NetApp’s Strategic Product Line To Help Drive Revenues, Profits
NetApp (NASDAQ:NTAP) is scheduled to report its fiscal Q2 earnings on Wednesday, November 15. Through the course of the year, NetApp witnessed a decline in net revenues driven by low product sales. Moreover, as a result of low demand for storage hardware coupled with falling prices, the company-wide gross margin was slightly lower than the comparable prior year period. Comparatively, NetApp’s services and software maintenance revenues have improved to offset the decline from product sales. However, this trend was reversed in NetApp’s fourth fiscal quarter 2017 ended April, with the company’s “Strategic Product” sales driving much of the growth in revenues as well as gross margins.
We have a $39 price estimate for NetApp, which is around 15% lower than the current market price. NetApp’s stock price has risen by over 25% this year, following better than anticipated results in previous quarters.
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Guidance For Fiscal Q2
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. This is expected to continue, with the company anticipating long-term margins of around 62-64% through the end of the decade. The operating margin is forecast to improve by over 4 percentage points to 16.5%, due to sustained efforts by the company to reduce operating expenses, largely by reducing headcount. Resulting net income per share is also expected to increase significantly, as shown below.
Key Trends & Highlights
In recent years, global spending on conventional external storage arrays has declined, due to which most large vendors such as Dell-EMC, NetApp, IBM (NYSE:IBM) and HP Enterprise (NYSE:HPE) have had a tough period in terms of storage hardware product sales. However, the trend reversed for NetApp in at the beginning of the year, with product sales driving significant revenue growth. NetApp’s storage product sales have risen 11% year-over-year to $1.6 billion this year. Within the product division, strategic product sales were up 23% y-o-y to $1.1 billion, while mature product sales were down 7% to $485 million. A significant portion of strategic products included NetApp’s all-flash array leading to strong growth in sales.
While industry-wide revenues from sales of external storage systems were down by mid single digits through the year, NetApp’s product sales rose double digits. NetApp was the only large vendor to witness growth in revenues during the quarter, according to data compiled by IDC. As a result, its market share in the external storage systems market was by over two percentage points to 13.5%.
NetApp has also reported an improvement in gross margins across segments during the year. The product gross margin improved due to a a higher mix of flash storage products sold. On the other hand, services and software maintenance gross profit margins also rose despite limited growth in revenues. The company anticipates higher margins for the coming quarters as well. We forecast margins to improve gradually through the end of our forecast period.
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