NetApp's Challenging Fundamentals Have Goldman Still Selling The Stock

NetApp Inc. (NASDAQ: NTAP) announced its F4Q EPS results and F1Q EPS guidance short of expectations. Goldman Sachs’ Simona Jankowski maintained a Sell rating for the company, while reducing its price target from $24 to $23.

NetApp reported its F4Q non-GAAP EPS at $0.55, below GS estimate of $0.57 and consensus expectation of $0.58. The company guided to F1Q non-GAAP EPS of $0.34-$0.39, missing the GS estimate of $0.40 and Street expectation of $0.45.

Fundamentals Remain Challenging

NetApp is operating against the backdrop of a sluggish IT spending environment, while facing headwinds from the transition to cloud and intense competition in storage. Meanwhile the company is also going through a product transition.

While mentioning that the revenue shortfall was not surprising, analyst Simona Jankowski identified two new negatives that had emerged from NetApp’s report.

Product gross margin came in at 46.8 percent, significantly short of the estimate of 50 percent. Moreover, this was the lowest level in 15 years and had resulted from pricing pressure in flash storage, where several new competitors had launched new products during the quarter.

Services were down 3 percent y/y, declining for the first time. This is a “worrying sign on the health of the installed base, even though management said the installed base continued to grow,” Jankowski said.

As a positive, the analyst stated that flash revenues had surged by a strong 35 percent q/q to $175mn. This was mostly organic growth, since the SolidFire acquisition [closed on February 2] did not contribute meaningfully.

The non-GAAP EPS estimates for FY17 and FY18 have been reduced further below consensus; from $2.21 to $2.08 and from $2.42 to $2.36, respectively, to reflect lower margins.