NetApp Inc. (NTAP - Analyst Report) reported lower-than-expected first-quarter fiscal 2016 results. The company’s adjusted earnings (including stock-based compensation and settlement of income tax audit but excluding amortization and other one-time items) came in at 4 cents, which missed the Zacks Consensus Estimate by a couple of cents.
However, shares of NetApp went up nearly 12% in after-hours trading yesterday, primarily due to an encouraging second quarter fiscal 2016 guidance.
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Quarter Details
NetApp’s revenues decreased 10.3% year over year to $1.335 billion and missed the Zacks Consensus Estimate of $1.347 billion. The year-over-year decline was primarily due to unfavorable foreign exchange rates. Also, a drop in Product revenues impacted the quarter’s revenues.
On an operating segment basis, Product revenues (50% of total revenue) decreased 24.8% from the year-ago quarter to $664 million. The decline was primarily due to lower-than-expected sales of ONTAP 7-Mode sales and unfavorable foreign exchange impact.
Software Maintenance revenues (18%) were up 12.2% on a year-over-year basis and came in at $248 million. Also, Hardware Maintenance & Other Services (32%) increased 9.9% year over year to $423 million. Within Service revenues, hardware maintenance support contracts revenues increased 14.2% from the year-ago figure, which more than offset the decline in revenues from Professional & Other Services (down 7.2% year over year).
The increase in software maintenance and hardware maintenance and other services revenues was primarily due to continuous growth in installed base and renewals from existing customers coupled with the advantage from an extra week during the quarter.
Adjusted gross margin (including stock-based compensation but excluding amortization and other one-time items) contracted 100 basis points (bps) from the year-ago quarter to 63%. The decrease was primarily due to lower product gross margin. Also, a lower revenue base and foreign currency headwinds negatively impacted the gross margin.
Adjusted operating expenses (including stock-based compensation but excluding amortization and other one-time items), as a percentage of revenues, increased 880 bps to 61%.
Adjusted operating margin (including stock-based compensation but excluding amortization and other one-time items) contracted 990 bps to 1.9% from the year-ago quarter, primarily due to higher operating expenses, as a percentage of revenues, and lower gross margin.
Net income (including stock-based compensation but excluding settlement of income tax audit, other one-time items and related tax effect) came in at $25.7 million compared with the year-ago figure of $147.1 million.
On a GAAP basis, net loss came in at $30 million as against net income of $88 million in the year-ago quarter.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and investments of $4.95 billion, compared with $5.33 billion in the previous quarter. Receivables were $415 million compared with $778.9 million in the last quarter. The company has a long-term debt balance of $1.49 billion.
NetApp generated cash from operations of $129 million compared with $396.6 million in the earlier quarter. During the quarter, the company repurchased shares worth $430 million and paid $54 million as dividend. The company declared a dividend of 18 cents during the quarter, payable on Oct 21, 2015.
Guidance
For the second quarter of fiscal 2016, NetApp expects revenues in the range of $1.40 to $1.50 billion (mid-point $1.45 billion). The Zacks Consensus Estimate is pegged at $1.398 billion. Management expects non-GAAP earnings per share to come between 55 cents and 60 cents (mid-point 57.5 cents). The Zacks Consensus Estimate stands at 28 cents.
Our Take
NetApp reported lower-than-expected first-quarter results. Also, year-over-year revenue comparisons were unfavorable, primarily due to unfavorable foreign exchange rates. However, the company provided an encouraging guidance for the next quarter.
Going further, the company is expected to gain momentum in flash-based solutions with the newly introduced all-flash array, which will help it to gain traction in the storage market. The recent product launches and product refreshes will drive revenues and stringent cost controls will ensure margin expansion.
However, we believe that an uncertain IT spending outlook and competition from EMC Corp. (EMC -Analyst Report) and Hewlett-Packard Company (HPQ - Analyst Report) remain headwinds.
NetApp currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the technology sector is Amazon.com Inc. (AMZN - Analyst Report), sporting a Zacks Rank #1 (Strong Buy).
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