NetApp Inc. (NTAP) reported third quarter fiscal 2012 adjusted earnings per share (EPS) of 41 cents, missing the Zacks Consensus Estimate by 3 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.
After the closing bell, NetApp's share price jumped 8.58%. Despite the miss, shares performed well only on the next quarter guidance that was better than the Street expectation.
NetApp reported third quarter revenues of $1.565 billion, up 21.4% from $1.289 billion in the year-ago quarter. The revenue was within the company’s guidance and modestly above the Zacks Consensus Estimate of $1.563 billion. While product revenues grew the most, other segments also improved year over year. Customer wins during the quarter were healthy as customers 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. But revenue growth was badly affected by the slowing demand from its the U.S. federal government, reflecting budget constraints due to the European crisis.
Product revenues were $1.06 billion in the quarter, up 25.9% from $844.3 million reported in the year-ago quarter and accounted for about 67.9% of the total revenue. The improvement was attributable to successful product launches during the quarter.
Software Entitlement & Maintenance revenues were $203.5 million, up 11.4% from $176.7 million in the year-ago quarter. The segment’s revenues represented around 13.0% of the total revenue.
Service revenues were $299.3 million, up 14.0% from $262.6 million reported in the year-ago quarter. The segment accounted for 19.1% of the total revenue.
NetApp reported gross profit of $908.5 million, representing a 7.4% year-over-year increase. Gross margin dropped 760 basis points (bps) year over year to 58.0%. The favorable effects of increased volumes and configuration mix were more than offset by a greater mix of E-Series OEM business, warranty costs and some pricing discounts.
Total operating expenses surged 20.3% from the year-ago quarter to $752.0 million. This was mostly driven by steeper expenses on research and development as well as sales and marketing. Operating income dropped 29.2% from the year-ago quarter to $156.5 million. Operating margin fell 710 bps year over year to 10.0%.
Net income on a GAAP basis was $119.6 million, or 32 cents per share, compared with $186.4 million, or 46 cents in the prior-year quarter. The quarter’s result was at the lower end of the company’s guided range.
Excluding the above-mentioned special items, but including stock-based compensation, adjusted net income was $151.5 million or 41 cents per share, compared to $197.0 million or 48 cents a year ago.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and investments of $4.9 billion, up from $4.6 billion in the previous quarter. Receivables were $685.4 million, up from $625.2 million a quarter ago. Inventories decreased $9.5 million from the prior quarter to $153.8 million. The company bears no long-term debt.
Cash generated from operations in the quarter was $269.2 million, down from $370.2 million in the prior quarter. Capital expenditure in the quarter was $91.3 million, down from $93.3 million in the year-ago quarter.
The company is still unsure about the extent of damage that the Thailand flood has caused to its fundamentals or results for the rest of fiscal 2012. Disk drives are the prime elements of its hardware suites. Thailand is the biggest manufacturer of hard disk drives (HDD) and this flood forced most of the producers to shut down their facilities. This will cause a major supply cut and price rise for raise prices in the HDD sector. But, as NetApp mostly uses enterprise class drives, the manufacturers of which have not been affected very badly, there is a possibility that NetApp will not be affected much.
For the fourth quarter of 2012, NetApp expects revenues in the range of $1.645 billion and $1.725 billion, representing 5.0% to 10.0% sequential and approximately 15.0% to 21.0% year-over-year growth.
Non-GAAP gross margins are expected to be roughly 59.0%, while non-GAAP operating margins are projected at roughly 17.0%. GAAP EPS is expected to range between 38 cents and 43 cents, while non-GAAP EPS is expected between 60 cents and 65 cents. The company estimates shares outstanding of approximately 378 million.
The quarter’s results were modest, with the bottom line missing the Zacks Consensus Estimate, while top line matching the same. Despite a high year-over-year revenue growth, NetApp posted a bottom-line decline, which was mostly due to higher costs and tax. Moreover, management guided its next quarter cautiously, 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.
NetApp is performing impressively, despite macro concerns and stiff competition from industrial heavyweights like International Business Machines Corp. (IBM) and EMC Corporation (EMC).
NetApp currently carries a Zacks #3 Rank (short-term Hold recommendation).
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