Data storage firm NetApp (NTAP 53.17, +7.35 +16.0%) spikes to better than six-year highs this afternoon in response to the company’s impressive Q2 earnings and Q3 guidance. The likely impetus behind the Q2 beat -- strength in the company’s Flash business.
For those who may not be familiar with the name, it may be prudent to delve quickly into what exactly NTAP does. The company groups their products by “Strategic” and “Mature” solutions. Strategic solutions include Clustered ONTAP, branded E-Series, SolidFire, AltaVault and optional add-on software products. Its Mature solutions include 7-mode OnTap, add-on hardware and related operating system (OS) software and original equipment manufacturers (OEM) products. Both NTAP’s Mature and Strategic product lines include a mix of disk, hybrid and all flash storage media. Basically, think of NTAP as a cloud data storage company – one that earns revenues both by selling its products and providing product maintenance.
Getting back to the results, NTAP impressed the Street both on the top and bottom lines in Q2. Earnings per share came in at $0.81 and revenues rose about 6% to $1.42 billion on gross margins of 64.3% (above the 63-63.5% guidance). Product revenues grew about 14% year-over-year to $807 million, offsetting modest declines in both Software and Hardware maintenance revenues. Importantly, NTAP’s All-Flash Array business – which includes All-Flash FAS, EF and SolidFire products – grew about 60% year-over-year to an annualized net revenue run rate of $1.7 billion.
By product line, management noted the headwinds in the Mature Product solutions are likely to abate in the coming quarters; in Q2, revenues from this area were down about 3% to about $250 million. Namely, NTAP noted that transition from 7-mode to Clustered ONTAP is in the rear-view mirror and the add-on hardware business is growing.
Further, the company’s SAN market saw strength, gaining share in Q2. Specifically, All-Flash FlexPod again helped results in the converged infrastructure market, contributing to 20% year-over-year growth in FlexPod revenues.
The Q3 guidance was equally impressive; NTAP sees net revenues in the range of $1.425-1.575 billion on EPS of $0.86-0.94 with gross margins between 62.5-63.5%. The company remains comfortable with the guidance given on last quarter’s call as it pertains to the second half of FY2018.
Specifically, they continue to expect their year-over-year growth rate to accelerate in the second half of the year and expect typical seasonal patterns with revenue dollars increasing each quarter. Further, NTAP expects gross margins for the remainder of the year to be at the high end or slightly above the 62-63% range previously communicated with operating margins to be at the high end of the 18-20% range previously communicated. Further, the company remains committed to achieving low-double-digit EPS growth for the year and FCF in the range of 19-21% of revenues.