Barclays Finds The Post-Earnings Bump In NetApp Surprising

NetApp Inc. NTAP reported Q2 results and Q3 guidance ahead of expectations on the back of “yet another round of cost cuts and restructuring measures.”

Barclays’ Mark Moskowitz maintained an Underweight rating on NetApp, while raising the price target from $25 to $27.

NetApp’s shares recorded strong gains, which was surprising, although the company’s strategic revenue growth slowed significantly and storage system revenue declined nearly 13 percent “after almost flattening last quarter,” Moskowitz commented.

Strategic Revenue Growth

While NetApp’s successful turnaround is based on “consistent, strong growth from strategic revenue” and a slowdown in legacy revenue declines, neither occurred during the quarter, Moskowitz pointed out. Strategic revenue came in at $439 million, representing merely 1 percent year-over-year growth. “Even when considering relative comps, trends seem concerning.”

The decline in legacy revenue accelerated to -29 percent year-over-year from -24 year-over-year in the prior quarter.

Storage System Revenue

Storage system revenue fell back “into old habits,” the analyst mentioned. The reported figure of $1.34 billion was significantly short of Barclays’ estimate of $1.39 billion and the Street’s $1.36 billion. Storage system revenue declined by 12.9 percent year-over-year, “a dramatic shift after storage system revenue almost flattened in Jul-Q (i.e., declining 0.6% Y/Y).”

“We understand that both of these declines were impacted by difficult, but in our view, manageable comps,” Moskowitz added.