NetApp Inc. (NTAP)
reported fourth quarter fiscal 2012 adjusted earnings per share
(EPS) of 55 cents, surpassing the Zacks Consensus Estimate of 49
cents. Adjusted EPS excludes amortization of intangible assets,
acquisition-related expenses, non-cash interest expense as well as
investments and tax gains, but includes stock-based compensation
expenses. The quarter’s beat was aided by better-than-expected
revenue growth and favorable tax rate.
However, after the closing bell,
NetApp's share price slid a massive 16.59% only due to a dismal
guidance for the next quarter that was below the Street
expectation. The guidance reflected uncertainty in the
macroeconomic environment and levels of tech spending.
Revenue
NetApp reported fourth quarter
revenues of $1.70 billion, up 19.2% from $1.43 billion in the
year-ago quarter. The revenue was within the company’s guidance
range of $1.645–$1.725 billion and slightly above the Zacks
Consensus Estimate of $1.68 billion. While product revenues grew
the most, other segments also improved year over year. The company
is enjoying a strong demand for its storage products thanks to
mobile devices with remote computing and Internet access like
Apple Inc’s (AAPL) iPhone that are so in
vogue.
Customer wins during the quarter
were healthy as they were keen on leveraging storage virtualization
to re-architect their data centers in order to gain efficiency,
flexibility and cost savings. Moreover, the quarter witnessed solid
geographical contributions from America and Asia-Pacific. But
revenue growth was adversely affected by the slowing demand from
the U.S. federal government and constrained European spending.
Product revenues were $1.17 billion
in the quarter, up 21.3% from $960.5 million reported in the
year-ago quarter and accounted for about 68.4% of the total
revenue. The double-digit improvement has been consistent since the
past nine quarters and the reason can be attributed to the
successful launch of new products and a well-knitted distribution
system. The recent launch of FlexPod, in association with
networking giant Cisco Systems Inc. (CSCO) was
quick to attract customers.
Software Entitlement &
Maintenance revenues were $212.5 million, up 13.6% from $187.0
million in the year-ago quarter. The segment’s revenues represented
around 12.5% of the total revenue.
Service revenues were $324.9
million, up 19.1% from $262.6 million reported in the year-ago
quarter. The segment accounted for 19.1% of the total revenue.
Operating
Results
NetApp reported gross profit of
$995.0 million, representing a 7.2% year-over-year increase. Gross
margin dropped 660 basis points (bps) year over year to 58.4%. The
gross margin was affected by higher costs of drives due to supply
shortages post the Thailand flood.
Total operating expenses increased
8.2% from the year-ago quarter to $773.6 million. This was mostly
due to a steep rise (25.6%) in research and development expenses.
Operating income grew 4.0% from the year-ago quarter to $221.4
million. Operating margin fell 190 bps year over year to 13.0%.
Net income on a GAAP basis was
$180.7 million, or 47 cents per share, compared with $160.6
million, or 40 cents in the prior-year quarter. The quarter’s
result was on the lower end of the company’s guided range of 38-43
cents.
Excluding the above-mentioned
special items, but including stock-based compensation, adjusted net
income was $208.3 million or 55 cents per share, compared to $186.2
million or 46 cents a year ago.
Balance Sheet & Cash
Flow
NetApp exited the quarter with
cash, cash equivalents and investments of $5.4 billion, up from
$4.9 billion in the previous quarter. Receivables were $830.9
million, up from $685.4 million a quarter ago. Inventories
increased $7.7 million from the prior quarter to $161.5 million.
The company bears no long-term debt, a 1.75% convertible senior
notes amounting $62.6 million is due in 2013.
Cash generated from operations of
$582.6 million, nearly doubled from $269.2 million in the prior
quarter. The improvement was backed by higher profit generation and
a favorable working capital. Capital expenditure in the quarter was
$124.2 million, up from $91.3 million in the year-ago quarter.
Guidance
NetApp provided a feeble first
quarter 2013 outlook reflecting normal seasonality (which is
typical of first quarters) and increasing macro uncertainty.
Additionally, management stated that operating expenses will be
closely monitored to neutralize the lackluster revenue.
For the first quarter of 2013,
NetApp expects revenues in the range of $1.4 billion to $1.5
billion, representing a decline of 12.0% to 18.0% sequentially.
However, the year-over-year comparison indicates a range of 4.0%
decline to 3.0% growth.
Non-GAAP gross margins are expected
in the range of 60.0–61.0%, while non-GAAP operating margins are
projected at roughly 11.5% (+/- 5.0%). GAAP EPS is expected to
range between 10 cents and 15 cents, while non-GAAP EPS is expected
between 34 cents and 39 cents. The company estimates shares
outstanding of approximately 380 million and a tax rate of
17.5%.
Our Take
The quarter’s results were
encouraging, with the top and bottom lines beating the Zacks
Consensus Estimates. Product strength was the driving force, but
margin contraction remained the main challenge. Moreover,
management guided a lackluster first quarter, keeping in mind the
ongoing macro uncertainty caused by the European debt crisis,
federal budget cuts and Thailand flood (which is limiting component
availability).
But we believe NetApp will be able
to sustain its growth story and remain a key player in the
virtualization and network storage market based on product launches
and strategic acquisitions. With its latest Engenio takeover,
NetApp will now be able to address the video storage market as well
as high performance computing applications like genomics
sequencing. Considering this, we think that the first quarter
guidance is a bit conservative.
However, we are cautious regarding
the impact of new product launches from EMC Corp.
(EMC) on NetApp’s fundamentals, going forward.
NetApp currently carries a Zacks #3
Rank (short-term Hold recommendation).
APPLE INC (AAPL): Free Stock Analysis Report
CISCO SYSTEMS (CSCO): Free Stock Analysis Report
EMC CORP -MASS (EMC): Free Stock Analysis Report
NETAPP INC (NTAP): Free Stock Analysis Report
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