Yahoo Finance NetApp (NTAP) Down 7.1% 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 7.1% 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 drivers.
NetApp Q3 Earnings Top Estimates
NetApp reported third-quarter fiscal 2023 non-GAAP earnings of $1.37 per share, which surpassed the Zacks Consensus Estimate by 4.6% but decreased 4.9% year over year. The company anticipated non-GAAP earnings between $1.25 and $1.35 per share.
Revenues of $1.53 billion decreased 5.4% year over year and 2% in constant currency. The company projected revenues in the range of $1.525-$1.675 billion. The downtick was caused by a weakening IT spending environment and cloud cost optimization. Apart from that, increased budget scrutiny, leading to smaller deal sizes and extended selling cycles acted as a dampener. Revenues missed the consensus mark by 5.6%.
The company tweaked its guidance for fiscal 2023 amid ongoing global macro turmoil and weak IT spending.
NetApp now expects fiscal 2023 revenues to be flat year over year. Earlier, NetApp had projected revenue growth of 2-4%
The company now anticipates non-GAAP earnings for fiscal 2023 to be between $5.30 and $5.50 per share. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at $5.41 per share.
For fiscal 2023, NetApp expects non-GAAP gross margin to be 66-67% and non-GAAP operating margin to be 23-24%.
Top-Line Details
The company introduced two segments for financial reporting, namely, Hybrid Cloud and Public Cloud.
The Hybrid Cloud segment consists of revenues from the company’s enterprise datacenter business, which include 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 of the Hybrid Cloud segment were down 9% year over year to $1.38 billion. The Public Cloud segment’s revenues were up 36.4% from the year-ago quarter’s levels to $150 million.
Within the Hybrid Cloud segment, Product revenues (49.6% of segment revenues) decreased 19.4% year over year to $682 million.
Revenues from Support Contracts (44.8%) totaled $616 million, up 5.1% year over year. Revenues from Professional and Other Services (5.6%) were $78 million, up 8.3% year over year.
Software product revenues amounted to $390 million, down 23.1%.
Region-wise, the Americas, Europe, the Middle East and Africa and the Asia Pacific contributed 54%, 32% and 14% to total revenues, respectively.
Direct and Indirect revenues contributed 22% and 78%, respectively, to total revenues.
Key Metrics
During the fiscal third quarter, the company’s All-Flash Array Business’ annualized net revenue run rate came in at $2.8 billion, down 12% year over year. Total billings decreased 11% year over year to $1.57 billion. Deferred revenues came in at $4.2 billion, up 6% year over year.
The Public Cloud Services recorded annualized recurring revenue (ARR) of $605 million, up 29% year over year. The Public Cloud ARR recorded a dollar-based net retention rate of 120%. The segment was affected due to reduced spending and the reduction in project-based workloads like chip design, EDA and HPC.
Combined recurring support and Public Cloud revenues were $766 million, up 10.1% on a year-over-year basis and contributing 50.2% to total revenues.
Operating Details
Non-GAAP gross margin was 66.8%, contracted 50 basis points (bps) with the year-ago quarter’s levels.
The Hybrid segment’s gross margin was 66.6%, which contracted 50 bps year over year. The Public Cloud segment’s gross margin was 68.7%, which contracted 220 bps year over year.
Non-GAAP operating expenses were down 5.1% year over year to $648 million. As a percentage of net revenues, the figure expanded 20 bps on a year-over-year basis to 42.5%.
Non-GAAP operating income decreased 7.9% year over year to $372 million.
Non-GAAP operating margin contracted 60 bps to 24.4%.
Balance Sheet & Cash Flow
NetApp exited the quarter ending Jan 27, 2023, with $3.141 billion in cash, cash equivalents and investments compared with $3.033 billion as of Oct 28, 2022. Long-term debt was $2.388 billion compared with $2.387 billion as of Oct 28, 2022.
The company generated net cash from operations of $377 million during the reported quarter compared with $214 million in the previous quarter.
Free cash flow was $319 million (free cash flow margin of 20.9%) compared with $137 million in the previous quarter (free cash flow margin of 8.2%).
The company returned $308 million to shareholders as dividend payouts ($108 million) and share repurchases ($200 million).
The company also announced a dividend of 50 cents payable on Apr 26, 2023, to shareholders of record as of the close of business on Apr 6, 2023.
Q4 Guidance
The company anticipates non-GAAP earnings to be between $1.30 and $1.40 per share. Net revenues are anticipated to be in the range of $1.475-$1.625 billion.
The company now anticipates non-GAAP earnings to be between $1.30 and $1.40 per share.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -5.86% due to these changes.
VGM Scores
Currently, NetApp has a subpar Growth Score of D, a grade with the same score on the momentum front. However, 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 D. 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 indicates a downward shift. 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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NetApp, Inc. (NTAP) : Free Stock Analysis Report
