NetApp (NTAP) Up 7.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for NetApp (NTAP). Shares have added about 7.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is NetApp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

NetApp’s Q1 Earnings And Revenues Surpass Estimates

NetApp reported first-quarter fiscal 2022 non-GAAP earnings of $1.15 per share, which surpassed the Zacks Consensus Estimate by 21.1% and increased 57.5% year over year. The company had anticipated non-GAAP earnings between 89 cents and 97 cents per share.

Revenues of $1.46 billion increased 12% year over year, outpacing the Zacks Consensus Estimate by 1.6%. The company had projected revenues in the range of $ $1.37-$1.47 billion. The upside was driven by strong demand across Hybrid Cloud and Public Cloud divisions.

Region wise, the Americas, EMEA and Asia Pacific contributed 54%, 31% and 15% to total revenues, respectively.

Direct and Indirect revenues contributed 23% and 77%, respectively, to total revenues.

Top Line Details

The company introduced two segments for financial reporting namely Hybrid Cloud and Public Cloud.

Hybrid Cloud consists of revenues from the company’s enterprise datacenter business, which includes product, support and professional services.

The Public Cloud segment consists of revenues from products, which are delivered as-a-service and included related support. The portfolio is inclusive of the company’s cloud automation and optimization services, storage services, as well as cloud infrastructure monitoring services.

Revenues in the Hybrid Cloud segment were up 8% year over year to $1.38 billion. Revenues in the Public Cloud segment were up 154.8% to $79 million.

Within the Hybrid Cloud segment, Product revenues (53% of segment revenues) increased 16% year over year to $730 million.

Revenues from Support Contracts (42%) totaled $578 million, up 0.2% year over year. Revenues from Professional and Other Services (5%) were $71 million, up 4.4% year over year.

Software product revenues amounted to $414 million, up 33% driven by favorable shift toward all-flash portfolio.

Key Metrics

During fiscal first quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $2.8 billion, up 23% year over year.

Public Cloud Services recorded annualized recurring revenues (ARR) of $337 million, up 89% year over year and 12% quarter over quarter. The company is witnessing solid momentum across customer cohorts with fiscal first-quarter Public Cloud dollar-based net retention rate of 192%.

Combined software revenue, recurring support and Public Cloud revenues stood at $1.1 billion, up 17% on a year-over-year basis, contributing 73% to total net revenue.

Operating Details

Non-GAAP gross margin was 69.3%, which contracted 130 basis points (bps) from the year-ago quarter’s levels.

On a non-GAAP basis, Product gross margin of 55.3% expanded 390 bps year over year. Sequential improvement of 100 bps can be attributed to higher-margined all-flash mix. Meanwhile, non-GAAP Services gross margin of 83.2% contracted 20 bps year over year, but expanded 70 bps sequentially.

Management noted that recurring support, cloud and other services business is a growth driver with gross margin coming in at 92%.

Non-GAAP operating expenses were up 0.2% year over year to $674 million. As a percentage of net revenues, the figure contracted 550 bps on a year-over-year basis to 46.2%.

Non-GAAP operating income increased 57.7% year over year to $336 million. Non-GAAP operating margin expanded 670 bps to 23%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Jul 30, 2021, with $4.547 billion in cash, cash equivalents and investments compared with $4.596 billion as of Apr 30, 2021. Long-term debt was $2.633 billion as of Jul 30, 2021 compared with $2.632 billion as of Apr 30.

The company generated net cash from operations of $242 million during the reported quarter compared with $559 million in the prior quarter.

Free cash flow was $191 million (free cash flow margin of 13.1%) compared with $521 million in the previous quarter (free cash flow margin of 33.5%).

The company returned $212 million to shareholders in form of dividend ($112 million) and share repurchases ($100 million).

Guidance

NetApp is banking on improvement in adoption of Public Cloud Services offerings as well as strength in Hybrid Cloud business to drive the top line, going ahead.

The company anticipates non-GAAP earnings for second-quarter fiscal 2022 between $1.14 and $1.24 per share.

Net revenues are anticipated in the range of $1.49-$1.59 billion, indicating year-over-year growth of 9% at mid-point.

For second-quarter fiscal 2022, NetApp expects non-GAAP gross margin to be 68% and non-GAAP operating margin to be 23%

Driven by strong fiscal first-quarter results, the company raised guidance for fiscal 2022. For fiscal 2022, NetApp projects revenue growth in the range of 8-9% compared with earlier guidance of 6-7%. Public cloud ARR is expected between $450 million and $500 million compared with previous guidance of $425-$500 million

The company anticipates non-GAAP earnings for fiscal 2022 between $4.85 and $5.05 per share compared with previous range of $4.45-$4.65 per share.

For fiscal 2022, NetApp expects non-GAAP gross margin to be 68% and non-GAAP operating margin in the range of 23-24%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 9.94% due to these changes.

VGM Scores

Currently, NetApp has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, NetApp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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