NetApp Earnings Preview: Software and Services to Drive Growth

-8.10%
Downside
105
Market
96.70
Trefis
NTAP: NetApp logo
NTAP
NetApp

NetApp (NASDAQ:NTAP) is set to announce its Q2 fiscal 2014 results on November 13. Last quarter, the company registered a 5% year-over-year increase in revenues, driven by growth in the software and services business which more than made up for the decline in the OEM hardware business. In addition, the revenues from branded hardware grew by 9% last quarter, the highest y-o-y increase in the previous seven quarters. The company should continue its strong momentum in Q2 as well, with its revenue guidance for Q2 implying close to 5% y-o-y growth. [1]

Our $45 price estimate for NetApp is about 10% ahead of the current market price.

See our full analysis on NetApp

Relevant Articles
  1. Up 27% Over The Past Year, Will Higher Margins And Cloud Sales Drive NetApp Stock Higher Post Q3 Earnings?
  2. Up 28% Since The Beginning Of 2023, What’s Next For NetApp Stock?
  3. What To Expect From NetApp’s Q4 Results?
  4. NetApp Stock Looks Attractive Despite Easing IT Spending
  5. Despite A Rise In Sales, Here’s Why NetApp Stock Has Underperformed The S&P
  6. After Strong Outperformance, Can NetApp Stock Maintain Its Streak?

Gross Margins To Improve From Increasing Software Mix

Growth in the software business last quarter was largely driven by the continued customer adoption of Data ONTAP, NetApp’s storage system operating system. The launch of ONTAP’s newer version, ONTAP 8.2, last quarter reinforced the company’s strong foundation in software-based data storage and saw the fastest rate of adoption among all of its major releases. Almost 60% of ONTAP’s installed base moved to the newer version, helping it hold on to its industry-leading customer base. Due to the already established base for software sales, we expect services revenue to grow accordingly.

The software business generates the highest margin among all of NetApp’s businesses. The recent growth in software revenues has, therefore, improved overall margins for the company and is likely to do the same in the upcoming quarter.

Branded Revenues Grow, OEM sales Suffer

OEM revenue, which consists of revenues from the sale of NetApp’s products by other companies like IBM and Fujitsu under their own brands, declined by 20% y-o-y in Q1 and is likely to be weak again this quarter. However, this was anticipated due to NetApp’s focus on higher-margin branded products as OEMs continue to reduce their purchase of NetApp sourced kits.

NetApp’s flash portfolio has been growing at a rapid rate due to the increasing requirement for high-speed arrays. According to management, during the last quarter more than 60% of FAS storage systems were shipped with flash pool or flash cache.  ((NetApp: Fiscal 1Q14 Financial Results, Company press release, August 2013)) Systems with flash pools, a hybrid disk and Solid State Drive (SSD) solution, grew 50% sequentially. Sales of the FlexPod system, a converged infrastructure solution offering preconfigured Cisco and NetApp components, increased 30% on a yearly basis.

Overall, gross margins are likely to benefit from a favorable product mix in the hardware segment with growing sales of high margin branded products and an increase in the high margin software sales.

Submit a Post at Trefis Powered by Data and Interactive ChartsUnderstand What Drives a Stock at Trefis

Notes:
  1. NetApp Reports Fiscal Year 2014 First Quarter Results, NetApp, August 14 2013 []