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NetApp (NTAP) Q4 Earnings Beat Estimates, Revenues Fall Y/Y

Zacks Equity Research

NetApp, Inc. NTAP reported fourth-quarter fiscal 2020 non-GAAP earnings of $1.19 per share, which surpassed the Zacks Consensus Estimate by 14.4%. However, the bottom line decreased 2.5% from the year-ago quarter.

Revenues of $1.401 billion declined 12% from the year-ago quarter. The top line also missed the Zacks Consensus Estimate by 0.8%. The decline can be attributed to coronavirus crisis-induced supply chain constraints, weak demand and logistical challenges. Nevertheless, management noted that Storage business, driven by strength in File, Block and Object Software, and Cloud Data Services, “performed better than the rest of the businesses.”

Region wise, the Americas, EMEA and Asia Pacific accounted for 54%, 32% and 14% of total revenues, respectively.

Direct and Indirect revenues represented 21% and 79%, respectively, of total revenues.
 

NetApp, Inc. Price, Consensus and EPS Surprise

NetApp, Inc. Price, Consensus and EPS Surprise

NetApp, Inc. price-consensus-eps-surprise-chart | NetApp, Inc. Quote

Top Line Details

Product revenues (56.6% of total revenues) decreased 21% year over year to $793 billion. The decline can be attributed to coronavirus crisis-induced macroeconomic headwinds.

Revenues from products under Strategic grouping were $544 million, down 12.7% year over year. The offerings include All-flash FAS products, enterprise software license agreements, private cloud solutions, and other add-on hardware and software product options.

Revenues from products under Mature grouping amounted to $249 million, down 34% year over year. The offerings include Hybrid FAS products, and related add-on OS software and hardware, branded E-Series and OEM products.

Software Maintenance revenues (19.1%) came in at $267 million, up 10.3% year over year.

Hardware Maintenance and Other Services revenues (24.3%) were $341 million, down 2.6% from the year-ago quarter.

Revenues from Hardware Maintenance Support Contracts totaled $279 million, up 1.8% year over year. Revenues from Professional and Other Services came in at $62 million, declining 6.1% year over year.

Key Metrics

During the fiscal fourth quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $2.6 billion, up 12% sequentially. However, all-flash revenues came in at $656 million, down 3% on a year-over-year basis.

Cloud Data Services recorded annualized recurring revenues of $111 million, soaring 113% year over year. Robust adoption of Microsoft Azure NetApp Files was a key driver. Cloud Data Services customer count exceeded 3,500, which more than doubled on a year-over-year basis. Moreover, the company’s partnerships with Alphabet’s GOOGL Google Cloud platform, Amazon’s AMZN Amazon Web Services, are expected to bolster adoption of its Cloud Data Services and expand customer base.

Private Cloud business recorded run rate of $408 million, up 19% quarter over quarter.
 

NetApp, Inc. Revenue (Quarterly)

NetApp, Inc. Revenue (Quarterly)

NetApp, Inc. revenue-quarterly | NetApp, Inc. Quote

Noteworthy Developments

NetApp acquired Talon Storage, in a bid to strengthen NetApp Cloud Volumes and Azure NetApp Files offerings, and aid customers to centralize and consolidate IT storage infrastructure to the public clouds, to facilitate remote work.

Moreover, the company recently announced the acquisition of CloudJumper, a cloud software company offering virtual desktop infrastructure (VDI) solutions, and remote desktop services (RDS) that aids enterprises to accelerate public cloud deployments for work-from-home setup, branch offices and enterprises.

The company unveiled an integrated solution for End User Computing (“EUC”) remote connected architecture with NetApp HCI, NVIDIA NVDA, and VMware.

The company rolled out a clustered architecture comprising NetApp AFF storage systems and Fujitsu PRIMERGY servers to accelerate complex artificial intelligence (AI) and enterprise machine learning (ML) workloads.

Moreover, the company introduced NetApp Active IQ web UI and mobile app to aid customers avoid disruptions and drive business output.

Further, growing clout of NetApp ONTAP AI aided the company in gaining recognition as a leader in IDC’s latest report on scale-out, file-based storage.

Operating Details

Non-GAAP gross margin was 68%, which expanded 280 basis points (bps) from the year-ago quarter.

On a non-GAAP basis, Product gross margin of 56.4% expanded 110 bps year over year, driven by improvement in all-flash product mix. Meanwhile, Software Maintenance gross margin of 94.4% contracted 150 bps, and Hardware Maintenance and Other Services gross margin expanded 220 bps to 74.5% year over year.

Non-GAAP operating expenses declined 7.5% year over year to $629 million. As a percentage of net revenues, the figure expanded 220 bps on a year-over-year basis to 44.9%.

Non-GAAP operating margin expanded 60 bps to 23.1%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Apr 24, 2020, with $2.882 billion in cash, cash equivalents and investments compared with $3.008 billion as of Jan 24, 2020. Long-term debt (including current portion) was $1.146 billion as of Apr 24, 2020, which remained unchanged on a sequential basis.

The company generated net cash from operations of $383 million during the quarter under review compared with $420 million reported in the fiscal third quarter.

Free cash flow was $359 million compared with $388 million in the previous quarter.

Further, the company returned $266 million to shareholders through shares repurchases worth $161 million and dividend payouts worth $105 million in the reported quarter. At the end of fiscal fourth quarter, NetApp had $478 million remaining in $4 billion buyback authorization program.

NetApp announced quarterly cash dividend of 48 cents per share to be paid out on Jul 29, 2020, to shareholders of record as of Jul 10, 2020.

Guidance

NetApp is banking on improvement in adoption of hybrid multi-cloud offerings, Cloud Data Services and Private Cloud offerings.

The company anticipates non-GAAP earnings for first-quarter fiscal 2021 between 36 cents and 44 cents per share. The Zacks Consensus Estimate for fiscal first-quarter earnings stands at 62 cents.

Moreover, net revenues are anticipated in the range of $1.09-$1.24 billion (mid-point of $1.165 billion). The consensus mark for fiscal first-quarter revenues is pegged at $1.17 billion.

For first-quarter fiscal 2021, NetApp expects non-GAAP gross margin in the range of 67-68% and non-GAAP operating margin to be 10%.

NetApp, currently carrying a Zacks Rank #3 (Hold), did not provide any guidance for fiscal 2021, citing uncertainty in demand visibility due to COVID-19 related business impacts. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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