NetApp (NTAP) Down 8.9% 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 8.9% 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 the most recent earnings report in order to get a better handle on the important catalysts.

NetApp Tops Q2 Earnings & Revenues Estimates

NetApp Inc (NASDAQ:NTAP). delivered fiscal second-quarter 2019 non-GAAP earnings of $1.06 per share, beating the Zacks Consensus Estimate by 7 cents. The figure also surged 32.5% from the year-ago period and was within the guided range.

Revenues of $1.517 billion increased 7.2% from the year-ago quarter, surpassing the Zacks Consensus Estimate of $1.511 billion. The figure was within the guided range.

Solid product adoption, increasing deal wins, and expanding customer base across varied geographies drove year-over-year growth. Moreover, the company’s transition to data fabric strategy (a software-defined approach to data management) has been a key catalyst behind Enterprise License Agreement (ELA) wins.

Further, NetApp witnessed increased momentum of its hyper-converged infrastructure (HCI) solutions from enterprises undergoing digital transformation. In fact, the company’s HCI is anticipated to be a positive for the top line in the long run. Expanded new cloud partnerships and open source projects were other notable factors.

Quarter Details

Product revenues (60.2% of total revenues) increased 11.4% year over year to $913 million. Growth was primarily driven by continuous strength in company’s all-flash array business and approximately $20 million from strategic enterprise agreements.

Strategic solutions comprised around 71.1% of net product revenues. It increased 14.7% on a year-over-year basis to $649 million. Mature solutions contributed 28.9% net product, up 4.3% year over year, came in at $264 million.

The combination of Software maintenance revenues, Hardware maintenance and other services revenues of $604 million declined 1.3% from the year-ago quarter.

Individually, software maintenance revenues (15.6%) came in at $236 million, up 5.4% year over year due to robust performance of the company’s cloud data services portfolio and growth in its installed base. Hardware maintenance and other services revenues (24.3%) were $368 million, declining 1.1% from the year ago quarter.

Geographically, Americas, EMEA and Asia Pacific accounted for 57%, 28% and 15% of total revenues, respectively.

Notable Developments

In a bid to expand presence in China, NetApp entered into a multi-year partnership with Lenovo, enabling it to expand capabilities of Data Fabric strategy, consequently its adoption. The partnership is aimed at enabling enterprises to accelerate digital transformation of their business processes.

NetApp is increasingly focused on strengthening its hybrid cloud domain with new capabilities. The company recently acquired StackPointCloud, a provider of cloud-based Kubernetes as-a-service (“KaaS”), for an undisclosed amount in a bid to release Kubernetes service.

NetApp’s converged infrastructure capabilities continued to expand as a result. The new NetApp Kubernetes Service (“NKS”) designed for multi-cloud deployments supports cloud-based stack for leading cloud platforms, including the likes of Amazon’s Amazon (NASDAQ:AMZN) Web Services ("AWS"), Microsoft’s Azure, Google (NASDAQ:GOOGL) Cloud, and the company’s NetApp HCI platform.

The company also announced open source project —Trident. The new NKS along with Trident are aimed at assisting software developers to create and deploy robust applications on leading cloud and private cloud platforms by leveraging the company’s high performance broad-based storage portfolio.

In an effort to extend the utilization of NetApp Data Fabric, the company unveiled new data services and FlexPod solutions. These initiatives will enable enterprises to capitalize on the potential of artificial intelligence (AI).

The company partnered with DreamWorks in a bid to develop a robust IT infrastructure and data services leveraging NetApp’s Data Fabric.

NetApp Cloud Volumes was selected by WuXiNextCODE to enable management and seamless deployment of data driven applications, which is a positive.

The company also launched NetApp ONTAP AI proven architecture, which accelerates accessibility to data as per the scale and speed requirements of AI. The architecture leverages NVIDIA’s DGX supercomputers.

The company also introduced MAX Data solution to enable utilization of persistent storage memory in servers. The new solution is aimed at accelerating data processing suitable for AI application standards, enabling data analytics in real-time.

Furthermore, the company enhanced its HCI portfolio with new enhancements. In a bid to facilitate virtualization technology processes in virtual desktop infrastructure (VDI), NetApp enabled support for compute nodes which are GPU-based. The new capabilities also include support for OpenShift Container Platform of Red Hat.

The availability of NetApp Cloud Volumes for Google Cloud Platform (“GCP”) was announced in the reported quarter. NetApp Cloud Volumes for AWS and GCP were enhanced with new DevOps.

The company is positive about making the most of the exponential rate of data growth with its cloud-integrated all-flash solutions that fit well with hybrid cloud infrastructure. During the second quarter, the company’s all-flash array business surged 29% on a year-over-year basis. Its annualized net revenue run rate was $2.2 billion. The cloud data services recorded a run-rate of $27 million.

The company’s expertise in the flash array market is aiding its popularity in storage area network (SAN) and converged infrastructure markets.

Operating Details

Non-GAAP gross margin was 64.9%, which expanded 40 basis points (bps) from the year-ago quarter. The expansion came on the back of higher product gross margin of 54.1% which expanded 140 bps. Gross margins also gained from the software portion of the ELAs.

Software maintenance gross margin of 96.6% contracted 70 bps on a year-over-year basis. Meanwhile, Hardware maintenance and other services gross margin expanded 110 bps to 71.5%.

Non-GAAP operating margin expanded 310 bps on a year-over-year basis to 22.1%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Oct 26, 2018, with $4.3 billion in cash, cash equivalents and investments as compared with previous quarter of $4.8 billion.

The company generated cash from operations of $165 million during the quarter compared with $326 million in the previous quarter. Free cash during the reported quarter came in at $122 million.

Further, the company repurchased shares worth $561 million and paid $102 million as dividends in the reported quarter.

NetApp announced quarterly cash dividend of 40 cents per share payable on Jan 23, 2019.

Guidance

For third-quarter fiscal 2019, NetApp expects non-GAAP earnings between $1.12 and $1.18 per share.

Net revenues are anticipated to be in the range of $1.55-$1.65 billion, implying growth of 4% at the mid-point from the year-ago quarter (including 1 point impact of exchange rate fluctuations).

NetApp expects non-GAAP gross margin to be in the range of 62.5-63.5% and non-GAAP operating margin to be roughly around 22%.

For fiscal year 2019, NetApp continues to anticipate net revenues to increase in mid-single digits.

NetApp anticipates gross margin to be range of 63-64% and operating margin to be approximately 22%. Effective tax rate is expected to be approximately 18%. Free cash flow margin is anticipated to come around 19-21%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, NetApp has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, NetApp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.