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NetApp (NTAP) Q3 Earnings & Revenues Beat; Increase Y/Y

NetApp Inc.NTAP reported third-quarter fiscal 2017 non-GAAP earnings (excluding stock-based compensation) of 82 cents per share, up 17.1% year over year and 36.7% sequentially. Earnings (including stock-based compensation) were 68 cents, which beat the Zacks Consensus Estimate by 9 cents.

Revenues increased 1.3% from the year-ago quarter and 4.8% from the previous quarter to $1.40 billion, which beat the Zacks Consensus Estimate of $1.39 billion. The figure was within management's guided range of $1.325-$1.475 billion.

We note that NetApp has outperformed the Zacks Computer Storage Devices industry in the last one year. While the stock gained 65.3%, the industry witnessed an increase of 55.3%.

Segment Revenue Details

Product revenues (55.8% of total revenue) increased 4.5% year over year and 10.4% sequentially to $784 million. Strategic solutions comprised 65.3% of net product revenues and increased 22.2% on a year-over-year basis and 13.3% sequentially.

However, mature solutions revenues slumped 17.8% from the year-ago quarter but increased 5.4% sequentially. NetApp anticipates headwinds impacting mature solutions revenues to decrease over rest of the fiscal year.

Software Maintenance revenues (17.1%) increased 2.6% from the year-ago quarter but declined 0.8% from previous quarter to $240 million.

Revenues from Hardware Maintenance & Other Services (29%) dropped 5.5% year over year and 2.1% quarter over quarter to $388 million. The revenue decline can primarily be attributed to lower hardware maintenance support contract revenues.

NetApp noted that in the quarter Clustered ONTAP was deployed on over 90% of FAS systems shipped. Unit shipments of Clustered ONTAP systems grew 24% year over year, and the install base of FAS systems continues to grow.

Moreover, Clustered ONTAP is now running on approximately 40% of systems in that large and growing install base. Additionally, Clustered ONTAP now manages over 50% of the FAS system capacity in the company's install base.

Further, NetApp noted that all-flash array business soared 160% year over year to an annualized net revenue run rate of almost $1.4 billion. The company is gaining market share against the likes of Hewlett-Packard HPE and EMC (now acquired by Dell).

Operating Details

Non-GAAP gross margin contracted 140 basis points (bps) from the year-ago quarter and 120 bps sequentially to 61.2%.

Netapp Inc. - Earnings Surprise | FindTheBest

Non-GAAP operating expenses as a percentage of revenues declined 530 bps from the year-ago quarter and 670 bps sequentially exhibiting benefits from the company's ongoing cost reduction initiatives. Moreover, favorable foreign exchange lowered operating expenses.

Consequently, non-GAAP operating margin expanded 390 bps on a year-over-year basis and 550 bps on a sequential basis to 17% in the reported quarter.

NetApp, Inc. Price, Consensus and EPS Surprise

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

Balance Sheet & Cash Flow

NetApp exited the quarter with cash, cash equivalents and investments of $4.64 billion, as compared with $4.36 billion at the end of previous quarter. The company has a long-term debt balance of $1.49 billion.

NetApp generated cash from operations of $235 million during the quarter, compared with $158 million in the previous quarter. Additionally, free cash flow increased from $102 million to $190 million at the end of the quarter.

Further, NetApp repurchased shares worth $284 million and paid $52 million as dividends in the reported quarter.

Guidance

For fourth-quarter fiscal 2017, NetApp expects non-GAAP earnings in the range of 79-84 cents per share. Net revenues are anticipated to be in the range of $1.365-$1.515 billion.

NetApp expect gross margin in the range of 60-62% and operating margin between 18.5% and 19.5% for the fourth quarter.

The company anticipates strong strategic solutions growth will improve product revenue growth trajectory in the rest of fiscal 2017.

Zacks Rank & Key Picks

NetApp sports a Zacks Rank #1 (Strong Buy). Seagate Technologies STX and Analog Devices ADI are other stocks worth looking in the broader sector, as both of them sports the same Zacks Rank as NetApp. You can see the complete list of today's Zacks #1 Rank stocks here.

Long-term earnings growth rate for Seagate and Analog Devices are pegged at 8.17% and 10.40%, 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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