It has been about a month since the last earnings report for NetApp (NTAP). Shares have added about 21.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is NetApp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
NetApp Q1 Earnings & Revenues Tops Estimates
NetApp 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 55 cents 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.
Q2 View
NetApp anticipates non-GAAP earnings for second-quarter fiscal 2020 between 91 cents and 99 cents per share. Moreover, net revenues are anticipated to be in the range of $1.325-$1.475 billion.
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%.
Noteworthy Developments
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.
Operating Details
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 announced quarterly cash dividend of 48 cents per share payable Oct 23, 2019, to shareholders on record as of Oct 4, 2019.
Guidance
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%.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
VGM Scores
At this time, NetApp has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, NetApp has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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