NetApp (NTAP) Down 5.5% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for NetApp (NTAP). Shares have lost about 5.5% in that time frame, outperforming 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 catalysts.

NetApp Q1 Earnings & Revenues Surpass Estimates

NetApp reported first-quarter fiscal 2021 non-GAAP earnings of 73 cents per share, which surpassed the Zacks Consensus Estimate by 82.5%. Moreover, the bottom line improved 12% from the year-ago quarter. The growth can be attributed to increase in revenue base.

Revenues of $1.303 billion increased 5% year over year, outpacing the Zacks Consensus Estimate by 13.5%. The improvement was driven by strength in File, Block and Object Software, and Public Cloud Services, which per management “outperformed the market.” Nevertheless, unfavorable foreign exchange movement limited growth by “one point.”

Region wise, the Americas, EMEA and Asia Pacific accounted for 54%, 29% and 16% of total revenues, respectively.

Direct and Indirect revenues represented 22% and 78%, respectively, of total revenues.

Top Line Details

Product revenues (48.1% of total revenues) decreased 3% year over year to $627 billion. The decline can be attributed to coronavirus crisis-induced macroeconomic headwinds. Nevertheless, the company witnessed gains from momentum in digital transformation and hybrid cloud projects.

Beginning first-quarter fiscal 2021, the company is now breaking out product revenues into software and hardware, in a bid to provide more visibility in to high-margined software business,. Revenues from products under Hardware grouping were $316 million, down 7% year over year owing to decline in uptake of spinning disk solutions. Revenues from products under Software grouping amounted to $311 million, up 2% year over year driven by solid traction witnessed by All-flash FAS products.

Software Maintenance revenues (23.1%) were $301 million, up 20.4% year over year.

Hardware Maintenance and Other Services revenues (28.8%) were $375 million, up 9.6% year over year. Revenues from Hardware Maintenance Support Contracts totaled $307 million, up 8.1% year over year. Revenues from Professional and Other Services were $68 million, up 17.2% year over year.

Key Metrics

During the fiscal first quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $2.3 billion, up 34% year over year. Moreover, all-flash revenues totaled $567 million, up 34% on a year-over-year basis.

Public Cloud Services recorded annualized recurring revenues of $178 million, soaring 192% year over year. Recent acquisitions of Spot, Cloud Jumper and Talon contributed $44 million in ARR as of the end of the quarter. Excluding the buyouts, Public Cloud Services business grew 120% on a year-over-year basis.

Operating Details

Non-GAAP gross margin was 68%, which expanded 80 basis points (bps) from the year-ago quarter.

On a non-GAAP basis, Product gross margin of 51.4% contracted 200 bps year over year, owing to higher NAND costs and coronavirus crisis-induced pricing trends. Meanwhile, Software Maintenance gross margin of 95% contracted 100 bps, and Hardware Maintenance and Other Services gross margin expanded 220 bps to 74.1% year over year.

Non-GAAP operating expenses climbed 3% year over year to $673 million. As a percentage of net revenues, the figure contracted 110 bps on a year-over-year basis to 51.7%.

Non-GAAP operating margin expanded 190 bps to 16.3%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Jul 31, 2020, with $3.773 billion in cash, cash equivalents and investments compared with $2.882 billion as of Apr 24, 2020. Long-term debt (including current portion) was $2.63 billion as of Jul 31, 2020, compared with $1.146 billion as of Apr 24, 2020.

The company generated net cash from operations of $240 million during the reported quarter compared with $383 million reported in the fiscal fourth quarter.

Free cash flow was $188 million compared with $359 million in the previous quarter.

Further, the company returned $107 million to shareholders through dividend payouts. In the reported quarter, the company has paused share buybacks, and did not make any share repurchases, owing to coronavirus crisis-induced business uncertainty and limited visibility.

NetApp announced quarterly cash dividend of 48 cents per share to be paid out on Oct 28, 2020, to shareholders of record as of Oct 9, 2020.

Guidance

NetApp is banking on improvement in adoption of Public Cloud Services offerings.

The company anticipates non-GAAP earnings for second-quarter fiscal 2021 between 66 cents and 74 cents per share. Moreover, net revenues are anticipated in the range of $1.225-$1.375 billion. For second-quarter fiscal 2021, NetApp expects non-GAAP gross margin in the range of 66-67% and non-GAAP operating margin to be 16%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -12.58% due to these changes.

VGM Scores

At this time, NetApp has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. 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 C. 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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