NetApp, Inc. NTAP reported first-quarter fiscal 2020 non-GAAP earnings of 65 cents per share, surpassing the Zacks Consensus Estimate by 8 cents. However, the figure declined 37.5% from the year-ago quarter. Nonetheless, earnings exceeded management’s revised guided range of 55cents to 60 cents per share.
Revenues of $1.236 billion marginally beat the consensus estimate of $1.23 billion. However, the figure declined 16.1% from the year-ago quarter. Nonetheless, the top line came marginally ahead of the revised guided range of $1.22-$1.23 billion. The year-over-year decline includes negative impact of around one point of exchange rate fluctuations.
Shares Up on Q2 View
In the after-hours trading, shares of NetApp jumped 3%, owing to promising fiscal second-quarter guidance and lower than anticipated decline in reported fiscal first quarter results.
NetApp anticipates non-GAAP earnings for second-quarter fiscal 2020 between 91 cents and 99 cents per share. The Zacks Consensus Estimate is currently pegged at 90 cents.
Moreover, net revenues are anticipated to be in the range of $1.325-$1.475 billion — the mid-point of $1.4 billion comparing favorably with the consensus mark of $1.37 billion.
Notably, NetApp stock has lost 25.1% on a year-to date basis against the industry's growth of 3.7%.
Quarter in Detail
Product revenues (52.1% of total revenues) decreased 26.4% year over year to $644 billion owing to macroeconomic headwinds.
Management noted that the combined revenues of Hardware maintenance and Software maintenance amounted to $523 million, down 1% from the year-ago quarter.
Software maintenance revenues (20.2%) came in at $250 million, up 9.2%. Hardware maintenance and other services revenues (27.7%) were $342 million, declining 7.6% from the year-ago quarter.
Per management, broader weakness in macroeconomic environment compelled the company’s two major enterprise customers to trim capital expenditure. This negatively impacted NetApp’s storage business. Moreover, enterprise software license agreements worth $90 million from the year-ago quarter did not get repeated in the quarter under review, and negatively impacted top-line performance.
Region wise, the Americas, EMEA and Asia Pacific accounted for 51%, 33% and 16% of total revenues, respectively.
Direct and Indirect revenues represented 19%and 81%, respectively, in total revenues.
During the fiscal first quarter, the company’s all-flash array business declined 24% on a year-over-year basis. Its annualized net revenue run rate was $1.7 billion. The cloud data services recorded a run-rate of $61 million, up 189%. Private cloud business recorded run rate of $250 million, up 85%.
NetApp, Inc. Revenue (Quarterly)
NetApp, Inc. revenue-quarterly | NetApp, Inc. Quote
During the reported quarter, NetApp unveiled AFF C190 cloud-capable all-flash storage solution primarily aimed at expanding presence among smaller enterprises looking to manage business across hybrid cloud platforms. The “entry-level” storage solution is reportedly priced under $20,000, making it affordable for small organizations to digitally transform cloud-based IT infrastructure.
Also, NetApp expanded all-flash storage portfolio with NVMe-based AFF A320 system. Further, the company rolled out NetApp ONTAP 9.6, comprehensive NVMe-based storage solution and launched new cloud-based services in order to provide hybrid storage architecture.
NetApp updated several hybrid multi-cloud offerings with high-efficiency and high-performance functionalities, to aid enterprises support complex workloads with enhanced storage capacity.
Non-GAAP gross margin was 67.2%, which expanded 100 basis points (bps) from the year-ago quarter.
Product gross margin of 53.4% contracted 230 bps. Software maintenance gross margin of 96% contracted 90 bps on a year-over-year basis. Hardware maintenance and other services gross margin declined30 bps to 71.9%.
Non-GAAP operating expenses were up 0.3% year over year to $652 million.
Consequently, non-GAAP operating margin contracted 770 bps to 14.4%.
Balance Sheet & Cash Flow
NetApp exited the quarter ending Jul 26, 2019, with $3.532 billion in cash, cash equivalents and investments compared with $3.899 billion in the previous quarter. Long-term debt (including current portion) was $1.545 billion compared with $1.544 billion in the previous quarter.
The company generated net cash from operations of $319 million during the quarter compared with $399 million in the fiscal fourth quarter.
Free cash flow was $287million compared with $364 million in the previous quarter.
Further, the company repurchased shares worth $250 million and paid $115 million as dividends in the reported quarter.
NetApp, Inc. Price, Consensus and EPS Surprise
NetApp, Inc. price-consensus-eps-surprise-chart | NetApp, Inc. Quote
NetApp announced quarterly cash dividend of 48 cents per share payable Oct 23, 2019, to shareholders on record as of Oct 4, 2019.
NetApp is banking on improvement in adoption of hybrid multi-cloud offerings, Cloud Data Services and Private Cloud offerings for the subsequent quarters.
For second quarter of fiscal 2020, NetApp expects non-GAAP gross margin to be 66% and non-GAAP operating margin to be in the range of 18-19%.
For fiscal 2020, NetApp anticipates net revenues to decline 5-10% from fiscal 2019.Non-GAAP earnings per share are projected to decline 2% to 15% on a year-over-year basis.
The company anticipates non-GAAP gross margin to be in the range of 65-66% and non-GAAP operating margin to be in the band of 19-22%.
NetApp’s fiscal first-quarter revenues and earnings declined year over year, however, the metrics topped estimates, which is noteworthy.
Nonetheless, uncertain macroeconomic environment and currency headwinds remain deterrents to revenue growth and margin expansion.
Further, intense competition from fellow storage peers including Pure Storage PSTG is likely to create pricing pressure, which might hurt profitability.
Zacks Rank & Stocks to Consider
NetApp currently carries a Zacks Rank #5 (Strong Sell).
Some better-ranked stocks in the broader technology sector worth considering are Chegg CHGG and Anixter International AXE. Both the stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for Chegg and Anixter is currently pegged at 30% and 8%, respectively.
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