) reported second-quarter fiscal 2014 earnings (excluding
amortization and other one-time items but including stock-based
compensation) of 52 cents per share, which beat the Zacks
Consensus Estimate by 4 cents. On a year-over-year basis,
earnings improved 36.8%.
NetApp's revenues for the quarter increased 0.6% year over
year to $1.55 billion but failed to beat the Zacks Consensus
Estimate of $1.61 billion. The modest year-over-year growth was
primarily driven by higher branded revenues, which increased 5.1%
from the year-ago quarter to $1.39 billion and fully offset the
27.9% decline in OEM revenues which came in at $151.1
On operating segment basis, Product revenues (61.6% of total
revenue) decreased 4.1% from the year-ago quarter to $955.3
million. Software Entitlement & Maintenance revenues (15.0%
of total revenue) increased 5.7% year over year to $231.8 million
in the quarter. Service revenues, which comprised 23.4% of total
revenue, surged 11.3% year over year to $362.8 million.
During the quarter, NetApp entered into partnerships to
provide cloud-based services. The company collaborated with
) to provide enhanced data management services across private and
public clouds. The company witnessed strong demand for its
storage operating system - Data ONTAP - and flash solutions.
Geographically, the Americas Commercial revenues and revenues
from EMEA region increased 3.0% and 2.0%, respectively, on a
year-over-year basis. Revenues from the Asia-Pacific region,
however, remained flat.
Adjusted gross margins (including stock-based compensation but
excluding amortization and other one-time items) expanded 300
basis points (bps) from the year-ago quarter to 63.2% primarily
due to favorable mix and strength in product margins.
Operating expenses (including stock-based compensation but
excluding amortization and other one-time items) as percentage of
revenues marginally increased 10 bps to 50.1%, primarily due to
lower sales and marketing expense.
Higher revenue base and lower-than-expected increase in
operating expenses helped operating margins (including
stock-based compensation but excluding amortization and other
one-time items) to expand 292 bps to 13.1% from the year-ago
Net income (including stock-based compensation but excluding
one-time items and related tax effect) margin increased 262 bps
from the year-ago quarter.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and
investments of $5.27 billion, up from $5.08 billion in the
previous quarter. Receivables were $590.4 million, up from $533.3
million in the previous quarter. The company has a long-term debt
balance of $995.0 million.
The company generated cash from operations of $362.5 million
compared with $285.8 million in the previous quarter NetApp
repurchased stocks worth $150.5 million and paid dividends
amounting to $51.3 million for the quarter.
For the third quarter of 2014, NetApp expects revenues in the
range of $1.575 billion to $1.675 billion, up 5.0% sequentially
but flat year over year. Branded revenues are expected to be
slightly down from the second quarter. However, revenue decline
in the OEM segment is expected to normalize in the upcoming
For the third quarter, non-GAAP gross margins are expected in
the range of 61.5% to 62%, while non-GAAP operating margin is
expected at 18%. Non-GAAP earnings per share are expected in the
range of 68 cents to 73 cents per share, up from 67 cents
reported in the year-ago quarter.
We believe that NetApp's innovative product line-up, frequent
updates and shareholder-friendly activities will boost
profitability, going forward. Moreover, its partnerships with
Oracle, Verizon and
) and rapid adoption of its ONTAP system are positives.
Nonetheless, we believe that uncertain IT spending outlook and
stiff competition from EMC remain the primary headwinds, going
forward. Moreover, tepid revenue guidance for the coming quarter
will remain an overhang on the stock.
NetApp currently carries a Zacks Rank #4 (Sell).
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