NetApp’s Stock Surges Despite Low Quarterly Revenues

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NTAP: NetApp logo
NTAP
NetApp

NetApp (NASDAQ:NTAP) announced its fiscal Q1 2017 earnings, reporting a 3% annual decline in net revenue to just under $1.3 billion. [1] The last few quarters have been tough for the company in terms of product sales, with its core hardware sales stagnating. The trend continued in the fourth fiscal quarter, with product sales remaining low at $660 million for the quarter. This represented a 1% annual decline, largely because of easier year-over-year comparisons. Additionally, hardware maintenance revenues were down 7% y-o-y to $393 million. Despite low revenues, margins were up for both the hardware maintenance and software maintenance divisions.

ntap_q1_17e2

Over the last couple of years, the storage hardware market has struggled due to stagnating demand and increased competition from smaller original design manufacturer (ODM) vendors. As a result, most large vendors including NetApp, EMC (NYSE:EMC), Hewlett-Packard Enterprise (NYSE:HPE) and IBM (NYSE:IBM) have struggled in this environment. The trend is likely to continue through the end of the year, as we forecast NetApp’s product revenues to fall by 6% y-o-y to $2.9 billion. Moreover, pricing pressure has led to falling margins for the product division, due to which the full year gross margin (non-GAAP) could fall by over 3 percentage points to around 47%.

ntap_q1_17e1

NetApp’s share in the storage systems market has consistently fallen over the last couple of years due to low demand for hardware. NetApp’s share stood at over 13% in 2013, which subsequently fell to 10.5% last year. This could decline to around 10% over the next couple of years before rising in the long run.

On the other hand, the company has made efforts to improve operational efficiency by reducing cash operating expenses over the last few quarters. This resulted in lower sales & marketing and research & development costs through fiscal 2016. NetApp’s management aims to lower its selling, general and administrative expenses in the coming quarters to improve profitability. Earlier this year, NetApp’s management indicated that it will cut 1,200 jobs by July, which is roughly 12% of the company’s total workforce. [2] The company reported a 13% annual decline in operating expenses to $652 million for the quarter as a result of this transformation. NetApp’s operating profit margin stood at 12.1% for the quarter – slightly higher than the guidance given at the end of the March quarter. The company further expects an operating margin of around 13.5% in the coming quarter. [3] As a result, NetApp’s net income stood at $64 million – significantly better than the net loss in the year ago period. Moreover, NetApp’s non-GAAP diluted EPS for the quarter stood at $0.46 which beat consensus and previous guidance by around 7 cents. Despite limited top line growth across revenue streams, NetApp’s operational efficiency led to a profitable quarter for the company. As a result of a positive set of results and a robust guidance for future quarters, NetApp’s stock jumped 15% on Thursday to around $33. We are in the process of revising our $27 price estimate for NetApp’s stock, which implies a 20% discount to the current market price.

See our complete analysis for NetApp

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Notes:
  1. NetApp Reports First Quarter 2017 Results, NetApp Press Release, August 2016 []
  2. NetApp To Slash 12 Percent Of Workforce, Fortune, February 2016 []
  3. NetApp Q1’17 Earnings Call Transcript, Seeking Alpha, August 2016 []