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NetApp (NTAP) Surpasses Q2 Earnings & Revenue Estimates

Zacks Equity Research
Updated

NetApp Inc. NTAP reported better-than-expected second-quarter fiscal 2016 results. The company’s adjusted earnings (including stock-based compensation and settlement of income tax audit but excluding amortization and other one-time items) came in at 45 cents, which surpassed the Zacks Consensus Estimate of 40 cents.
 

Netapp Inc. - Earnings Surprise | FindTheBest

 

Quarter Details

Though NetApp’s revenues decreased 6.4% year over year to $1.445 billion, it surpassed the Zacks Consensus Estimate of $1.422 billion. The year-over-year decline was primarily due to unfavorable foreign exchange rates. Also, uncertain IT spending environment along with a drop in Product revenues impacted the quarter’s revenues.

On an operating segment basis, Product revenues (56% of total revenue) decreased 12.3% from the year-ago quarter to $815 million. The decline was primarily due to lower-than-expected sales of ONTAP 7-Mode sales and unfavorable foreign exchange impact.

Software Maintenance revenues (16%) were up 3.6% on a year-over-year basis and came in at $233 million. Also, Hardware Maintenance & Other Services (28%) increased 2.1% year over year to $397 million. Within Service revenues, hardware maintenance support contracts revenues increased 4.8% from the year-ago figure, which more than offset the decline in revenues from Professional & Other Services (down 8.9% year over year).

The increase in software maintenance and hardware maintenance and other services revenues, up 3% year over year, was primarily due to existing and new service contracts.

Adjusted gross margin (including stock-based compensation but excluding amortization and other one-time items) contracted 250 basis points (bps) from the year-ago quarter to 62.1%. The decrease was primarily due to lower product gross margin. Also, a lower revenue base and foreign currency headwinds negatively impacted the gross margin.

Adjusted operating expenses (including stock-based compensation but excluding amortization and other one-time items), as a percentage of revenues, decreased 10 bps to 51.1%.

Adjusted operating margin (including stock-based compensation but excluding amortization and other one-time items) contracted 230 bps to 11.1% from the year-ago quarter, primarily due to lower revenue base and lower gross margin.

Net income (including stock-based compensation but excluding settlement of income tax audit, other one-time items and related tax effect) came in at $135.6 million compared with the year-ago figure of $171.3 million.

On a GAAP basis, net income came in at $114 million compared with $160 million in the year-ago quarter.

Balance Sheet & Cash Flow

NetApp exited the quarter with cash, cash equivalents and investments of $4.81 billion, compared with $4.95 billion in the previous quarter. Receivables were $587 million compared with $415 million in the last quarter. The company has a long-term debt balance of $1.49 billion.

NetApp generated cash from operations of $145 million compared with $129 million in the earlier quarter. During the quarter, the company repurchased shares worth $183 million and paid $53 million as dividend. The company declared a dividend of 18 cents during the quarter, payable on Jan 20, 2016.

Guidance

For the third-quarter of fiscal 2016, NetApp expects revenues in the range of $1.40 to $1.50 billion (mid-point $1.45 billion). The Zacks Consensus Estimate is pegged at $1.488 billion. Management expects non-GAAP earnings per share to come between 66 cents and 71 cents (mid-point 68.5 cents). The Zacks Consensus Estimate stands at 48 cents.

Our Take

NetApp reported better-than-expected second-quarter results. However, year-over-year revenue comparisons were unfavorable, primarily due to unfavorable foreign exchange rates. Also, the company provided tepid revenue guidance for the next quarter.

Nonetheless, the company is expected to gain momentum in flash-based solutions with the newly introduced all-flash array, which will help it to gain traction in the storage market. The recent product launches and product refreshes will drive revenues and stringent cost controls will ensure margin expansion.

However, we believe that an uncertain IT spending outlook and competition from EMC Corp. EMC and Hewlett-Packard Company HPQ remain headwinds.

NetApp currently carries a Zacks Rank #2 (Buy). Another stock worth considering in the technology sector is Amazon.com Inc. AMZN, sporting the same Zacks Rank #2.

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