NetApp (NTAP) Beats on Q1 Earnings and Revenues, Guides Well

NetApp Inc.NTAP reported first-quarter fiscal 2018 adjusted earnings (excluding all one-time items but including stock-based compensation) of 52 cents per share, beating the Zacks Consensus Estimate by 10 cents.

On a non-GAAP basis, the company reported earnings of 62 cents per share, which surged 34.8% year over year but declined 27.9% sequentially. The sequential decline can primarily be attributed to seasonality as management had already stated in the guidance. However, the figure was better than the guided range of 49-57 cents per share.

Revenues increased 2.4% from the year-ago quarter but decreased 10.5% from the previous quarter to $1.33 billion, surpassing the Zacks Consensus Estimate of $1.32 billion. The figure was toward the higher-end of management's guided range of $1.24-$1.39 billion.

NetApp stock has gained 22.1% year to date, substantially outperforming the 12% rally of the industry it belongs to.

Revenue Details

Product revenues (54.6% of total revenue) increased 9.5% year over year but declined 15.1% sequentially to $723 million. The year-over-year increase marked the third consecutive quarter of product revenue growth, which per the company was mainly driven by its "successful pivot to the growth areas of the market."

Strategic solutions comprised 69.2% of net product revenues. It increased 6.9% on a year-over-year basis but decreased 16.1% sequentially. Mature solutions revenues declined 10.4% from the year-ago quarter and 12.9% sequentially.

Software Maintenance revenues (17.7% of total revenue) decreased 2.9% from the year-ago quarter as well as sequentially to $234 million. Revenues from Hardware Maintenance & Other Services (27.8% of total revenue) declined 6.4% year over year and 4.9% quarter over quarter to $368 million. The year-over-year decline was mainly due to the effect of changes in service pricing, years of product revenues decline and execution issues in client renewal.

During the quarter, the company expanded its strategic partnership with Microsoft's MSFT Azure and also unveiled new hybrid cloud software solutions.

Acquired last year, SolidFire has been fully integrated into NetApp's go-to-market organization and the product group. Per management, the all-flash array business, which includes all Flash FAS, EF and SolidFire products and services, witnessed year-over-year growth of 95%. Its annualized net revenue run rate was $1.5 billion.

Notably, the company was also named a leader in Gartner's Magic Quadrant for Solid-State Arrays in the first quarter. Also, the company is working on increasing total addressable market (TAM) to increase growth opportunities in the future.

NetApp, Inc. Price, Consensus and EPS Surprise

NetApp, Inc. Price, Consensus and EPS Surprise | NetApp, Inc. Quote

Margin Details

Non-GAAP gross margin was 63.8%, which was better than management's guided range of 62-63%. Also, it expanded 140 basis points (bps) from the year-ago quarter and 130 bps sequentially on the back of higher product gross margin (up 320 bps from the year-ago quarter and 100 bps sequentially).

Software maintenance gross margin expanded 30 bps year over year but declined 50 bps sequentially. Hardware maintenance and other services gross margin increased 220 bps on a year-over-year basis. However, hardware maintenance and other services gross margin declined 20 bps sequentially.

Non-GAAP operating margin (excluding stock-based compensation) expanded 370 bps on a year-over-year basis but declined 490 bps on a sequential basis to 15.8%. The sequential decline in operating margin was due to higher operating expenses as stated by management during fourth-quarter fiscal 2016 conference call.

Liquidity Improves, Share Buyback Continues

NetApp exited the quarter with cash, cash equivalents and investments of $5.32 billion compared with $4.92 billion at the end of the previous quarter. The company has a long-term debt balance of $745 million.

The company generated cash from operations of $250 million during the quarter compared with $365 million in the previous quarter. Further, the company repurchased shares worth $150 million and paid $54 million as dividends in the reported quarter.


For second-quarter fiscal 2018, NetApp expects non-GAAP earnings per share in the range of 64-72 cents and GAAP earnings in the range of 47-55 cents. The Zacks Consensus Estimate for the current quarter is pegged at 55 cents.

Net revenues are anticipated to be in the range of $1.31-$1.46 billion, which at the mid-point implies 3.4% growth from the year-ago quarter and 4.5% growth sequentially. The Zacks Consensus Estimate is currently pegged at $1.36 billion.

NetApp expect gross margin in the range of 63-63.5% and operating margin between 16% and 17%.

The company updated some of its fiscal 2018 outlook. NetApp now expects gross margin in the range of 62% to 63% compared with the earlier guidance of 63% to 63.5%. Operating margin is anticipated to be between 18% and 20%, up from the previous range of 16% to 17%. The company continues to expect low double-digit growth in fiscal 2018 earnings per share. Also, it continues to anticipate free cash flow in the range of 17-19% of revenues.

Zacks Rank & Stocks to Consider

NetApp currently has a Zacks Rank #3 (Hold)

Better-ranked stocks in the broader technology sector are Lam Research Corp. LRCX , sporting a Zacks Rank #1 (Strong Buy), and Alibaba Group BABA , having a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Long-term earnings growth rate for Alibaba and Lam Research are projected to be 28.97% and 17.2%, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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