Network Appliances Inc. (NTAP) reported second quarter fiscal 2011 adjusted earnings per share (EPS) of 45 cents, exceeding the Zacks Consensus Estimate of 39 cents. Adjusted EPS excludes amortization of intangible assets, acquisition related expenses, non-cash interest expense as well as investments and tax gains, but includes stock-based compensation expenses.
During the quarter, NetApp launched new solutions, enhanced customer satisfaction by providing advanced IT infrastructure and extended its partnership program with VMware Inc. (VMW) and Fujitsu. This led to a significant revenue growth during the quarter, which, along with operating leverage, resulted in promising quarterly earnings. Shares were up 1.73% after hours in response to the news.
Revenue
NetApp reported second quarter revenues of $1.21 billion, up 32.6% from $910.0 million in the year-ago quarter. Revenues also exceeded the Zacks Consensus Estimate of $1.19 billion and were in line with the higher end of the company’s guidance range. While product revenues witnessed the most significant increase, other segments also improved on a year-over-year basis.
Product revenues were $780.0 million in the quarter, up 48.6% from $525.0 million reported in the year-ago quarter and accounted for about 64.6% of total revenue. The improvement was due to successful product launches during the quarter.
Software Entitlement & Maintenance revenues in the quarter were $177.9 million, up 4.8% from $169.8 million reported in the year-ago quarter. The segment’s revenues represented around 14.7% of total revenue.
Service revenues were $249.5 million in the quarter, up 16.0% from $215.1 million reported in the year-ago quarter. The segment accounted for 20.7% of total revenue.
Operating Results
Gross margin on a GAAP basis was 66.3%, slightly down from 66.7% in the year-ago quarter. Improvements from tight cost control have been offset by lower average selling price. Operating income on a GAAP basis was $197.4 million (16.3% of total revenue), compared to $115.4 million (12.7% 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 increase in operating profits. Operating expenses, as a percentage of total revenue, were lower year over year.
Net income on a GAAP basis was $164.6 million, or 42 cents per share, compared with $95.7 million, or 27 cents per share in the prior-year quarter. GAAP net income in the quarter includes amortization of intangible assets, stock-based compensation expenses, restructuring charges, non-cash interest expense and tax gains.
Excluding the above-mentioned special items, net income on a non-GAAP basis, was $202.7 million, or 52 cents per share, compared with $130.1 million, or 37 cents per share in the year-earlier quarter. However, including stock-based compensation, adjusted EPS in the quarter was 45 cents.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and investments of $4.38 billion, up from $3.92 billion in the previous quarter. Receivables were $446.6 million, an increase of $74.1 million sequentially. Inventories decreased $5.7 million from the prior quarter to $84.7 million.
Long-term deferred revenues were $866.4 million, reflecting a sequential increase of approximately $45.4 million. Long-term debt was $1.33 billion, up from $1.3 billion in the prior quarter.
Cash generated from operations in the quarter was $364.7 million, up from $267.3 million in the prior-year quarter. Capital expenditure in the quarter was $43.3 million, up from $22.8 million in the year-ago quarter.
Guidance
NetApp expects third quarter 2011 revenues in the range of $1.24 billion to $1.29 billion, representing a 3% to 7% sequential growth and approximately 23% to 28% year-over- year growth. GAAP EPS is expected to range between 39 cents and 41 cents, while non-GAAP EPS is expected to be in the range of 48 cents to 50 cents. The company also expects shares outstanding to be approximately 408 million. NetApp commented that the third quarter forecasts are somewhat conservative, given slowing business trends from Europe.
Our Take
The quarter’s results were encouraging, with both revenues and earnings per share exceeding Zacks Consensus Estimates. We believe that the momentum will continue based on revenue growth trends, strong partnership programs and increasing IT spending.
NetApp is doing well, despite the stiff competition from technical behemoths such as International Business Machines Inc. (IBM) and EMC Corporation (EMC) in the data storage and management software space.
Currently, NetApp has a short-term Strong Buy recommendation, as indicated by the Zacks #1 Rank.
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