Why Is NetApp (NTAP) Down 34.9% Since Last Earnings Report?

It has been about a month since the last earnings report for NetApp (NASDAQ:NTAP). Shares have lost about 34.9% 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 catalysts.

NetApp Q3 Earnings Miss, Revenues Decline Y/Y

NetApp, Inc. reported third-quarter fiscal 2020 non-GAAP earnings of $1.16 per share, which missed the Zacks Consensus Estimate by 2.5%.

Moreover, the figure declined 3.3% from the year-ago quarter. Nonetheless, the bottom line came within the guided range of $1.14 and $1.22 per share.

Revenues of $1.404 billion lagged the Zacks Consensus Estimate by 4%. Moreover, the figure declined 10.2% from the year-ago quarter due to macroeconomic headwinds and unpredictability in large enterprise purchasing behavior. Nonetheless, the top line came within the guided range of $1.39-$1.54 billion.

Region wise, the Americas, EMEA and Asia Pacific accounted for 50%, 35% and 15% of total revenues, respectively.

Direct and Indirect revenues represented 21% and 79%, respectively, of total revenues.

Quarter in Detail

Product revenues (56.1% of total revenues) decreased 18.6% year over year to $787 billion owing to macroeconomic headwinds.

Per management, broader weakness in macroeconomic environment is compelling enterprises to trim capital expenditure, which is affecting storage business.

Revenues from products under Strategic grouping came in at $483 million, down 6.6% year over year. The offerings include All-flash FAS products, enterprise software license agreements, private cloud solutions, and other add-on hardware and software product options.

Revenues from products under Mature grouping came in at $304 million, down 32.4% year over year. The offerings include Hybrid FAS products, and related add-on OS software and hardware, branded E-Series and OEM products.

Software Maintenance revenues (18.7%) came in at $263 million, up 10%.

Hardware Maintenance and Other Services revenues (18.7%) were $354 million, down 0.8% from the year-ago quarter.

Revenues from Hardware Maintenance Support Contracts came in at $293 million, up 0.3% year over year. Revenues from Professional and Other Services came in at $61 million, down 6.2%.

Key Metrics

During the fiscal third quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $2.3 billion.

Cloud Data Services recorded annualized recurring revenues of $83 million, up 146% year over year. Robust adoption of Microsoft (NASDAQ:MSFT) Azure NetApp Files was a key driver.

Private Cloud business recorded run rate of $344 million, which remained flat year over year.

Product Rollouts in Q3

NetApp introduced storage systems — the NetApp AFF A400 end-to-end NVMe all-flash system, the NetApp FAS8700 high-end hybrid flash array, and the FAS8300 next-generation mid-range hybrid flash array.

The company announced NetApp StorageGRID enhancements — StorageGRID 11.3 software, SGF6024 all-flash appliance, SG6060 expansion appliance, SG1000 service appliance, and StorageGRID tiering to Azure Blob storage to meet increasing demand for object storage.

Additionally, NetApp introduced three features for NetApp Cloud Insights including Kubernetes Topology Visualization, NetApp Cloud Secure Insider Threat Detection, and NetApp Active IQ Integration.

Moreover, the company enhanced NetApp Cloud Volumes ONTAP for Amazon’s cloud-arm Amazon (NASDAQ:AMZN) Web Services (AWS) with new NetApp Cloud Backup Service, the new NetApp Cloud Compliance service, and the ability to leverage NVMe flash available on virtual compute instances.

In the third quarter, NetApp expanded its multiprotocol file services to encompass NFSv4.1, NFSv3, and SMB for both Azure NetApp Files and NetApp Cloud Volumes Service for AWS. With this expansion, NetApp now delivers the widest range of support for Microsoft Windows and Linux workloads.

Further, NetApp released NetApp ONTAP System Manager 9.7, which offers expanded integration of hybrid cloud, with seamless and efficient migration of tiered data between private and public clouds by using FabricPool, symmetric active-active host-to-LUN access, and extended scale-out NAS deployments.

NetApp also introduced support for software RAID configurations backed by NVMe drives.

Partnerships Remain Noteworthy

NetApp expanded partnership with Alphabet’s Google (NASDAQ:GOOGL) Cloud Services that included the general availability of NetApp Cloud Volumes ONTAP and Cloud Volumes Service for Google Cloud. The expansion also includes the availability of Cloud Volumes Service in the U.K. region and support for Anthos on Cloud Volumes ONTAP, Cloud Volumes Service, and NetApp HCI.

Additionally, in partnership with NVIDIA (NASDAQ:NVDA), NetApp unveiled NVIDIA DGX SuperPOD, which helps simplify supercomputing and enables AI for high-performance computing (HPC) teams. NetApp and NVIDIA also announced their collaboration on the NVIDIA Magnum IO, a multi-GPU, multi-node networking and storage I/O optimization stack.

Moreover, Enterprise Networking Solutions, Inc. was granted a 3-year contract by the State of California Department of General Services to deliver NetApp data center modernization and hybrid cloud infrastructure solutions to the State of California.

Operating Details

Non-GAAP gross margin was 67.8%, which expanded 410 basis points (bps) from the year-ago quarter.

On a non-GAAP basis, Product gross margin of 55.4% expanded 280 bps, Software Maintenance gross margin of 95.4% contracted 40 bps, and Hardware Maintenance and Other Services gross margin expanded 260 bps to 74.9% year over year.

Non-GAAP operating expenses increased 1.7% year over year to $640 million.

Non-GAAP operating margin contracted 130 bps to 22.2%.

Balance Sheet & Cash Flow

NetApp exited the quarter ending Jan 24, 2019, with $3.008 billion in cash, cash equivalents and investments compared with $2.987 billion in the previous quarter. Long-term debt (including current portion) was $1.146 billion compared with $1.145 billion in the previous quarter.

The company generated net cash from operations of $420 million during the quarter compared with $53 million utilized in the fiscal second quarter.

Free cash flow was $388 million compared with ($89) million in the previous quarter.

Further, the company repurchased shares worth $500 million and paid out dividends worth $108 million in the reported quarter.

NetApp announced quarterly cash dividend of 48 cents per share to be paid out on Apr 22, 2020, to shareholders of record as of Apr 3, 2020.

Guidance

NetApp is banking on improvement in adoption of hybrid multi-cloud offerings, Cloud Data Services and Private Cloud offerings.

NetApp anticipates non-GAAP earnings for fourth-quarter fiscal 2020 between $1.28 and $1.36 per share.

Moreover, net revenues are anticipated to be in the range of $1.455-$1.605 billion.

For fourth-quarter fiscal 2020, NetApp expects non-GAAP gross margin to be in the range of 66-67% and non-GAAP operating margin to be in the range of 23.

For fiscal 2020, NetApp updated guidance. The company now anticipates net revenues to decline 8% from fiscal 2019. In the prior guidance, management had anticipated revenues to decline in the 5-10% range.

Non-GAAP earnings per share are now projected to decline 5% to 8% on a year-over-year basis, excluding contribution from buybacks.

The company anticipates non-GAAP gross margin to be in the range of 67-68%. Non-GAAP operating margin is projected to be around 21%

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -5.17% due to these changes.

VGM Scores

At this time, NetApp has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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.