EUR 850.00 For Business Accounts Only

Morningstar | NetApp's Data Fabric Still Intact; Maintain $35 FVE

NetApp kicked off fiscal year 2019, beating expectations from the top line to gross margins, as it saw a continued uplift from ongoing all-flash array refresh. While NetApp has been outperforming in the all-flash market, showing the value of NetApp's Data Fabric, we believe the refresh is temporary. We trust the continued cloud transition won't be as terrible of a blow to NetApp as to other storage providers--thanks to its niche, security-concerned market. However, storage capabilities have advanced so significantly that we believe it will cannibalize the traditional and dependable five-year storage refresh cycle. For these reasons, we are maintaining our fair value estimate of $35 for this no-moat, very high uncertainty company.

In the first quarter, revenue came in at $1.47 billion, growing 12% year over year. NetApp's largest segment, product--which accounts for 59% of revenue--saw a 20% year-over-year increase, totaling $875 million. Growth was primarily driven by an unguided enterprise license agreement and all-flash array, which increased its revenue by 50% year over year. Smaller segments, software and hardware maintenance, saw little change. Software maintenance had growth of 3% year over year due to interest in cloud data services. Hardware maintenance revenue remained flat year over year.

First-quarter gross margins of 66% came in above management's guidance. As product becomes a greater part of the sales mix, however, overall margins could be worse off. Management shoots to get product margins in at 55% to help with this mix shift, but that will be tough as we expect difficult pricing to come.

Looking ahead, management guided for net revenue in the $1.45-$1.55 billion range for the second quarter, with non-GAAP EPS of $0.94-$1. Management maintained fiscal 2019 revenue growth in the mid-single digits, but raised margin guidance for fiscal 2019 from 63% to 64% due to a better-than-expected first quarter.

All in all, apart from difficulties ahead in refresh cycles, we believe that additional storage growth for private data centers will sway toward hyperconverged infrastructure. Although NetApp is in the space, NetApp is yet to break out and take significant market share despite their Data Fabric differentiator. On the public cloud side, we believe that cloud service providers aren't incentivized to adopt NetApp hardware unless requested by customers--most of those requests, we believe, would come from existing NetApp customers.