NetApp (NTAP) Up 4.2% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for NetApp (NASDAQ:NTAP). Shares have added about 4.2% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is NetApp due for a pullback? 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’s Q2 Earnings And Revenues Surpass Estimates

NetApp reported second-quarter fiscal 2022 non-GAAP earnings of $1.28 per share, which surpassed the Zacks Consensus Estimate by 4.9% and increased 21.9% year over year. The company had anticipated non-GAAP earnings between $1.14 and $1.24 per share.

Revenues of $1.566 billion increased 11% year over year, topping the Zacks Consensus Estimate by 1.2%. The company had projected revenues in the range of $1.49-$1.59 billion. The upside was driven by strong demand in the Hybrid Cloud and Public Cloud divisions.

Region-wise, the Americas, EMEA and Asia Pacific contributed 55%, 29% and 15% to total revenues, respectively.

Direct and Indirect revenues contributed 24% and 76%, respectively, to total revenues.

Top-Line Details

Beginning first quarter of fiscal 2022, the company introduced two segments for financial reporting — Hybrid Cloud and Public Cloud.

Hybrid Cloud consists of revenues from the company’s enterprise datacenter business, which includes product, support and professional services.

The Public Cloud segment consists of revenues from products, which are delivered as-a-service and include related support. The portfolio is inclusive of the company’s cloud automation and optimization services, storage services as well as cloud infrastructure monitoring services.

Revenues in the Hybrid Cloud segment were up 8% year over year to $1.48 billion. Revenues in the Public Cloud segment were up 85.1% to $87 million.

Within the Hybrid Cloud segment, Product revenues (55% of segment revenues) increased 8.7% year over year to $814 million.

Revenues from Support Contracts (40%) totaled $590 million, up 6.7% year over year. Revenues from Professional and Other Services (5%) were $75 million, up 11.9% year over year.

Software product revenues amounted to $475 million, up 14%, driven by a favorable shift toward the all-flash portfolio.

In the quarter under review, the company expanded several cloud partnerships. For instance, NetApp announced that Amazon (NASDAQ:AMZN) FSx for NetApp ONTAP service is available everywhere globally. Amazon FSx for NetApp ONTAP is Amazon Web Services managed service and is based on NetApp ONTAP software. NetApp, in collaboration with Google (NASDAQ:GOOGL) Cloud, rolled out NetApp Cloud Volumes Service for Google Cloud in Salt Lake City and Tokyo, initially.

Key Metrics

During the fiscal second quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $3.1 billion, up 22% year over year.

Public Cloud Services recorded annualized recurring revenues (ARR) of $388 million, up 80% year over year and 15% quarter over quarter. The performance was driven by continued momentum in Azure NetApp Files, Spot and Cloud Insights. The company is witnessing solid momentum across customer cohorts with a fiscal second-quarter Public Cloud dollar-based net retention rate of 179%.

Combined software, recurring support and Public Cloud revenues stood at $1.2 billion, up 13% on a year-over-year basis, contributing 74% to total net revenues.

Operating Details

Non-GAAP gross margin was 68.3%, which contracted 140 basis points (bps) from the year-ago quarter’s levels.

On a non-GAAP basis, Product gross margin of 54.7% expanded 170 bps year over year but contracted 60 bps sequentially. Meanwhile, non-GAAP Services gross margin of 83.1% expanded 50 bps year over year but contracted 10 bps sequentially.

Management noted that recurring support, cloud and other services business is a growth driver with gross margin coming in at 92%.

Non-GAAP operating expenses were up 5.9% year over year to $696 million.

Non-GAAP operating income increased 28.5% year over year to $374 million. Non-GAAP operating margin expanded 330 bps to 23.9%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Oct 29, 2021, with $4.548 billion in cash, cash equivalents and investments compared with $4.547 billion as of Jul 30, 2021. Long-term debt was $2.634 billion as of Sep 30, 2021 compared with $2.633 billion as of Jul 30.

The company generated net cash from operations of $298 million during the reported quarter compared with $242 million in the prior quarter.

Free cash flow was $252 million (free cash flow margin of 16.1%) compared with $191 million in the previous quarter (free cash flow margin of 13.1%).

The company returned $237 million to shareholders in dividends ($112 million) and share repurchases ($125 million).

Guidance

The company anticipates non-GAAP earnings for third-quarter fiscal 2022 between $1.21 and $1.31 per share.

Net revenues are anticipated in the range of $1.525-$1.675 billion, indicating year-over-year growth of 9% at the mid-point.

For third-quarter fiscal 2022, NetApp expects non-GAAP gross margin to be 67-68% and non-GAAP operating margin to be 23%

NetApp raised fiscal year revenue outlook on robust demand pipeline for the second half of fiscal 2022 along with strong fiscal second-quarter results and the acquisition of CloudCheckr. In November 2021, NetApp concluded the buyout of CloudCheckr for an undisclosed sum. With the CloudCheckr buyout, the company is looking to bolster the Spot by NetApp FinOps solutions.

For fiscal 2022, NetApp projects revenue growth in the range of 9-10% compared with the earlier guidance of 8-9%. Public cloud ARR is expected between $510 million and $540 million compared with previous guidance of $450-$500 million

The company anticipates non-GAAP earnings for fiscal 2022 between $4.90 and $510 per share compared with previous range of $4.85-$5.05 per share.

For fiscal 2022, NetApp expects non-GAAP gross margin to be 68% and non-GAAP operating margin in the range of 23-24%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, NetApp has a nice Growth Score of B, 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

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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