NetApp's Legacy Business Drove Q1 Beat; Morgan Stanley Maintains Underweight Recommendation

NetApp Inc. NTAP reported its Q1:F17 results, with the revenue beating expectations.

Morgan Stanley’s Katy L. Huberty maintains an Underweight rating on the company, while raising the price target from $21 to $24.

Revenue Beat

“Mature business drove much of the July revenue beat with OEM and US Public Sector surprising positively. Restructuring is beginning to bear fruit in lower service costs and OpEx,” Huberty mentioned.

NetApp reported its Q1:F17 revenue 3 percent ahead of the consensus forecast, driven by a 24-percent decline in Mature product revenue, as compared to a 40-percent decline in FY16.

“The improvement is a function of 1) better performance in the quarter at OEM customers which isn't necessarily expected to continue and 2) better US Public sector growth skewed to Ontap 7 refreshes,” the analyst explained.

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Margins

Margins and free cash flow also beat expectations, driven by the company’s restructuring efforts. The new CFO, Ron Pasek, has prioritized cost control, with NetApp achieving run-rate savings of $50 million during the quarter.

Management guided to operating margin of 15–17 percent for FY17, which Huberty believes could be achievable.

Free Cash Flow

The analyst pointed out that the company’s focus on streamlining its business, along with improved linearity drove lower inventory and A/R days, which in turn led to a 100 percent year-on-year increase in free cash flow.

Full ratings data available on Benzinga Pro.