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NetApp (NTAP) Down 18.2% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for NetApp (NTAP). Shares have lost about 18.2% 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 the most recent earnings report in order to get a better handle on the important catalysts.

NetApp Q1 Earnings & Revenues Top Estimates, Up Y/Y

NetApp, Inc reported first-quarter fiscal 2023 non-GAAP earnings of $1.20 per share, which surpassed the Zacks Consensus Estimate by 9.1% and increased 4.3% year over year. The company anticipated non-GAAP earnings between $1.05 and $1.15 per share.

Revenues of $1.59 billion increased 9.2% year over year, beating the Zacks Consensus Estimate by 2.64%. The company projected revenues in the range of $1.475-$1.625 billion. The upside can be attributed to the strong revenue growth for the Hybrid and Public Cloud business segments.

Region-wise, the Americas, EMEA and the Asia Pacific contributed 54%, 31% and 15% to total revenues, respectively.

Direct and Indirect revenues contributed 21% and 79%, respectively, to total revenues. In the quarter under review, billings were $1.56 billion, up 13.4% year over year. Deferred revenues came in at $4.2 billion, up 6.8% year over year.

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 5.9% year over year to $1.46 billion. The Public Cloud segment’s revenues were up 67% from the year-ago quarter’s levels to $132 million.

Within the Hybrid Cloud segment, Product revenues (53.8% of segment revenues) increased 7.7% year over year to $786 million.

Revenues from Support Contracts (41%) totaled $598 million, up 3.5% year over year. Revenues from Professional and Other Services (5.2%) were $76 million, up 7% year over year.

Software product revenues amounted to $476 million, up 15% owing to the value driven by ONTAP software and data services.

Key Metrics

During the fiscal first quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $3 billion, up 7% year over year.

Public Cloud Services recorded annualized recurring revenues (ARR) of $584 million, up 73% year over year. The performance was driven by continued momentum in cloud storage, especially by Azure NetApp Files, AWS FSx for ONTAP and Google CVS. Public cloud ARR dollar-based net retention rate of 151%.

Combined recurring support and Public Cloud revenues stood at $730 million, up 11% on a year-over-year basis and contributing 46% to total net revenues.

Operating Details

Non-GAAP gross margin was 66.7%, contracted 260 basis points (bps) with the year-ago quarter’s levels.

The Hybrid segment’s gross margin of 66.4% contracted 280 bps year over year. The Public Cloud segment gross margin of 69.7% contracted 120 bps year over year.

Non-GAAP operating expenses were up 4.2% year over year to $702 million. As a percentage of net revenues, the figure contracted 210 bps on a year-over-year basis to 44.1%.

Non-GAAP operating income increased 7.2% year over year to $360 million. Non-GAAP operating margin contracted 40 bps to 22.6%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Jul 29, 2022, with $3.439 billion in cash, cash equivalents and investments compared with $4.134 billion as of Apr 29, 2022. Long-term debt was $2.387 billion as of Jul 29, 2022, compared with $2.386 billion as of Apr 29, 2022.

The company generated net cash from operations of $281 million during the reported quarter compared with $411 million in the previous quarter.

Free cash flow was $216 million (free cash flow margin of 13.6%) compared with $343 million in the previous quarter (free cash flow margin of 20.4%).

The company returned $460 million to shareholders in the form of dividends ($110 million) and share repurchases ($350 million).

The company also announced a dividend of 50 cents payable on Oct 26, 2022, to shareholders of record as of the close of business on Oct 7.

Guidance

The company anticipates non-GAAP earnings for second-quarter fiscal 2023 between $1.28 and $1.38 per share.

Net revenues are anticipated in the range of $1.595-$1.745 billion, indicating year-over-year growth of 7% at the mid-point.

For fiscal 2023, NetApp projects revenue growth of 6-8%, while Public cloud ARR is expected to be 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?

It turns out, estimates review flatlined 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. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% 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

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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