NetApp Inc. (NTAP) reported third-quarter fiscal 2014 adjusted earnings (excluding amortization and other one-time items but including stock-based compensation) of 58 cents per share, which beat the Zacks Consensus Estimate by a couple of cents. On a year-over-year basis, earnings improved 14.5%.
Quarter Details
NetApp’s revenues for the quarter decreased 1.2% year over year to $1.61 billion and lagged the Zacks Consensus Estimate of $1.64 billion. Reported revenues were within management’s guided range of $1.575 to $1.675 billion. The modest year-over-year decline was primarily due to a 22.3% decline in original equipment manufacturer (OEM) revenues which more than offset the 1.8% increase in Branded revenues.
On operating segment basis, Product revenues (63.0% of total revenue) decreased 4.3% from the year-ago quarter to $1.02 billion. Software Entitlement & Maintenance revenues (14.0% of total revenue) decreased 0.7% year over year to $227.0 million in the quarter. However, Service revenues (23.0% of total revenue) increased 7.9% year over year to $368.0 million.
The company witnessed strong demand for its storage operating system — Data ONTAP — and flash solutions. Arrow Electronics’ (ARW) and Avnet’s (AVT) contributions to net revenue were 20% and 15%, respectively.
Geographically, the Americas Commercial revenues and U.S. Public Sector revenues declined 3% and 13%, respectively, while revenues from EMEA and Asia Pacific region increased 3% each, on a year-over-year basis.
Adjusted gross margins (including stock-based compensation but excluding amortization and other one-time items) expanded 309 basis points (bps) from the year-ago quarter to 63.1% primarily due to lower-than-expected costs and efficient productivity.
Operating expenses (including stock-based compensation but excluding amortization and other one-time items) as a percentage of revenues increased 104 bps to 48.1%, primarily due to increase in research and development, and general and administrative expenses. In dollar terms, operating expenses increased 0.9% year over year.
Operating margins (including stock-based compensation but excluding amortization and other one-time items) to expand 205 bps to 14.9% from the year-ago quarter primarily due to lower-than-expected operating expenses. Net income (including stock-based compensation but excluding one-time items and related tax effect) came in at $203.7 or 58 cents which increased from $187.4 million or 51 cents driven by efficient cost management and share repurchase initiatives.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and investments of $5.07 billion, compared to $5.27 billion in the previous quarter. Receivables were $584.3 million compared to $590.4 million in the previous quarter. The company has a long-term debt balance of $995.2 million.
NetApp generated cash from operations of $331.8 million compared with $362.5 million in the previous quarter. The company repurchased stocks worth $507.0 million and paid dividends amounting to $50.4 million for the reported quarter.
Guidance
For the fourth quarter of 2014, NetApp expects revenues in the range of $1.62 to $1.75 billion, up 4.0% sequentially at the mid-point of the range but reflects 3% decline year over year. The Zacks Consensus Estimate is pegged at $1.74 billion
Management expects non-GAAP gross margins in the range of 62.5, and non-GAAP operating margin in the range of 19% to 19.5%. Non-GAAP earnings per share are expected in the range of 77 to 82 cents per share, up from 69 cents reported in the year-ago quarter. The Zacks Consensus is pegged at 63 cents.
Our Take
We believe NetApp’s innovative product line-up, frequent updates and shareholder-friendly activities will boost profitability, going forward. Moreover, its partnerships with Oracle (ORCL) and Verizon, and rapid adoption of its ONTAP system are positives.
Nonetheless, we believe that uncertain IT spending outlook and stiff competition from EMCremain the primary headwinds, going ahead. Moreover, tepid revenue guidance for the coming quarter will remain an overhang on the stock.
NetApp currently carries a Zacks Rank #4 (Sell).
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