NetApp, Inc. ( NTAP Quick Quote NTAP - Free Report) reported second-quarter fiscal 2022 non-GAAP earnings of $1.28 per share, which surpassed the Zacks Consensus Estimate by 4.9% and increased 21.9% year over year. The company had anticipated non-GAAP earnings between $1.14 and $1.24 per share. Revenues of $1.566 billion increased 11% year over year, topping the Zacks Consensus Estimate by 1.2%. The company had projected revenues in the range of $1.49-$1.59 billion. The upside was driven by strong demand in the Hybrid Cloud and Public Cloud divisions. Region-wise, the Americas, EMEA and Asia Pacific contributed 55%, 29% and 15% to total revenues, respectively. Direct and Indirect revenues contributed 24% and 76%, respectively, to total revenues. Following the announcement, shares of NetApp are trading up 1.7% in the premarket trading on Dec 1. In the past year, shares of NetApp have surged 50.1% compared with the industry’s rally of 39.2% on a year-to-date basis. Top-Line Details
Beginning first quarter of fiscal 2022, the company introduced two segments for financial reporting — Hybrid Cloud and Public Cloud.
Hybrid Cloud consists of revenues from the company’s enterprise datacenter business, which includes product, support and professional services. The Public Cloud segment consists of revenues from products, which are delivered as-a-service and include related support. The portfolio is inclusive of the company’s cloud automation and optimization services, storage services as well as cloud infrastructure monitoring services. Revenues in the Hybrid Cloud segment were up 8% year over year to $1.48 billion. Revenues in the Public Cloud segment were up 85.1% to $87 million. Within the Hybrid Cloud segment, Product revenues (55% of segment revenues) increased 8.7% year over year to $814 million. Revenues from Support Contracts (40%) totaled $590 million, up 6.7% year over year. Revenues from Professional and Other Services (5%) were $75 million, up 11.9% year over year. Software product revenues amounted to $475 million, up 14%, driven by a favorable shift toward the all-flash portfolio. In the quarter under review, the company expanded several cloud partnerships. For instance, NetApp announced that Amazon FSx for NetApp ONTAP service is available everywhere globally. Amazon FSx for NetApp ONTAP is Amazon Web Services managed service and is based on NetApp ONTAP software. NetApp, in collaboration with Google Cloud, rolled out NetApp Cloud Volumes Service for Google Cloud in Salt Lake City and Tokyo, initially. Key Metrics
During the fiscal second quarter, the company’s All-Flash Array Business annualized net revenue run rate came in at $3.1 billion, up 22% year over year.
Public Cloud Services recorded annualized recurring revenues (ARR) of $388 million, up 80% year over year and 15% quarter over quarter. The performance was driven by continued momentum in Azure NetApp Files, Spot and Cloud Insights. The company is witnessing solid momentum across customer cohorts with a fiscal second-quarter Public Cloud dollar-based net retention rate of 179%. Combined software, recurring support and Public Cloud revenues stood at $1.2 billion, up 13% on a year-over-year basis, contributing 74% to total net revenues. Operating Details
Non-GAAP gross margin was 68.3%, which contracted 140 basis points (bps) from the year-ago quarter’s levels.
On a non-GAAP basis, Product gross margin of 54.7% expanded 170 bps year over year but contracted 60 bps sequentially. Meanwhile, non-GAAP Services gross margin of 83.1% expanded 50 bps year over year but contracted 10 bps sequentially. Management noted that recurring support, cloud and other services business is a growth driver with gross margin coming in at 92%. Non-GAAP operating expenses were up 5.9% year over year to $696 million. Non-GAAP operating income increased 28.5% year over year to $374 million. Non-GAAP operating margin expanded 330 bps to 23.9%. Balance Sheet & Cash Flow
NetApp exited the quarter ending Oct 29, 2021, with $4.548 billion in cash, cash equivalents and investments compared with $4.547 billion as of Jul 30, 2021. Long-term debt was $2.634 billion as of Sep 30, 2021 compared with $2.633 billion as of Jul 30.
The company generated net cash from operations of $298 million during the reported quarter compared with $242 million in the prior quarter. Free cash flow was $252 million (free cash flow margin of 16.1%) compared with $191 million in the previous quarter (free cash flow margin of 13.1%). The company returned $237 million to shareholders in dividends ($112 million) and share repurchases ($125 million). The company also announced a dividend of 50 cents payable on Jan 26, 2021, to shareholders of record as of the close of business on Jan 7. Guidance
The company anticipates non-GAAP earnings for third-quarter fiscal 2022 between $1.21 and $1.31 per share. The Zacks Consensus Estimate for earnings is pegged at $1.28.
Net revenues are anticipated in the range of $1.525-$1.675 billion, indicating year-over-year growth of 9% at the mid-point. The Zacks Consensus Estimate for revenues is pegged at $1.59 billion. For third-quarter fiscal 2022, NetApp expects non-GAAP gross margin to be 67-68% and non-GAAP operating margin to be 23% NetApp raised fiscal year revenue outlook on robust demand pipeline for the second half of fiscal 2022 along with strong fiscal second-quarter results and the acquisition of CloudCheckr. In November 2021, NetApp concluded the buyout of CloudCheckr for an undisclosed sum. With the CloudCheckr buyout, the company is looking to bolster the Spot by NetApp FinOps solutions. For fiscal 2022, NetApp projects revenue growth in the range of 9-10% compared with the earlier guidance of 8-9%. Public cloud ARR is expected between $510 million and $540 million compared with previous guidance of $450-$500 million The company anticipates non-GAAP earnings for fiscal 2022 between $4.90 and $510 per share compared with previous range of $4.85-$5.05 per share. The Zacks Consensus Estimate for fiscal 2022 earnings is pegged at $5.02. For fiscal 2022, NetApp expects non-GAAP gross margin to be 68% and non-GAAP operating margin in the range of 23-24%. Zacks Rank and Stock to Consider
NetApp currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks worth considering in the broader technology space includes Arrow Electronics ( ARW Quick Quote ARW - Free Report) , Alphabet ( GOOGL Quick Quote GOOGL - Free Report) and Monolithic Power Systems ( MPWR Quick Quote MPWR - Free Report) . While Alphabet and Arrow Electronics sport a Zacks Rank #1 (Strong Buy), Monolithic carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Arrow Electronics’ shares have gained 29.9% on a year-to-date basis. The long-term earnings growth rate for the company is currently projected at 27.4%. Alphabet’s shares have surged 55.5% on a year-to-date basis. The long-term earnings growth rate for the company is currently projected at 25.8%. Monolithic’s shares have rallied 72.5% on a year-to-date basis. The long-term earnings growth rate for the company is currently projected at 25%.