NetApp Guidance Disappoints, But Sell-Side Still Positive

NetApp Inc. NTAP reported Wednesday after the market close fiscal first-quarter non-GAAP earnings of 62 cents, up 35 percent, on revenues of $1.33 billion. The bottom line result trounced the consensus estimate of 55 cents per share.

The company expects second quarter non-GAAP earnings per share of 64–72 cents on net revenues of $1.31 billion to $1.46 billion. Analysts, on average, estimate earnings of 70 cents per share on revenues of $1.37 billion.

Notwithstanding the strong FQ1 results, NetApp shares were down 5.69 percent at $39.99, as the lukewarm guidance spooked investors.

Nevertheless, the sell side is upbeat on NetApp, as evident from comments by Wells Fargo Securities as well as Maxim Group.

Wells Fargo maintains its Market Perform rating on NetApp, but lifted its price target from $39 to $40, citing its upwardly revised 2018 earnings per share estimate. Meanwhile, Maxim Group reiterated its Buy rating and 12-month price target of $56.

NetApp Executing Well

Wells Fargo analyst Maynard Um said the company's product strength points to continued traction with gross margin performance, reflecting limited impact from competitive dynamics and transformation progress.

However, the analyst noted that hardware maintenance support contract revenue was weaker than expected, dragged by prior years of product declines. The analyst expects it to be a headwind for most of the remainder of the year, although expecting it to start growing in the next fiscal year.

See also: Sell-Side Likes NetApp Heading Into Its Q1 Earnings Report

"Fundamentally, NTAP is executing well and better than we would have anticipated with goto-market and sales compensation changes not having any negative impact, which we feared," Wells Fargo said.

That said, the firm sees the prospect of a more aggressive Hewlett Packard Enterprise Co HPE as well as DELL EMC as a key tests for NetApp in the coming quarters.

As such, the firm raised its 2018 earnings per share estimate from $3.02 to $3.10.

Strong Product Revenue Quarter

Maxim Group termed the quarter as a strong product revenue quarter. Analyst Nehal Chokshi said improving short-term deferred revenue with respect to a year-ago should serve to mitigate concerns over hardware maintenance revenues.

Given the mere 1 percent year-over-year decline in short-term deferred revenue compared to the 7-percent drop in the April quarter, the analyst believes hardware maintenance renewal execution issues have likely been rectified.

Maxim Group stated that apart from the top line growth, the 13 percent earnings per share beat, relative to the consensus, was orchestrated by a 100 basis point-sequential improvement and a 325 basis-point year-over-year improvement in gross margin.

The firm indicated that the management explicitly expects revenue acceleration through the remainder of the year due to alignment with multi-year trends. Citing the management, the firm said the driver of the acceleration is the differentiated technology in All Flash Arrays, Converged Infrastructure and Hybrid Cloud.

At last check, shares of NetApp were down 5.94 percent at $39.89.

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Image Credit: By LPS.1 (Own work) [CC0], via Wikimedia Commons