A month has gone by since the last earnings report for NetApp (NTAP). Shares have lost about 14% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is NetApp due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
NetApp Q2 Earnings Top Estimates
NetApp reported second-quarter fiscal 2023 non-GAAP earnings of $1.48 per share, which surpassed the Zacks Consensus Estimate by 10.5% and increased 16% year over year. The company anticipated non-GAAP earnings between $1.28 and $1.38 per share.
Revenues of $1.66 billion increased 6% year over year and 12% in constant currency. The company projected revenues in the range of $1.595-$1.745 billion. The upside can be attributed to the strong product revenue growth. The deceleration in revenue growth for the cloud services business acted as a dampener. Revenues missed the consensus mark by 0.6%.
The company tweaked its guidance for fiscal 2023 amid ongoing global macro turmoil and significant forex volatility.
NetApp now expects fiscal 2023 revenues to grow in the range of 2-4% year over year, and Public Cloud ARR- are expected to be nearly $700 million.
Earlier, NetApp had projected revenue growth of 6-8%, while Public Cloud ARR was expected to be between $780 million and $820 million.
The company now anticipates non-GAAP earnings for fiscal 2023 between $5.30 and $5.50 per share. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at $5.48 per share. The company anticipated non-GAAP earnings for fiscal 2023 between $5.40 and $5.60 per share.
For fiscal 2023, NetApp expects non-GAAP gross margin to be 66-67% and non-GAAP operating margin to be 23%.
Top-Line Details
The company introduced two segments for financial reporting, namely Hybrid Cloud and Public Cloud.
The Hybrid Cloud segment consists of revenues from the company’s enterprise datacenter business, which includes the product, support and professional services.
The Public Cloud segment consists of revenues from products, which are delivered as-a-service and include related support. The portfolio includes the company’s cloud automation and optimization services, storage services and cloud infrastructure monitoring services.
Revenues of the Hybrid Cloud segment were up 3% year over year to $1.52 billion. The Public Cloud segment’s revenues were up 63% from the year-ago quarter’s levels to $142 million.
Within the Hybrid Cloud segment, Product revenues (55% of segment revenues) increased 3% year over year to $837 million.
Revenues from Support Contracts (40%) totaled $607 million, up 2.9% year over year. Revenues from Professional and Other Services (5%) were $77 million, up 2.7% year over year.
Software product revenues amounted to $495 million, up 4.2%, owing to the value driven by ONTAP software and data services.
Region-wise, the Americas, EMEA and the Asia Pacific contributed 54%, 32% and 14% to total revenues, respectively.
Direct and Indirect revenues contributed 23% and 77%, respectively, to total revenues.
Key Metrics
During the fiscal second quarter, the company’s All-Flash Array Business’ annualized net revenue run rate came in at $3.1 billion, up 2% year over year. Total billings increased 3% year over year to $1.6 billion. Deferred revenues came in at $4.1 billion, up 4.8% year over year.
The Public Cloud Services recorded an ARR of $603 million, up 55% year over year. The Public Cloud ARR recorded a dollar-based net retention rate of 140%.
Combined recurring support and Public Cloud revenues stood at $749 million, up 11% on a year-over-year basis and contributing 45% to total revenues.
Operating Details
Non-GAAP gross margin was 66.3%, contracted 200 basis points (bps) with the year-ago quarter’s levels.
The Hybrid segment’s gross margin was 66.1%, which contracted 210 bps year over year. The Public Cloud segment’s gross margin was 68.3%, which contracted 300 bps year over year.
Non-GAAP operating expenses were up 1.9% year over year to $709 million. As a percentage of net revenues, the figure contracted 180 bps on a year-over-year basis to 42.6%.
Non-GAAP operating income increased 5.1% year over year to $393 million. Non-GAAP operating margin contracted 30 bps to 23.6%.
Balance Sheet & Cash Flow
NetApp exited the quarter ending Oct 28, 2022, with $3.033 billion in cash, cash equivalents and investments compared with $3.439 billion as of Jul 29. Long-term debt was $2.387 billion, unchanged as of Jul 29.
The company generated net cash from operations of $214 million during the reported quarter compared with $281 million in the previous quarter.
Free cash flow was $137 million (free cash flow margin of 8.2%) compared with $216 million in the previous quarter (free cash flow margin of 13.6%).
The company returned $258 million to shareholders as dividend payouts ($108 million) and share repurchases ($150 million).
Guidance
The company anticipates non-GAAP earnings to be between $1.25 and $1.35 per share.
Net revenues are anticipated in the range of $1.525-$1.675 billion, indicating a year-over-year decline of 1% at the mid-point.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -9.3% due to these changes.
VGM Scores
At this time, NetApp has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, 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 C. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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