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A month has gone by since the last earnings report for NetApp (NTAP). Shares have lost about 5.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is NetApp due for a breakout? 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 Q4 Earnings Surpass Estimates, Revenues Fall Y/Y
NetApp, Inc. reported fourth-quarter fiscal 2020 non-GAAP earnings of $1.19 per share, which surpassed the Zacks Consensus Estimate by 14.4%. However, the bottom line decreased 2.5% from the year-ago quarter.
Revenues of $1.401 billion declined 12% from the year-ago quarter. The top line also missed the Zacks Consensus Estimate by 0.8%. The decline can be attributed to coronavirus crisis-induced supply chain constraints, weak demand and logistical challenges. Nevertheless, management noted that Storage business, driven by strength in File, Block and Object Software, and Cloud Data Services, “performed better than the rest of the businesses.”
Region wise, the Americas, EMEA and Asia Pacific accounted for 54%, 32% and 14% of total revenues, respectively.
Direct and Indirect revenues represented 21% and 79%, respectively, of total revenues.
Top Line Details
Product revenues (56.6% of total revenues) decreased 21% year over year to $793 billion. The decline can be attributed to coronavirus crisis-induced macroeconomic headwinds.
Revenues from products under Strategic grouping were $544 million, down 12.7% year over year. The offerings include All-flash FAS products, enterprise software license agreements, private cloud solutions, and other add-on hardware and software product options.
Revenues from products under Mature grouping amounted to $249 million, down 34% year over year. The offerings include Hybrid FAS products, and related add-on OS software and hardware, branded E-Series and OEM products.
Software Maintenance revenues (19.1%) came in at $267 million, up 10.3% year over year.
Hardware Maintenance and Other Services revenues (24.3%) were $341 million, down 2.6% from the year-ago quarter.
Revenues from Hardware Maintenance Support Contracts totaled $279 million, up 1.8% year over year. Revenues from Professional and Other Services came in at $62 million, declining 6.1% year over year.
During the fiscal fourth quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $2.6 billion, up 12% sequentially. However, all-flash revenues came in at $656 million, down 3% on a year-over-year basis.
Cloud Data Services recorded annualized recurring revenues of $111 million, soaring 113% year over year. Robust adoption of Microsoft Azure NetApp Files was a key driver. Cloud Data Services customer count exceeded 3,500, which more than doubled on a year-over-year basis. Moreover, the company’s partnerships with Alphabet’s Google Cloud platform, Amazon’s Amazon Web Services, are expected to bolster adoption of its Cloud Data Services and expand customer base.
Private Cloud business recorded run rate of $408 million, up 19% quarter over quarter.
Non-GAAP gross margin was 68%, which expanded 280 basis points (bps) from the year-ago quarter.
On a non-GAAP basis, Product gross margin of 56.4% expanded 110 bps year over year, driven by improvement in all-flash product mix. Meanwhile, Software Maintenance gross margin of 94.4% contracted 150 bps, and Hardware Maintenance and Other Services gross margin expanded 220 bps to 74.5% year over year.
Non-GAAP operating expenses declined 7.5% year over year to $629 million. As a percentage of net revenues, the figure expanded 220 bps on a year-over-year basis to 44.9%.
Non-GAAP operating margin expanded 60 bps to 23.1%.
Balance Sheet & Cash Flow
NetApp exited the quarter ending Apr 24, 2020, with $2.882 billion in cash, cash equivalents and investments compared with $3.008 billion as of Jan 24, 2020. Long-term debt (including current portion) was $1.146 billion as of Apr 24, 2020, which remained unchanged on a sequential basis.
The company generated net cash from operations of $383 million during the quarter under review compared with $420 million reported in the fiscal third quarter.
Free cash flow was $359 million compared with $388 million in the previous quarter.
Further, the company returned $266 million to shareholders through shares repurchases worth $161 million and dividend payouts worth $105 million in the reported quarter. At the end of fiscal fourth quarter, NetApp had $478 million remaining in $4 billion buyback authorization program.
NetApp announced quarterly cash dividend of 48 cents per share to be paid out on Jul 29, 2020, to shareholders of record as of Jul 10, 2020.
NetApp is banking on improvement in adoption of hybrid multi-cloud offerings, Cloud Data Services and Private Cloud offerings.
The company anticipates non-GAAP earnings for first-quarter fiscal 2021 between 36 cents and 44 cents per share.
Moreover, net revenues are anticipated in the range of $1.09-$1.24 billion (mid-point of $1.165 billion).
For first-quarter fiscal 2021, NetApp expects non-GAAP gross margin in the range of 67-68% and non-GAAP operating margin to be 10%.
NetApp did not provide any guidance for fiscal 2021, citing uncertainty in demand visibility due to COVID-19 related business impacts.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted -51.1% due to these changes.
At this time, NetApp has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, NetApp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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