Earnings preview: What to expect from NetApp in Q4?

Data storage provider NetApp Inc. (NTAP) is set to report its earnings results for the fourth quarter of 2019 on Wednesday after the market closes. The results will be benefited by lower costs and expenses as well as revenue growth in product and software maintenance while hardware maintenance and other services could drag the results down.

The company’s major hurdle in the top line growth includes the falling revenue from the original equipment manufacturer, and tough macroeconomic scenario, as well as the competition from HP Inc. (HPQ) and International Business Machines (IBM) in the storage area network market.

The results will be driven by all-flash array annualized and cloud data services net revenue run rate. The popularity in the storage area network could drive the product revenues growth for the quarter and the synergies from strategic enterprise agreements could be beneficial for the all-flash array business segment.

Analysts expect the company’s earnings to jump by 20% to $1.26 per share and revenue will rise by 0.30% to $1.65 billion for the fourth quarter. In comparison, during the previous year quarter, NetApp posted a profit of $1.05 per share on revenue of $1.64 billion.

The company has surprised investors by beating analysts’ expectations in the past four quarters. Investors expect NetApp to report upbeat results for the fourth quarter. Majority of the analysts recommended a “strong buy” or “buy” rating while expecting the stock to reach $79.30 per share in the next 52 weeks.

Previous Quarter Performance

For the third quarter, the data storage provider swung to a profit from a loss last year, helped by lower costs and expenses. Revenue inched up by 2% helped by revenue increases in product and software maintenance but hardware maintenance and other services saw a decline. In terms of geographic mix, Americas comprised 52% of revenue, with the majority coming from Americas Commercial.

For the fourth quarter of 2019, NetApp expects net revenues in the range of $1.59 billion to $1.69 billion and GAAP earnings in the range of $1.06 to $1.12 per share. Adjusted earnings are anticipated to be in the range of $1.22 to $1.28 per share.

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The company’s advantage over its competitors will continue, as the market shifts to flash, and NetApp expects that shift to accelerate with ongoing NAND price declines. All-flash arrays carry a higher average selling price, which benefits not only product revenue, but also recurring services revenue for the third quarter.

The major market transition, which the company is exploiting, is the shift from traditional IT to the private cloud, and the shift from on-premises infrastructure to hybrid clouds. NetApp is seeing accelerating momentum with its private cloud solutions and public cloud solutions are positioned to deliver strong growth in fiscal 2020.

The fourth quarter has historically proven to be a strong seasonal period for free cash flow conversion, as such the company remained committed to driving free cash flow of 19% to 21% of revenues for the full fiscal year. NetApp’s confidence in its long-term vision and execution is reflected in capital allocation strategy.

Shares of NetApp closed Monday’s regular session down 1.39% at $68.13 on the Nasdaq. The stock has risen over 15% in the year so far and over 4% in the past three months.

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