration benefited the company. It was also aided by latest applications and services such as artificial intelligence (AI), machine learning (ML) and analytics.

Further, strong numbers from all–flash FlexPod was a positive. The company announced increasing momentum of its HCI solutions, which began shipping in the second quarter.

Geographically, Americas, EMEA and Asia Pacific accounted for 57%, 29% and 14% of total revenues, respectively.

Recent Activities

NetApp unveiled the all new AFF A800 array, a high performance, cloud-connected flash system to power AI and compute-intensive applications.

The company also updated its flagship NetApp ONTAP 9 software which emphasizes on improvements to FabricPool and hybrid cloud data tiering. It also gives support to Microsoft Azure.

During the reported quarter, the company also announced new FlexPod solutions to simplify the delivery of cloud infrastructure and deliver focused industry-specific applications.

Management was particularly optimistic about its expanded partnership with Microsoft Azure for the development of the industry’s first cloud-based enterprise, Network File System (“NFS”) delivered via Azure. Moreover, the company looks to widen its reach with the announcement of NFLEX converged infrastructure with Fujitsu management.

The company is positive about making the most of the exponential rate of data growth with its cloud-integrated all-flash solutions that fit well with hybrid cloud infrastructure. During the fourth quarter, the company’s all-flash array business surged 50% on a year-over-year basis. Its annualized net revenue run rate was $2.2 billion.

The company’s expertise in the flash array market is aiding its popularity in storage area network (SAN) and converged infrastructure markets. The company’s hyper-converged infrastructure is also anticipated to be a positive for the top line in the long run.

Margin Details

Non-GAAP gross margin was 66.2%, which expanded 290 basis points (bps) from the year-ago quarter on the back of higher product gross margin of 55.7%. Gross margins also gained from the software portion of the ELAs.

Software maintenance gross margin was almost flat on a year-over-year basis. Meanwhile, Hardware maintenance and other services gross margin expanded 210 bps.

Non-GAAP operating margin expanded 690 bps on a year-over-year basis to 22.1%.

Balance Sheet

NetApp exited the quarter with $4.8 billion in cash and short-term investments as compared with previous quarter of $5.3 billion.

The company generated cash from operations of $326 million during the quarter compared with $494 million in the previous quarter. Free cash during the quarter came in at $262 million. Further, the company repurchased shares worth $500 million and paid $105 million as dividends in the reported quarter.

In the second-quarter of fiscal 2019, NetApp’s quarterly cash dividend of 40 cents per share is payable on Oct 24, 2018.

Guidance

For second-quarter fiscal 2019, NetApp expects non-GAAP earnings in the range of 94 cents to $1.00 per share.

Net revenues are anticipated to be in the range of $1.450-$1.550 billion, implying growth of 6% at the mid-point from the year-ago quarter.

NetApp expects gross margin is projected to be in the range of 63-64% and operating margin to be roughly in the range of 20-21%.

Management remains hopeful of the momentum in its hybrid cloud business. Its differentiated product portfolio and strong distribution channels will keep demand and adoption of the products strong going ahead.

For fiscal year 2019, net revenues are anticipated to increase in mid-single digits. The company raised margins and EPS guidance. NetApp now expects EPS growth to be in mid-20s (previous guidance was more than 15% growth rate).

NetApp now expects gross margin to be range of 63-64% (previously 63%) and operating margin to be approximately 22% (previously in the range of 20-21%). Effective tax rate is expected to be approximately 18%, unchanged from the previous guidance.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, NetApp has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

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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