Benefits Of NetApp's Streamlining Are Starting To Show

Brean Capital’s Ananda Baruah believes NetApp Inc. NTAP shares are cheap at the current valuation, and if the company executes on its FY17 revenue growth guidance, the stock could continue to move higher.

Baruah maintains a Hold rating on the company.

Growth Story

“The story is that Emerging Product sales is growing strong at 24 percent Y/Y and NTAP is vocally stating a return to overall revenue growth by Apr Q '17,” the analyst mentioned.

In addition, with cost alignment, the company has guided to operating margin expansion from 13 percent at present to 18–20 percent for FY18.

“Additionally, it appears Street may not be modeling ANY of the $1.3 billion remaining in share repurchase, which our modeling suggests could add as much as $0.30–$0.35 to Street FY18E EPS of ~$2.47 heading into the call,” Baruah said.

Related Link: NetApp's Descent Appears To Be Leveling Off, BTIG Says

July Quarter

NetApp reported its July quarter revenue and EPS ahead of the consensus expectations. Overall revenue decline 3 percent, year-on-year, with product revenue falling 1 percent year-on-year, services dropping 7 percent and software subscription falling 2 percent year-on-year.

Guidance

Following gross margins of 62.5 percent for the July quarter, management expects a decline, guiding to October quarter gross margin of 62–63 percent.

The company has also guided to revenue of $1.265–$1.415 billion and EPS of $0.51–$0.56, ahead of the consensus forecasts.

“Revenue guidance implies a Y/Y decline of 4 percent as growth in the strategic product category is offset by a further decline in the mature business bucket,” the analyst stated.

Streamlining

Early benefits of the company’s streamlining efforts have begun to bear fruit, the analyst pointed out, saying that NetApp continues to target cost control across all aspects.

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