NetApp Reports Strong Results Driven By Strength In Strategic Product Sales

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NetApp (NASDAQ:NTAP) announced its fiscal Q1 earnings on August 16, reporting a 2% increase in net revenues to just over $1.3 billion. Reported net revenue and gross margin figures were in line with the mid point of the guidance provided by the company at the end of the previous quarter. Higher revenues and healthier margins were largely due to strength in the company’s strategic solutions, which make up roughly 70% of product sales. Over the last two quarters, revenue growth has come from product sales rather than the software maintenance or services segments. Storage product sales were up by 11% year-over-year to $723 million for the quarter. Within the product division, strategic product sales (including sales for products such as the all-flash array) were up 22% y-o-y to $596 million while mature product sales were down 10% to $256 million. With product revenues rising significantly, both hardware and software maintenance revenues suffered – a trend likely to accompany the increase in product sales in future quarters as well. Correspondingly, revenues from hardware maintenance support contracts were down 8% to $298 million.

An increasing mix of strategic products, which include certain high-margin flash storage products, led to an improvement in product gross margins. NetApp’s non-GAAP gross margin for the quarter stood at 63.8%, which was 140 basis points higher than the year-ago period. The reported gross margin was well above the mid-point of the guided range of around 62.5%. In addition to the product division, both maintenance divisions reported an improvement in gross margins, as shown below. The company attributed the increase in product gross margin to improved sales discipline during the quarter.

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In recent quarters, NetApp has reported an improvement in its adjusted operating profit margin, attributable to cost reduction measures primarily by reducing headcount. NetApp successfully improved its non-GAAP operating margin by almost 4 percentage points to 15.8% for the quarter. Resulting earnings per share stood at 62 cents per share, which was 35% higher on a y-o-y basis as shown in the table on top.

Robust Guidance For Q2’18

Netapp’s management has given positive guidance for the current quarter. Net revenues are forecast to increase by around 7% over the prior year quarter to $1.39 billion, while the gross margin may be 80 basis points higher on a y-o-y basis. The operating margin is forecast to improve by over 4 percentage points to 16.5%, leading to robust growth in diluted earnings per share, as shown below.

We are in the process of revising our $38 price estimate for NetApp, which is over 10% lower than the current market price. NetApp’s stock price has risen by over 15% this year, following a strong set of recent quarterly results.

See our complete analysis for NetApp

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