NetApp (NTAP) Q4 Earnings Lower Than Expected, View Soft

NetApp Inc. (NASDAQ:NTAP) recently reported dismal fourth-quarter fiscal 2016 results wherein both adjusted earnings per share of 36 cents and revenues of $1380 million missed the respective Zacks Consensus Estimate of 40 cents and $1411.7 million. On a year-over-year basis too, the metrics registered steep declines of 23.4% and 10.4%, respectively. Revenues were marred by an uncertain IT spending environment along with a drop in Product revenues.

Moreover, the guidance for the first quarter of fiscal 2017 came in below analysts’ expectations, sending shares tumbling as much as 7.4% in the aftermarket session yesterday.

Quarter Details

On an operating segment basis, Product revenues (54.9% of total revenue) decreased 17.2% year over year to $757 million. Higher discounts and promotions and a “weaker-than- expected OEM business” primarily resulted in the decline.

Software Maintenance revenues (16.9%) increased 3.1% on a year-over-year basis to $234 million. Also, Hardware Maintenance & Other Services (28.2%) decreased 2.5% year over year to $389 million. Within Service revenues, hardware maintenance support contracts revenues were down 1.6% year over year to $318 million, while Professional & Other Services revenues fell 7.8% year over year to $71 million.

Adjusted gross margin (including stock-based compensation but excluding amortization and other one-time items) contracted 90 basis points (bps) from the year-ago quarter to 60.7%. The decrease was primarily due to lower product gross margin and lower revenue base.

Adjusted operating expenses (including stock-based compensation but excluding amortization and other one-time items), as a percentage of revenues, increased 160 bps to 51.7%.

Adjusted operating margin (including stock-based compensation but excluding amortization and other one-time items) contracted 250 bps to 9% from the year-ago quarter, primarily due to a lower revenue base and lower gross margin.

Balance Sheet & Cash Flow

NetApp exited the quarter with cash, cash equivalents and investments of $5.303 billion, compared with $5.326 billion as of Apr 24, 2015. Receivables were $813 million compared with $779 million in the prior year quarter. The company has a long-term debt balance of $1.49 billion.

NetApp generated cash from operations of $974 million during the fiscal compared with $1.268 billion in the previous year quarter. In the fourth quarter, the company generated operating cash flow of $345 million as against $396 million in the comparable period last year.

Further, NetApp repurchased shares worth $262 million and paid $51 million as dividends in the fourth quarter. During fiscal 2016, the company spent $960 million on share buybacks and $210 million for dividend, representing 140% of free cash flow.

Concurrent with its fourth-quarter results, the company announced a 5% hike in its quarterly cash dividend, which now stands at 19 cents per share, to be payable on Jul 27, 2016.

Guidance

NetApp also issued its outlook for the first quarter of fiscal 2017. The company expects revenues in the range of $1.20 billion to $1.35 billion. The Zacks Consensus Estimate is pegged at $1.296 billion. GAAP earnings per share are anticipated between 13 cents and 18 cents and non-GAAP earnings per share within 34 cents to 39 cents. The Zacks Consensus Estimate stands at 29 cents.

Our Take

NetApp posted dismal results for the fiscal fourth quarter wherein its top and bottom line results compared unfavorably with the year-ago quarter figures. Also, the company provided tepid revenue guidance for the next quarter due to persistent uncertainty regarding global IT spending.

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 refreshes will drive revenues while stringent cost controls will facilitate margin expansion over the long run.

However, the recent forecast for worldwide IT spending by Gartner raises concerns about NetApp’s near-term performance. Competition from EMC Corp. (NYSE:EMC) and HP Inc. (NYSE:HPQ) add to the woes.

NetApp currently carries a Zacks Rank #4 (Sell). Another stock worth considering in the technology sector is Imation Corp. (NYSE:IMN) , carrying a Zacks Rank #2 (Buy).