NetApp (NTAP) Q2 Earnings Beat, Revenues Miss Estimates

NetApp, Inc. (NASDAQ:NTAP) reported second-quarter fiscal 2020 non-GAAP earnings of $1.09 per share, surpassing the Zacks Consensus Estimate by 15.96%. Moreover, the figure improved 2.8% from the year-ago quarter. The bottom line also exceeded management’s guided range of 91 cents to 99 cents per share.

Revenues of $1.371 billion lagged the Zacks Consensus Estimate by 1.13%. Moreover, the figure declined 9.6% from the year-ago quarter. Nonetheless, the top line came within the guided range of $1.325-$1.475 billion. The year-over-year decline includes negative impact of around one point of exchange rate fluctuations.

Quarter in Detail

Product revenues (56% of total revenues) decreased 15.6% year over year to $771 billion owing to macroeconomic headwinds.

Per management, broader weakness in macroeconomic environment is compelling enterprises to trim capital expenditure, which is affecting storage business. Moreover, enterprise software license agreements worth $20 million from the year-ago quarter did not get repeated in the reported quarter, and negatively impacted top-line performance.

Revenues from products under Strategic grouping came in at $442 milion, down 8.9% 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 came in at $329 million, down 23.1% year over year. The offerings include Hybrid FAS products, and related add-on OS software and hardware, branded E-Series and OEM products.

Management noted that the combined revenues of Hardware maintenance and Software maintenance amounted to $540 million, flat on a year-over-year basis.

Software Maintenance revenues (19%) came in at $254 million, up 7.6%.

Hardware Maintenance and Other Services revenues (25%) were $346 million, declining almost 6% from the year-ago quarter.

Revenues from Hardware Maintenance Support Contracts came in at $286 million, down 5.6% year over year. Revenues from Professional and Other Services came in at $60 million, down 7.7%.

Region wise, the Americas, EMEA and Asia Pacific accounted for 56%, 29% and 14% of total revenues, respectively.

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

Key Metrics

During the fiscal second quarter, the company’s All-Flash Array Business improved 30% sequentially. Its annualized net revenue run rate came in at $2.2 billion.

Cloud Data Services recorded annualized recurring revenues of $72 million, up 167% year over year. Robust adoption of Microsoft (NASDAQ:MSFT) Azure NetApp Files is a key driver.

Meanwhile, Private Cloud business recorded run rate of $312 million, up 28% year over year. Growing clout of NetApp HCI, SolidFire and StorageGRID offerings aided growth.

Product Roll Outs & Partnerships Remain Noteworthy

NetApp launched new cloud-based services in order to provide hybrid storage architecture. The company unveiled cloud-capable offerings to facilitate high-performance infrastructure at VMworld 2019, namely, NetApp Kubernetes Service (NKS), NetApp HCI for VDI with VMware Horizon 7, and NetApp HCI Implementation Service for VMware Private Cloud at VMworld 2019.

The company’s NetApp ONTAP System Manager 9.6 is aimed at aiding users utilize the latest ONTAP System Manager GUI, or Optimized GUI, which provides an interface to simplify storage management tasks.

NetApp also rolled out SnapCenter 4.2 dashboard, to facilitate seamless data reporting.

In a bid to enable VMware vSphere Client users utilize HTML5-based framework, NetApp unveiled advanced Virtual Storage Console (VSC), VMware Storage Replication Adapter (SRA) and NetApp VASA Provider.

NetApp updated several hybrid multi-cloud offerings with high-efficiency and high-performance functionalities, to aid enterprises support complex workloads with enhanced storage capacity.

Furthermore, the company expanded all-flash storage portfolio with end-to-end NVMe-based NetApp EF600 storage array in the fiscal second quarter.

Additionally, the company launched memory-accelerated FlexPod based on NetApp MAX Data technology that can be integrated with Intel’s Optane memory to accelerate complex workloads and advanced applications.

Moreover, NetApp entered into collaboration with Alibaba (NYSE:BABA) and Equinix (NASDAQ:EQIX). Per the deal, NetApp Private Storage (NPS) for Cloud has been integrated with Platform Equinix and Alibaba Cloud. Notably, the integration is aimed at enabling enterprises based in Indonesia to run complex workloads and applications across the multicloud platform, simplifying data management in a secure manner.

In partnership with NVIDIA (NASDAQ:NVDA), NetApp is enabling customers to accelerate AI projects with joint ONTAP AI solutions.

The company has also partnered Broadcom (NASDAQ:AVGO) on NetApp Verified Architecture, which demonstrates VMware installation on NetApp ONTAP 9.6, by utilizing Broadcom’s Brocade 32GB FC switches and Emulex 32GB HBAs.

Operating Details

Non-GAAP gross margin was 68.6%, which expanded 370 bps from the year-ago quarter.

Product gross margin of 57.3% expanded 320 bps. Software Maintenance gross margin of 95.7% contracted 90 bps on a year-over-year basis. Hardware Maintenance and Other Services gross margin declined 220 bps to 73.7%.

Non-GAAP operating expenses were down 2.8% year over year to $631 million.

Consequently, non-GAAP operating margin expanded 40 bps to 22.5%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Oct 25, 2019, with $2.987 billion in cash, cash equivalents and investments compared with $3.532 billion in the previous quarter. Long-term debt (including current portion) was $1.145 billion compared with $1.545 billion in the previous quarter.

The company utilized net cash from operations of $53 million during the quarter compared with $319 million generated in the fiscal first quarter.

Free cash flow was ($89) million compared with $287 million in the previous quarter.

Further, the company repurchased shares worth $500 million and paid out dividends worth $111 million in the reported quarter.

NetApp announced quarterly cash dividend of 48 cents per share payable Jan 22, 2019, to shareholders on record as of Jan 3, 2019.

Guidance

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

NetApp anticipates non-GAAP earnings for third-quarter fiscal 2020 between $1.14 and $1.22 per share, the mid-point of which — $1.18 — is below the Zacks Consensus Estimate of $1.19.

Moreover, net revenues are anticipated to be in the range of $1.39-$1.54 billion — the mid-point of $1.465 billion is below the consensus mark of $1.50 billion.

For third-quarter fiscal 2020, NetApp expects gross margin to be 67% and operating margin to be 22%.

For fiscal 2020, NetApp updated guidance. The company now anticipates net revenues to decline 8% from fiscal 2019. In the prior guidance, management anticipated revenues decline in the 5-10% range.

Non-GAAP earnings per share are now projected to decline 5% to 8% on a year-over-year basis, excluding contribution from buybacks.

The company now anticipates gross margin to be in the range of 67-68%, compared with prior guidance of 66-67%. Operating margin is now projected to be in the band of 21-22%.

Zacks Rank & Other Stocks to Consider

NetApp currently carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks in the broader technology sector worth considering are Alteryx, Inc. (NYSE:AYX) , Instructure, Inc. (NYSE:INST) and Fortinet, Inc. (NASDAQ:FTNT) . All the three stocks flaunt a Zacks Rank #1 (Strong buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Alteryx, Instructure and Fortinet is currently pegged at 39.85%, 30% and 14%, respectively.

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