How Did NetApp Fare In Q4, And What Can We Expect From Fiscal 2020?

by Trefis Team
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NetApp (NASDAQ: NTAP) recently reported its Q4 fiscal 2019 results, which were slightly below our estimates. This note details the company’s Q4 performance, and Trefis’ forecasts for the full fiscal 2020. You can view our interactive dashboard analysis ~ How Did NetApp Fare In Q4, And What Can We Expect From Fiscal 2020? In addition, you can see more of our data for Information Technology companies here.

How did NetApp’s top line fare in Q4?

  • NetApp’s total revenues declined 3% to $1.59 billion in Q4 fiscal 2019.
  • This can partly be attributed to currency headwinds, and lower maintenance renewals.
  • The company’s revenue has largely trended higher in the recent quarters from $1.47 billion in Q1 fiscal 2019 to $1.59 billion in Q4 fiscal 2019.

What impacted the Q4 earnings?

  • Adjusted earnings per share grew 9% from $1.12 in Q4 fiscal 2018 to $1.22 in Q4 fiscal 2019.
  • The growth in earnings can be attributed to a slight improvement in margins, and lower share count, partly offset by lower revenues.

How does the revenue growth in the recent quarters compare to its peers?

  • NetApp’s revenues have declined at an average rate of 0.4% over the last four quarters. This has been better performance when compared to its peers.
  • Seagate’s revenue declined at an average rate of 4.3% over the last four quarters.
  • Western Digital’s revenue declined at an average of 7.4% over the last four quarters.
  • The decline in Western Digital has been higher given its exposure to flash-based products, which has seen massive price declines over the past few quarters, while NetApp has benefited from the transition to flash-based storage.

What are NetApp’s key sources of revenue?

  • NetApp generates its revenues from storage solutions and related products and services. The company reports its revenue under three segments ~ Product, Software Maintenance, and Services.
  • Product segment includes revenues generated from NetApp’s storage-based hardware and related software sales. The segment accounted for a little under 60% of the company’s total revenues in fiscal 2018.
  • Software Maintenance refers to product upgrades, enhancements, and technical support for customers. The segment contributed 16% to the company’s top line in the previous fiscal.
  • NetApp’s services revenue refers to revenues earned from maintenance of hardware sold. It also includes revenues from professional services, and training. This is a recurring revenue stream, and it can be linked to the company’s installed base.

How much can NetApp’s top line grow in fiscal 2020?

  • NetApp’s total revenues will likely grow 5.4% to $6.48 billion in fiscal 2020.
  • This growth should primarily be led by the Products segment, which should benefit from the transition to all-flash arrays. The segment revenues could grow in high single-digits in 2020 to $4.0 billion. However, the global server market could see a slowdown in 2019, given the expected launch of new processors in the near term. This could impact the overall sales growth in the near term.
  • Software maintenance could also see mid-single-digit growth, benefiting from overall growth in the company’s installed base. The company’s sale of add-on software and infrastructure solutions products could further aid the revenue growth. However, the sales growth could be impacted by slowdown in demand from China, and ongoing trade tensions between the U.S. and China.
  • Services segment could see modest decline to $1.43 billion in fiscal 2020, due to lower maintenance renewals. Services revenues can be linked to the company’s installed base, which could be impacted by the overall demand outlook in the near term, primarily on the enterprise side.

How much can NetApp’s full fiscal earnings grow?

  • NetApp’s full fiscal 2020 earnings will likely be $5.05 per share on an adjusted basis, reflecting 12% growth over the prior fiscal.
  • Earnings growth can be attributed to higher revenues and lower share count. The company has guided for a slight growth in margins.
  • Average consensus earnings for fiscal 2020 ~ $5.01.

What is the price estimate of NetApp based on the above?

  • Our price estimate of $81 for NetApp is based on a 16x price to earnings multiple, and earnings of $5.05 per share in fiscal 2020.
  • The multiple for NetApp’s valuation is higher than that of Western Digital and Seagate, given the impact of NAND pricing has been favorable for NetApp.



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