) went up 1.2% in after-hours trade on Wednesday after the company
reported better-than-expected first-quarter fiscal 2015 results.
The encouraging results were primarily buoyed by growth in branded
storage equipment sales and better-than-expected revenue from
hardware maintenance support contracts.
Adjusted earnings (including stock-based compensation but excluding
amortization and other one-time items) on a proportionate tax basis
came in at 45 cents per share, beating the Zacks Consensus Estimate
of 40 cents. Moreover, on a year-over-year basis, earnings improved
16.1%, primarily due to lower share count and higher gross margins.
Netapp, Inc. - Earnings Surprise |
Though, NetApp's revenues for the quarter decreased 1.8% year over
year to $1.49 billion, it came ahead of the Zacks Consensus
Estimate of $1.47 billion. The year-over-year decline was primarily
due to a 22.7% drop in original equipment manufacturer (OEM)
revenues. However, Branded revenues increased 0.8% from the
year-ago quarter and came in at $1.36 billion.
On an operating segment basis, Product revenues (59% of total
revenue) decreased 5.2% from the year-ago quarter to $882.6
million. Software Entitlement & Maintenance revenues (15.0% of
total revenue) decreased 3.2% year over year to $221.3 million.
Nonetheless, Service revenues (26.0%) increased 7.9% year over year
to $385.3 million. Within Service revenues, hardware maintenance
support contracts revenues increased 10.7% on a year-over-year
basis, which more than offset the decline in revenues from
Professional & Other Services (down 0.8% year over year).
The company witnessed strong demand for its storage operating
system - Data ONTAP - and flash solutions. Arrow Electronics' (
) and Avnet's (
) contribution in net revenues were 22% and 16%, respectively.
Adjusted gross margins (including stock-based compensation but
excluding amortization and other one-time items) expanded 301 basis
points (bps) from the year-ago quarter to 63.9%. The improvement
came primarily on the back of higher product gross margins and
service gross margins.
Operating expenses (including stock-based compensation but
excluding amortization and other one-time items) as a percentage of
revenues increased 187 bps to 52.2%, primarily due to an increase
in sales and marketing expenses and general and administrative
expenses. In dollar terms, operating expenses increased 1.9% year
Operating margins (including stock-based compensation but excluding
amortization and other one-time items) expanded 114 bps to 11.7%
from the year-ago quarter, primarily due to strong demand for its
storage operating system and better-than-expected growth in branded
revenues. Net income (including stock-based compensation but
excluding one-time items and related tax effect) came in at $147.4
million, up from $138.8 million reported in the year-ago quarter
driven by margin expansions.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and
investments of $5.56 billion, compared with $5.00 billion in the
previous quarter. Receivables were $585.4 million versus $855.9
million in the previous quarter. The company has a long-term debt
balance of $1.49 billion.
NetApp generated cash from operations of $215.5 million compared
with $369.5 million in the previous quarter. The company
repurchased stocks worth $119.0 million and paid dividends
amounting to $53.0 million in the reported quarter.
For the second quarter of fiscal 2015, NetApp expects revenues in
the range of $1.49 to $1.59 billion (mid-point $1.54 billion), up
approximately 3% sequentially and flat on a year-over-year basis at
the mid-point. The Zacks Consensus Estimate is pegged at $1.54
Management expects non-GAAP gross margin in the range of 64%-64.5%,
and non-GAAP operating margin in the range of 17.5% to 18%.
Non-GAAP earnings per share are expected within 66 to 71 cents per
share. The Zacks Consensus is pegged at 52 cents per share.
The company expects demand for its scale-out enterprise storage
systems and converged solutions to increase with the adoption of
hybrid cloud strategies in fiscal 2015. Thus, leveraging this
demand, the company expects branded revenues to be up in mid
single-digits in 2015. Nonetheless, management expects
approximately 40% revenue decline from its OEM customers during
For fiscal 2015, NetApp expects gross margins to be between 63% and
64%, while operating margin is expected to be 80%.
NetApp reported better-than-expected first-quarter results and also
provided an encouraging second-quarter guidance, reflecting the
company's stringent cost control measures and continuing share
buyback initiatives. Management's positive commentary on the
company's scale-out enterprise storage systems and converged
solutions bode well. Moreover, rapid adoption of the ONTAP system
remains a growth catalyst, going forward.
Additionally, NetApp is gaining momentum in flash based solutions
with the newly introduced all-flash array, which will help the
company to gain traction in the storage market. The recent product
launches and product refreshes will drive revenues and improve cost
efficiency, thus enhancing margins.
Nonetheless, we believe that an uncertain IT spending outlook and
competition from EMC Corp. (
) remain headwinds. Continuous decline in OEM revenues also remains
a cause of concern.
NetApp currently carries a Zacks Rank #3 (Hold).
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