A month has gone by since the last earnings report for NetApp, Inc. (NTAP - Free Report) . Shares have added about 4% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock next earnings release, or is it due for a pullback? 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 drivers.
NetApp reported third-quarter fiscal 2017 non-GAAP earnings (excluding stock-based compensation) of $0.82 per share, up 17.1% year over year and 36.7% sequentially. Earnings (including stock-based compensation) were $0.68, which beat the Zacks Consensus Estimate by $0.09.
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.
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 and EMC (now acquired by Dell).
Non-GAAP gross margin contracted 140 basis points (bps) from the year-ago quarter and 120 bps sequentially to 61.2%.
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.
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.
For fourth-quarter fiscal 2017, NetApp expects non-GAAP earnings in the range of $0.79–$0.84 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.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed an upward trend in fresh estimates. There have been nine revisions higher for the current quarter In the past month, the consensus estimate has shifted by 12.79% due to these changes.
At this time, NetApp's stock has an average Growth Score of 'C', though it is lagging a bit on the momentum front with a 'D'. Charting a somewhat similar path, the stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the company's stock is suitable for value and growth investors.
Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #1 (Strong Buy). We are expecting an above average return from the stock in the next few months.