NetApp Inc. (NTAP) reported third quarter fiscal 2011 adjusted earnings per share (EPS) of 45 cents, exceeding the Zacks Consensus Estimate of 41 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.
During the quarter, NetApp launched new solutions and improved its IT infrastructure that enhanced customer satisfaction. This led to significant revenue growth during the quarter, which, along with operating expense control, resulted in the earnings surprise.
Revenue
NetApp reported third quarter revenues of $1.27 billion, up 25.3% from $1.01 billion in the year-ago quarter. Revenues also fell short of the Zacks Consensus Estimate of $1.28 billion and were in line with the higher end of the company’s guidance range. While product revenues grew the most, other segments also improved on a year-over-year basis.
Product revenues were $818.6 million in the quarter, up 32.2% from $619.0 million reported in the year-ago quarter and accounted for about 64.6% of the total revenue. The improvement was attributable to successful product launches during the quarter.
Software Entitlement & Maintenance revenues were $183.8 million in the quarter, up 7.5% from $170.9 million in the year-ago quarter. The segment’s revenues represented around 14.5% of total revenue.
Service revenues were $265.7 million in the quarter, up 19.8% from $221.8 million reported in the year-ago quarter. The segment accounted for 21.0% of total revenue.
Operating Results
NetApp delivered GAAP gross profit of $823.8 million, representing a 28.4% year-over-year increase. Gross margin on a GAAP basis was 65.0%, up from 63.4% in the year-ago quarter. Tight cost control and a stable average selling price powered the gross margin expansion.
Operating income on a GAAP basis was $198.6 million (15.7% of total revenue), compared to $129.3 million (12.8% of total revenue) in the year-earlier quarter. Substantial increase in the company’s sales, as well as tight control on operating expenses led to the higher operating profits. Operating expenses, as a percentage of total revenue, were lower year over year.
Net income on a GAAP basis was $172.5 million, or 42 cents per share, compared with $107.9 million, or 30 cents per share in the prior-year quarter.
Excluding the above-mentioned special items, but including stock-based compensation, adjusted net income was $182.8 million or 45 cents per share, compared to $119.1 million or 33 cents.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and investments of $4.78 billion, up from $4.38 billion in the previous quarter. Receivables were $541.5 million, up by $94.9 million sequentially. Inventories increased $12.5 million from the prior quarter to $97.2 million.
Long-term deferred revenues were $966.4 million, reflecting a sequential increase of approximately $100.0 million. Long-term debt was $1.34 billion, up from $1.33 billion in the prior quarter.
Cash generated from operations in the quarter was $363.5 million, slightly down from $364.7 million in the prior quarter. Capital expenditure in the quarter was $66.3 million, up from $43.3 million in the year-ago quarter.
Guidance
NetApp expects fourth quarter 2011 revenues of approximately $1.38 billion (+/- 2%), representing a 7% to 11% sequential growth and approximately 15% to 20% year-over- year growth. NetApp expects further increases in product demand, but fears some supply constraints in the fourth quarter
Non-GAAP gross margins are expected to be roughly 65%, while non-GAAP operating margins are projected at around 18.2%. GAAP EPS is expected to range between 38 cents and 42 cents, while non-GAAP EPS is expected between 49 cents and 53 cents. The company also expects shares outstanding to be approximately 414 million.
Our Take
The quarter’s results were encouraging, with the earnings per share exceeding the Zacks Consensus Estimate and revenues missing the same mildly. We believe that the momentum will continue based on revenue growth trends, strong partnership programs and increased IT spending.
Moreover, we are optimistic about NetApp’s merger and acquisition strategy. Recently, NetApp acquired Akorri Networks Inc. to supply a wide range of tools to automate and analyze their IT infrastructures, increase efficiency, and provide new business needs.
NetApp is performing impressively, despite stiff competition from industrial big shots such as International Business Machines Inc. (IBM) and EMC Corporation (EMC).
NetApp is currently rated as a Zacks #2 Rank (short-term Buy) stock.
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