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NetApp (NTAP) Stock Down Despite Q3 Earnings Beat

NetApp, Inc. NTAP reported third-quarter fiscal 2021 non-GAAP earnings of $1.10 per share, which surpassed the Zacks Consensus Estimate by 8.91%. The company had anticipated non-GAAP earnings between 94 cents and $1.02 per share. However, the bottom line declined 5.2% from the year-ago quarter.

Revenues of $1.47 billion increased 4.7% year over year, outpacing the Zacks Consensus Estimate by 2.52%. The company had projected revenues in the range of $1.34 billion to $1.49 billion. The improvement was driven by strength in all-flash storage business, and Public Cloud Services, which per management “outperformed the market.” Also, favorable foreign exchange movement expanded growth by “two points.”

Region wise, the Americas, EMEA and Asia Pacific accounted for 53%, 32% and 15% of total revenues, respectively.

Direct and Indirect revenues represented 24% and 76%, respectively, of total revenues.

Stock Down on Not-So-Encouraging Q4 Earnings View

NetApp is banking on improvement in adoption of Public Cloud Services offerings.

The company anticipates non-GAAP earnings for fourth-quarter fiscal 2021 between $1.06 and $1.14 per share. The mid-point of the guided range –– $1.10 –– matches the Zacks Consensus Estimate for fiscal fourth-quarter earnings. This might have hurt investors sentiments.

Despite better-than-expected fiscal third-quarter earnings, following a not-so-upbeat guidance, shares of NetApp were down more than 6% in the pre-market on Feb 25.

NetApp, Inc. Price, Consensus and EPS Surprise

NetApp, Inc. price-consensus-eps-surprise-chart | NetApp, Inc. Quote

Net revenues are anticipated to be $1.44-$1.54 billion. The mid-point of the guided range –– $1.49 billion –– is above the consensus mark for fiscal fourth-quarter revenues, which currently stands at $1.46 billion.

Notably, for fourth-quarter fiscal 2021, NetApp expects non-GAAP gross margin to be 67% and non-GAAP operating margin to lie in 21-22% range.

Top Line Details

Product revenues (52.7% of total revenues) decreased 1.5% year over year to $775 million. The decline can be attributed to coronavirus crisis-induced macroeconomic headwinds. Nevertheless, the company witnessed gains from momentum in digital transformation and hybrid cloud projects across enterprise end-markets, particularly from strength in the Americas.

In a bid to provide more visibility in to high-margined software business, the company is now breaking up product revenues into software and hardware. Revenues from products under Hardware grouping were $347 million, down 15.8% year over year. Revenues from products under Software grouping amounted to $428 million, up 14.1% year over year driven by solid mix of All-flash FAS products.

Software Maintenance revenues (22.7%) were $334 million, up 27% year over year.

Hardware Maintenance and Other Services revenues (24.6%) were $361 million, up 2% year over year. Revenues from Hardware Maintenance Support Contracts totaled $293 million, flat year over year. Revenues from Professional and Other Services were $68 million, up 11.5% year over year.

Key Metrics

During the fiscal third quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $2.6 billion, up 11% year over year. Moreover, all-flash revenues totaled $652 million, up 11% on a year-over-year basis.

Public Cloud Services recorded annualized recurring revenues (ARR) of $237 million, up 186% year over year and 10% on a quarter-over-quarter basis. The company is witnessing solid momentum across customer cohorts with fiscal third-quarter dollar-based net retention rate of 227%. Management is optimistic on strong sales pipeline and revised its projection on Cloud ARR. The company is now on track to deliver $260-$290 million in fiscal 2021 in Cloud ARR, compared with $250-$300 million projected during its fiscal second-quarter earnings conference. Management had then expected to cross $1 billion mark in Cloud ARR in fiscal 2025.

Moreover, its partnerships with Microsoft’s MSFT Azure, Alphabet’s GOOGL Google Cloud platform, Amazon’s AMZN Amazon Web Services are expected to aid it in expanding customer base.

Software and recurring maintenance and cloud revenues of $1.055 billion were up 13.3% on a year-over-year basis, accounting for 72% of total net revenues.

Operating Details

Non-GAAP gross margin was 67.3%, which contracted 50 basis points (bps) from the year-ago quarter.

On a non-GAAP basis, Product gross margin of 53.4% contracted 200 bps year over year. Sequential improvement of 40 bps can be attributed to higher-margined all-flash mix. Meanwhile, Software Maintenance gross margin of 93.1% contracted 230 bps, and Hardware Maintenance and Other Services gross margin shrunk 150 bps to 73.4% year over year.

Further, management noted that recurring maintenance, cloud and other services business is a growth driver, with gross margin coming in at 82.9%, which expanded 30 bps sequentially.

Non-GAAP operating expenses climbed 4.4% year over year to $668 million. As a percentage of net revenues, the figure contracted 20 bps on a year-over-year basis to 45.4%.

Non-GAAP operating income improved 3.2% year over year to $668 million. Non-GAAP operating margin shrunk 30 bps to 21.9%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Jan 29, 2021, with $3.894 billion in cash, cash equivalents and investments compared with $3.646 billion as of Oct 30, 2020. Long-term debt (including current portion) was $2.632 billion as of Jan 29, 2021, compared with $2.631 billion as of Oct 30, 2020.

The company generated net cash from operations of $373 million during the reported quarter compared with $161 million in the fiscal second quarter.

Free cash flow was $341 million (free cash flow margin of 23.2%) compared with $121 million in the previous quarter (free cash flow margin of 8.5%).

Further, the company paid out $107 million worth dividends. The company reinitiated share repurchase program during the fiscal third quarter buying back shares worth $50 million. In total, the company returned $157 million to shareholders.

On Feb 24, NetApp announced quarterly cash dividend of 48 cents per share to be paid out on Apr 28, 2021, to shareholders of record as of Apr 9, 2021.

Zacks Rank

NetApp currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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