NetApp Earnings Preview: Stagnating Hardware Market To Pressure Top Line

NetApp (NASDAQ:NTAP) is scheduled to report its fiscal Q1 earnings on August 17. ^[1] Over the last couple of years, NetApp’s core storage hardware business has struggled due to stagnating demand and increased competition from smaller original design manufacturer (ODM) vendors. Most other large vendors, such as EMC (NYSE:EMC), Hewlett-Packard Enterprise (NYSE:HPE), Hitachi Data Systems and IBM (NYSE:IBM), have also struggled in this environment. As a result, NetApp’s top line growth over the last few quarters has been primarily dependent on its software and services businesses. In the most recent quarter, NetApp reported a 17% decline in storage product revenues to under $760 million, while corresponding hardware maintenance and services revenues were down 3% y-o-y to $389 million. Comparatively, software maintenance revenues were up 3% y-o-y to $234 million as shown in the table below. Despite lower revenues from hardware maintenance and services, NetApp reported a massive improvement in the segment’s gross profit margin.

This trend could continue in the June quarter and through the rest of the year as well, with storage product sales expected to remain low. We forecast NetApp’s full year revenues to be lower than 2015 levels owing to weakness in the storage hardware division.

NetApp’s share in the storage systems market has fallen due to low demand for hardware over the last couple of years, with smaller vendors gaining share. We expect the trend to continue in the near term, and forecast NetApp’s share to decline to 10.5% over the next few years from over 13% in 2013. Thereafter we forecast NetApp’s share to rise, albeit more gradually than historic rates, to around 11% through the end of our forecast period.

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] This should help the company sustain its operating profit margin through the end of the year.

See our complete analysis for NetApp

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. NetApp Hosts First Quarter Fiscal Year 2017 Financial Results Webcast, NetApp Press Release, August 2016 [↩]
2. NetApp To Slash 12 Percent Of Workforce, Fortune, February 2016 [↩]