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NetApp (NTAP) Beats on Q4 Earnings & Revenues, View Tepid

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NetApp Inc. (NTAP - Free Report) reported fourth-quarter fiscal 2017 non-GAAP earnings (including stock-based compensation) of 72 cents per share, beating the Zacks Consensus Estimate by 4 cents.

Earnings (excluding stock-based compensation) surged 56.4% from the year-ago quarter and almost 5% sequentially to 86 cents. The figure was better than management’s guided range of 79–84 cents per share. The upside was primarily driven by strong top-line growth along with margin expansion.

Revenues increased 7.3% from the year-ago quarter and 5.5% from the previous quarter to $1.48 billion, surpassing the Zacks Consensus Estimate of $1.44 billion. The figure was within management’s guided range of $1.365–$1.515 billion.

However, first-quarter fiscal 2018 guidance was unimpressive due to seasonality. We believe that this will keep the share price under pressure. Notably, NetApp has return 12.1% as compared with S&P 500’s gained of 7.7% on a year-to-date basis.



In-Line SolidFire Revenue, Lower Costs Drove FY17 Results

In fiscal 2017, revenues declined almost 0.5% over fiscal 2016 to $5.52 billion. However, management noted revenue contribution from SolidFire was in line with expectation but was significantly less dilutive to overall operating results. This positively impacted profitability.

Earnings surged 28.2% to $2.73 per share driven by improving operating margins, which reflected benefits from lower costs. NetApp stated that it “overachieved” its goal of delivering a net run rate savings of almost $130 million in operating expenses and cost of sales.

NetApp, Inc. Price, Consensus and EPS Surprise

Further, the company returned over $900 million to shareholders in the form of share buybacks and dividends. The company is increasing quarterly dividend payout by 5% to 20 cents per share.

Robust Strategic Solutions Drove Q4 Revenues

Product revenues (57.5% of total revenue) increased 12.5% year over year and 8.7% sequentially to $852 million. Strategic solutions comprised 70% of net product revenues and increased 23.9% on a year-over-year basis and 16.4% sequentially.

However, mature solutions revenues declined 7.2% from the year-ago quarter and 5.9% sequentially. NetApp anticipates headwinds impacting mature solutions revenues to decrease over rest of the fiscal year.

Software Maintenance revenues (16.3% of total revenue) increased 3.4% from the year-ago quarter and 0.8% from previous quarter to $242 million.

Revenues from Hardware Maintenance & Other Services (26.1% of total revenue) dropped 0.5% year over year but increased 1.8% quarter over quarter to $387 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 in over 95% of FAS systems shipped. Moreover, Clustered ONTAP is now running on approximately 50% of systems in that large and growing install base.

Further, NetApp noted that all-flash array business soared 140% year over year to an annualized net revenue run rate of almost $1.7 billion. We note that the company continues to gain market share against the likes of Hewlett-Packard (HPE - Free Report) and EMC (now acquired by Dell).

Lower Costs Boost Margins

Non-GAAP gross margin (including stock-based compensation) was 62.2%. Gross margin (excluding stock based compensation) was 62.5%, which was better than management’s guided range of 60–62%.

Gross margin expanded 140 basis points (bps) from the year-ago quarter and 100 bps sequentially, on the back of higher product gross margin (up 210 bps from the year-ago quarter and 320 bps sequentially) which reflected improving sales discipline, fewer promotions and lower reserves.

Software maintenance gross margin expanded 40 bps sequentially and 130 bps on a year-over-year basis. Hardware maintenance and other services gross margin increased 240 bps on a year-over-year basis, reflecting the benefits from its transformation initiatives. However, hardware maintenance and other services gross margin declined 130 bps sequentially.

Non-GAAP operating expenses as a percentage of revenues increased 30 bps from the year-ago quarter and 40 bps sequentially due to higher variable compensation expense.

Consequently, non-GAAP operating margin (including stock-based compensation) expanded 860 bps on a year-over-year basis and 60 bps on a sequential basis to 17.6%. Operating margin (excluding stock-based compensation) was 20.7%, much better than management’s guided range of 18.5–19.5%.

Liquidity Improves, Share Buyback Continues

NetApp exited the quarter with cash, cash equivalents and investments of $4.92 billion, as compared with $4.64 billion at the end of previous quarter. The company has a long-term debt balance of $744 million.

The company generated cash from operations of $365 million during the quarter, compared with $235 million in the previous quarter. Further, the company repurchased shares worth $129 million and paid $51 million as dividends in the reported quarter.

Guidance Consistent with Long-Term View

For first-quarter fiscal 2018, NetApp expects non-GAAP earnings in the range of 49–57 cents per share, which reflects 15% growth year-over-year at the midpoint. The guidance is consistent with the company’s historical first-quarter results and long-term model of low double-digit earnings growth.

The Zacks Consensus Estimate for the current quarter is pegged at 50 cents.

Net revenues are anticipated to be in the range of $1.24–$1.39 billion, which implies 2% growth from the year-ago quarter. The Zacks Consensus Estimate is currently pegged at $1.31 billion.

NetApp expect gross margin in the range of 62–63% and operating margin between 13.5% and 14.5% for the first quarter, which is the company’s seasonally weak quarter due to higher anticipated operating expenses.

For fiscal 2018, NetApp expects moderate revenue growth. Gross margin is anticipated to be in the range of 62–63% and operating margin in the range of 18–20%. The company expects to deliver low double-digit earnings growth and anticipates free cash flow in the range of 17–19% of revenues.

NetApp is now focused on expanding its total addressable market (TAM) by growing product portfolio and strengthening its dominant position in all-flash arrays and converged infrastructure markets. Management anticipates continuing penetration into Tier 1 SAN market, which will drive top-line growth.

Moreover, launch of the ACI solution as well as new cloud services and partnerships along with reinvigorating the OEM program will boost results.

Further, NetApp anticipates continued operating margin improvement despite higher investments on business due to improving productivity. Additionally, the capital allocation program will continue to drive profitability in the long haul.

Zacks Rank & Key Picks

NetApp carries a Zacks Rank #3 (Strong Buy). Quantum Corp and Western Digital (WDC - Free Report) are two stocks worth looking in the sector, as both of them sport 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 Quantum and Western Digital are pegged at 20% and 4.75%, respectively.

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