NetApp (NTAP) is trading sharply lower this morning after reporting earnings for Q4 (Apr) last night and guiding for Q1 (Jul). NTAP is a supplier of data storage systems used by businesses for archiving and backup.
Non-GAAP EPS rose 9% yr/yr to $1.22, which was on the lower end of prior guidance of $1.22-1.28. Revenue fell 3.2% yr/yr to $1.59 bln, which also was on the lower end of prior guidance of $1.59-1.69 bln. NTAP could argue AprQ results were within its guidance range, but investors are generally disappointed when they come in at the low end. Also, both EPS and revenue were below analyst expectations.
The move is not just due to disappointing Q4 (Apr) results. It appears that FY20 is off to a slow start as well as the guidance for Q1 (Jul) came in well below market expectations: non-GAAP EPS of $0.78-0.86 and revenue of $1.315-1.465 bln. For the full year, NTAP expects revenue growth "at the low-end of mid-single-digit range." This is roughly in-line with analyst expectations, so perhaps there is more weakness at the start of the fiscal year.
On the call, CEO George Kurian cited some execution issues in the quarter and some FX headwinds. Specifically, Kurian said NTAP's execution challenges were in three areas:
- NTAP was "inconsistent in its go-to-market execution." NTAP is reallocating resources to fix this, enabling European distributors to lead in smaller countries and NTAP is boosting its sales team that is focused on acquiring new enterprise accounts;
- NTAP concedes it did not execute well on renewals; and
- Its OEM business was down significantly. It's just a small part of total revenue, but it had an impact. Of note, NTAP does not expect its OEM business to recover the company says it is "resetting our expectations. OEM will be materially lower in fiscal year 2020 and will create a slight headwind to growth in the first three quarters of the year."
Besides earnings, the other big announcement was a 20% dividend increase. It initially seemed a bit odd to have such a big increase when guidance was lowered so much. However, when we checked NTAP's dividend history, this is not unusual. It has bumped up its dividend at the end of the past few fiscal years, as is the case here. Also, the 20% increase is a lot, but last year, NTAP doubled its quarterly dividend from $0.20 to $0.40 and now it's going to $0.48. That is a big increase in just two years and maybe NTAP is deciding to offer more of a dividend to maintain its attractiveness if growth is slowing a bit.
Overall, while it's nice to get a dividend boost, we are cautious on NTAP in the near term. This was NTAP's first EPS miss in three years. Also, that JulQ EPS guidance was quite a bit below market expectations, which makes us nervous about future guide-downs in the coming quarters. Hopefully, NTAP bounces back with a nice beat-and-raise next quarter but we think caution makes sense for now.