of data management firm NetApp (NTAP 69.45-8.58 (-11.00%) gave up
both the 200-day simple moving average (73.77) and late-October lows this
morning in reaction to underwhelming guidance for next quarter and mostly
in-line revenues for the current period.
Jumping right into the print, NetApp reported second quarter earnings per share (EPS) which beat market expectations at $1.06 on revenues which beat the midpoint of the company’s guidance at $1.52 bln. Overall gross margins were 65%, aided by product gross margins that increased one and a half points yr/yr to 54.5%, reflecting continued salesforce discipline, benefit from Enterprise License Agreements (ELAs), and some one-time items.
Sales strength was driven by product revenue growth 11% to $913 mln as strength in the all-flash array business, an expanding traction in NetApp’s HCI platform as well as roughly $20 mln benefit from ELAs.
NetApp management noted that, similar to Q1, the company again saw healthy growth in deferred and financed unearned services revenue, which increased 5% compared to last year.
Investors are perhaps scrutinizing the company’s cloud position, which didn’t live up to the bullish market expectations. Based on Q2 results, the company’s annualized monthly recurring cloud data services revenue is approximately $27 mln, up 35% from Q1. However, in Q2, NetApp's all-flash array business inclusive of All Flash FAS, EF, and SolidFire products and services grew 29% compared to last year to an annualized net revenue run rate of $2.2 bln, essentially flat compared to last quarter.
NetApp’s revenue guidance wasn’t as bullish as the market had expected, either; the company’s third quarter EPS forecast of $1.12-1.18 did come in ahead of where the market thought NetApp would be next quarter, but third quarter sales guidance of $1.55-1.65 bln wasn’t as robust as the market had anticipated. The revenue outlook perhaps suggests that product revenue may decelerate a little from the nearly 11.5% growth seen in the second quarter. Additionally, the company guided gross margins in-line at 62.5-63.5% for the third quarter.
For the full year, management remains confident in its mid-single-digit FY19 revenue growth forecast plus any benefit from ELAs. The company expects ELAs to represent roughly 2% of total annual revenue for FY19 and future years and remains committed to roughly flat FY19 operating expenses.
As product revenues decline, NetApp is getting more and more benefit from ELAs. The stock was on a four-session losing streak heading into the print, and ahead of the open, was indicated below the 200-day SMA. Shares have continued to retreat off their opening levels, now down about 11.6%, as investors weren’t impressed with the all-flash array run rate essentially stagnating at $2.2 bln.
- OUR VIEW
- LEARNING CENTER