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NetApp (NTAP) Down 10.5% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for NetApp (NTAP - Free Report) . Shares have lost about 10.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is NetApp due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

NetApp’s Q4 Earnings Surpass Estimates

NetApp reported fourth-quarter fiscal 2022 non-GAAP earnings of $1.42 per share, which surpassed the Zacks Consensus Estimate by 11.8% and increased 21.4% year over year. The company had anticipated non-GAAP earnings between $1.21 and $1.31 per share.

Revenues of $1.68 billion increased 8% year over year but missed the Zacks Consensus Estimate by 0.2%. The company had projected revenues in the range of $1.635-$1.735 billion. The upside can be attributed to the strong demand for All-flash and object storage solutions.

Region wise, the Americas, EMEA and Asia Pacific contributed 54%, 32% and 14% to total revenues, respectively.

Direct and Indirect revenues contributed 24% and 76%, respectively, to total revenues. In the quarter under review, billings were $2 billion, up 16% year over year. Deferred revenues came in a $4.2 billion, up 5% year over year.

For fiscal 2022, the company reported non-GAAP earnings of $5.28 per share, up 30% year over year. Yearly revenues surged 10% to $6.32 billion.

However, pandemic-induced supply chain headwinds and substantial increases in freight and logistical and component costs acted as headwinds. The company expects supply chain troubles to affect product margins in fiscal 2023, albeit at a gradually declining impact.

Top-Line Details

The company introduced two segments for financial reporting, namely Hybrid Cloud and Public Cloud.

Hybrid Cloud consists of revenues from the company’s enterprise datacenter business, which includes the product, support and professional services.

The Public Cloud segment consists of revenues from products, which are delivered as-a-service and include related support. The portfolio includes the company’s cloud automation and optimization services, storage services and cloud infrastructure monitoring services.

Revenues in the Hybrid Cloud segment were up 4.8% year over year to $1.56 billion. The Public Cloud segment’s revenues were up 82% from the year-ago quarter’s levels to $120 million.

Within the Hybrid Cloud segment, Product revenues (57% of segment revenues) increased 6% year over year to $894 million.

Revenues from Support Contracts (38%) totaled $590 million, up 2.4% year over year. Revenues from Professional and Other Services (5%) were $76 million, up 4% year over year.

Software product revenues amounted to $530 million, up 10% on a favorable shift toward an all-flash portfolio.

In the quarter under review, the company rolled out new products like NetApp Cloud Volumes Edge Cache software as a service (features intelligent caching and global file locking) and NetApp Cloud Manager Digital Wallet service.

Key Metrics


During the fiscal fourth quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $3.2 billion, up 12% year over year.

Public Cloud Services recorded annualized recurring revenues (ARR) of $505 million, up 68% year over year. The performance was driven by continued momentum in cloud storage, especially Azure NetApp Files. However, the company noted that lower-than-expected growth due to higher churn, reduced expansion rates, and salesforce turnover in the cloud operations portfolio impeded Public cloud ARR growth in the reported quarter. Public cloud ARR dollar-based net retention rate of 159%.

Combined software revenue, recurring support and Public Cloud revenues stood at $1.24 billion, up 10.5% on a year-over-year basis and contributing 74% to total net revenues.

Operating Details

Non-GAAP gross margin was 65.7%, contracted 160 basis points (bps) with the year-ago quarter’s levels.

The Hybrid segment’s gross margin of 65.4% contracted 170 bps year over year. The Public Cloud segment gross margin of 68.3% contracted 290 bps year over year.

Management noted that recurring support, cloud and other services business is a growth driver with gross margin coming in at 93%.

Non-GAAP operating expenses were up 4.8% year over year to $721 million. As a percentage of net revenues, the figure contracted 130 bps on a year-over-year basis to 42.9%.

Non-GAAP operating income increased 6.7% year over year to $382 million. Non-GAAP operating margin contracted 30 bps to 22.7%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Apr 29, 2022, with $4.134 billion in cash, cash equivalents and investments compared with $4.201 billion as of Jan 28, 2022. Long-term debt was $2.386 billion as of Apr 29, 2022, compared with $2.385 billion as of Jan 28, 2022.

The company generated net cash from operations of $411 million during the reported quarter compared with $260 million in the prior quarter.

Free cash flow was $343 million (free cash flow margin of 20.4%) compared with $199 million in the previous quarter (free cash flow margin of 12.3%).

The company returned $361 million to shareholders in the form of dividends ($111 million) and share repurchases ($250 million).

Guidance

The company anticipates non-GAAP earnings for first-quarter fiscal 2023 between $1.05 and $1.15 per share.

Net revenues are anticipated in the range of $1.475-$1.625 billion, indicating year-over-year growth of 6% at mid-point.

For fiscal 2023, NetApp projects revenue growth of 6-8% while Public cloud ARR is expected between $780 million and $820 million.  

The company anticipates non-GAAP earnings for fiscal 2023 between $5.40 and $5.60 per share.

For fiscal 2023, NetApp expects non-GAAP gross margin to be 66-67% and non-GAAP operating margin in the range of 23-24%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, NetApp has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, NetApp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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