NetApp Inc. (NTAP) reported fourth quarter fiscal 2011 adjusted earnings per share (EPS) of 47 cents, which exceeded the Zacks Consensus Estimate of 44 cents. Adjusted EPS excludes amortization of intangible assets, acquisition-related expenses, restructuring charges, non-cash interest expense as well as investments and tax gains, but includes stock-based compensation expenses. After the closing the bells, NetApp's share price increased 3.61%.
Revenue
NetApp reported fourth quarter revenues of $1.43 billion, up 21.9% from $1.17 billion in the year-ago quarter. Revenues also surpassed the Zacks Consensus Estimate of $1.39 billion and the company’s guidance range. The improvement was driven by a surge in demand for its storage products as well as a change in the company’s revenue recognition policy. While product revenues grew the most, other segments also improved on a year-over-year basis.
Product revenues were $960.5 million in the quarter, up 26.6% from $758.8 million reported in the year-ago quarter and accounted for about 67.2% of the total revenue. The improvement was attributable to successful product launches during the quarter.
Software Entitlement & Maintenance revenues were $187.0 million, up 7.6% from $173.8 million in the year-ago quarter. The segment’s revenues represented around 13.1% of total revenue.
Service revenues were $280.8 million, up 17.4% from $239.2 million reported in the year-ago quarter. The segment accounted for 19.7% of total revenue.
Operating Results
NetApp delivered GAAP gross profit of $928.2 million, representing a 24.0% year-over-year increase. Gross margin on a GAAP basis was 65.0%, up from 63.9% in the year-ago quarter. Cost control measures and a stable average selling price aided gross margin expansion. Operating income on a GAAP basis was $212.9 million (14.9% of total revenue), compared with $172.9 million (14.8% of total revenue) in the year-ago quarter. Operating expenses as a percentage of total revenue were up from last year.
Net income on a GAAP basis was $160.6 million, or 40 cents per share, compared with $145.1 million, or 40 cents per share in the prior-year quarter.
Excluding the above-mentioned special items, but including stock-based compensation, adjusted net income was $188.3 million or 47 cents per share, compared to $145.3 million or 40 cents a year ago.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and investments of $5.17 billion, up from $4.78 billion in the previous quarter. Receivables were $742.6 million, up $201.1 million sequentially. Inventories increased $11.3 million from the prior quarter to $108.5 million.
Cash generated from operations in the quarter was $458.8 million, up from $363.5 million in the prior quarter. Capital expenditure in the quarter was $72.9 million, up from $66.3 million in the year-ago quarter.
Guidance
NetApp expects first quarter 2012 revenues of approximately $1.5 billion (+/- 3%), representing 2% to 8% sequential and approximately 26% to 34% year-over-year growth.
Non-GAAP gross margins are expected to be roughly 62%, while non-GAAP operating margins are projected to be in the range of 18.0–18.5%. GAAP EPS is expected to range between 31 cents and 36 cents, while non-GAAP EPS is expected between 52 cents and 57 cents. The company estimates shares outstanding of approximately 410 million.
Our Take
The quarter’s results were encouraging, with both top and bottom lines exceeding the Zacks Consensus Estimates. We believe that the momentum will continue based on revenue growth trends, strong product demand and increased IT spending.
Moreover, we are optimistic on NetApp’s merger and acquisition strategy. Recently, NetApp acquired the external storage systems business of LSI Corporation (LSI) for a cash consideration of $480.0 million. With Engenio, 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 stiff competition from industrial heavyweights like International Business Machines Inc. (IBM) and EMC Corporation (EMC).
NetApp currently carries a Zacks #2 Rank (short-term Buy recommendation).
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