Strategic Product Sales To Help Drive NetApp’s Profitability

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NetApp

NetApp (NASDAQ:NTAP) is scheduled to report its fiscal Q3 earnings on February 14. Through the course of the previous fiscal 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. 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. This led to solid demand for NetApp’s all-flash storage product line, leading to significant revenue growth through second half of the year. At the end of the previous quarter, NetApp’s management provided solid guidance for Q3 FY’18 (quarter ended January).

We have created an interactive analysis where we have summarized the company’s Q3 FY’18 expectations. You can change expected revenue, gross margin and income margin figures for NetApp to gauge how it will impact expected EPS.

See our complete analysis for NetApp

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Key Growth Trends

NetApp’s strong performance was driven largely by strength in product sales combined with a higher mix of flash products (which have typically higher margins) in recent quarters. NetApp’s strategic product sales make up around 70% of total product sales. Strategic product sales (including sales for products such as the all-flash array) rose 23% on a y-o-y basis to over $1.6 billion through the three quarters of 2017. Comparatively, mature product sales were down 7% to $730 million, due to which total storage product sales were up by 12% year-over-year to $2.4 billion.

As a result of increased product sales, NetApp’s share in the storage systems market has risen this year. According to data compiled by IDC, NetApp’s market share has improved from 11.2% in the first half of 2016 to 13.5% through the first two quarters of 2017. We forecast NetApp’s market share to eventually increase to over 15% through the end of our forecast period.

An increasing mix of strategic products, which include certain high-margin flash storage products, has driven product gross margins in recent quarters. NetApp’s non-GAAP product gross margin has improved by almost 3 percentage points through 2017. This is the first time since 2014 that product gross margins have improved. We forecast margins to improve through 2018 and stabilize going forward.

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