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NetApp (NTAP) Beats on Q3 Earnings, Issues Impressive View

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NetApp Inc. (NTAP - Free Report) reported fiscal third-quarter 2018 non-GAAP earnings of 99 cents per share, beating the Zacks Consensus Estimate by 9 cents. The figure surged 20% on a year-over-year basis and was also above the guided range.

Revenues of $1.52 billion increased 8% from the year-ago quarter, surpassing the Zacks Consensus Estimate of $1.49 billion. The figure was well within the guided range.

The impressive third-quarter results were driven by strong product adoption, increasing deal wins, and expanding customer base across varied geographies. Moreover, the company’s transition to data fabric strategy (a software-defined approach to data management) is expanding business opportunities.

Shares of NetApp rose more than 3% yesterday, backed by impressive results and positive guidance.

NetApp stock has gained 37.5% in the last year, substantially outperforming the 12.6% rally of the industry it belongs to.



 

Segment Details

Product revenues (60% of total revenues) increased 17% year over year to $920 million. This was the fifth consecutive quarter of product revenue growth, driven primarily by the company’s strong strategic product line and a 3.5 point currency benefit.

Strategic solutions comprised 70% of net product revenues. It increased 26% on a year-over-year basis. Mature solutions contributed 30% to total revenues, which remained flat year over year.

The combination of Software maintenance revenues, Hardware maintenance and other services revenue of $603 million saw a decline of 3% year over year and 2% sequentially. Management blamed lower revenue generation from renewals for the decline.

NetApp’s converged infrastructure market saw growth of more than 50% on a year-over-year basis, driven primarily by strong numbers from all–flash FlexPod.

The company announced increasing momentum of its HCI, which began shipping in the second quarter. In the current reported quarter, the company scored a seven-figure deal with a major automotive company, which boosted its VMware server virtualization environment.

Management was particularly optimistic about its expanded partnership with Microsoft (MSFT - Free Report) Azure for the development of the industry’s first cloud-based enterprise, Network File System (NFS) delivered via Azure. Moreover, with the announcement of NFLEX converged infrastructure with Fujitsu management, it looks to widen its reach.

The company is positive about making the most of the exponential rate of data growth with its cloud-integrated all-flash solutions that fit well with hybrid cloud infrastructure. During the third quarter, the company’s all-flash array business surged 50% on a year-over-year basis. Its annualized net revenue run rate was $2 billion.

The company’s expertise in the flash array market is aiding its popularity in storage area network (SAN) and converged infrastructure markets. Management noted that the company is winning market share against competitors like HP, International Business Machines (IBM - Free Report) and EMC. The company’s hyper-converged infrastructure is also expected to be a positive for the top line in the long run.

NetApp, Inc. Price, Consensus and EPS Surprise

NetApp, Inc. Price, Consensus and EPS Surprise | NetApp, Inc. Quote

Margin Details

Non-GAAP gross margin was 62.6%, which was well within the guided range of 62.5-63.5%. Also, it expanded 110 basis points (bps) from the year-ago quarter on the back of higher product gross margin of 50.2%.

Software maintenance gross margin increased 40 bps from the year-ago quarter. Hardware maintenance and other services gross margin increased 140 bps on a year-over-year basis.

Non-GAAP operating margin expanded 20 bps on a year-over-year basis to 20.4%.

Balance Sheet

NetApp exited the quarter with $5.6 billion in cash and short-term investments, down from the second quarter due to additional bonds issued in late September.

The company generated cash from operations of $420 million during the quarter compared with $314 million in the previous quarter. Further, the company repurchased shares worth $150 million and paid $53 million as dividends in the reported quarter.

Guidance

For fourth-quarter fiscal 2018, NetApp expects non-GAAP earnings in the range of 95 cents–$1.03 per share. The Zacks Consensus Estimate for the current quarter is pegged at 90 cents.

Net revenues are anticipated to be in the range of $1.52 billion and $1.67 billion, which implies 8% growth at the midpoint from the year-ago quarter. The Zacks Consensus Estimate is pegged at $1.49 billion.

NetApp expects gross margin in the range of 61.5%-62.5% and operating margin in the range of 20%-21%.

Management remains hopeful of the momentum of its hybrid cloud business. Its differentiated product portfolio and strong distribution channels will keep demand and adoption of the products strong going ahead.

Zacks Rank and Stocks to Consider

NetApp carries a Zacks Rank #3 (Hold)

A better-ranked stock in the Computer-Storage Devices industry is Seagate Technology PLC (STX - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate has a long-term expected earnings growth rate of 15.6%.

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