Key Takeaways And Trends From NetApp’s Q4

NetApp (NASDAQ: NTAP) reported strong fiscal fourth quarter results, as both its revenue and earnings per share beat market expectations. The stock price, however, dipped slightly after the earnings release. This is not a surprise given that the company rarely sees positive earnings reactions, as it has a history of posting conservative guidance. So while the earnings beat was not a big surprise, the company’s guidance came in below expectations. While this may just be a continuation of the trend of conservative guidance, investors were clearly disappointed in the outlook. That said, we continue to focus more on the company’s strengths. Its revenues grew by 10.8% year-over-year to $1.64 billion, largely driven by an impressive 25% growth in strategic products. Moreover, despite the negative reaction from investors, the company’s EPS increased 22% year-over-year to $1.05.

We have a $74 price estimate for NetApp, which is ahead of the current market price. Our interactive dashboard details our forecasts and estimates for the company. Below we outline the key takeaways from NetApp’s Q4.

Strategic Products Led Growth In Product Business, Other Businesses Remained Fairly Stable

NetApp’s strategic products business continues to be the principal contributor to the company’s growth. All-flash array products have been a cornerstone of the company’s strategic products business, and saw 43% year-over-year growth. The success of flash products has also bodes well for the Storage Area Network (SAN) and converged infrastructure markets. The company is averaging two SAN displacements per day in 2018, which has resulted in new customer acquisitions and wallet share gains with existing customers. Further, the company is increasingly gaining traction in the HCI market. Other businesses, however, remained fairly flat for the company, signaling the importance of its success in strategic products to drive overall growth in the coming quarters.

Currency benefits and improved sales discipline helped the company expand its gross margin by 63 basis points to 62.3%. This was further boosted by relatively higher sales of strategic products, which includes high-margin flash storage products.

Future Outlook

In the last fiscal year, NetApp witnessed solid revenue growth, driven primarily by strategic products. Solid demand for the company’s all-flash storage product line led to strong revenue growth, which we expect will continue in the upcoming quarters. The transition to flash storage arrays has been a positive for the company, with this part of the business seeing around 43% year-on-year growth. As a result of increased product sales, NetApp’s share in the storage systems market has been on the rise, per data compiled by IDC. Given that the company has been gaining traction among its customers with the help of solutions such as Data Fabric and ONTAP Data Management Software, we expect further growth in NetApp’s market share. Meanwhile, the company has also launched AFF800, the first 30TB NVMe platform SSD, which will likely generate interest in the enterprise storage market.

Moreover, the deal to power Microsoft’s Azure Enterprise NFS service and the launch of NFLEX converged infrastructure with Fujitsu will further boost the top line. The company has also recently landed a high-profile deal with Google to integrate its services in the Google Cloud platform. That said, NetApp experiences some level of seasonality, with the first quarter generally being the weakest.

We expect the company to generate about $1.46 billion in revenue in the first quarter. Furthermore, we expect NetApp’s net margin to slightly improve in the near term due to high-margin flash products. Moreover, with NAND prices stabilizing, the company should be able to optimize the pricing of its products. We forecast adjusted net income of about $233 million, or EPS of about $0.85.

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