NetApp Inc. (NTAP - Analyst Report) started fiscal 2017 on a strong note with better-than-expected results for the first quarter. Solid quarterly results boosted investor confidence, leading to the stock gaining approximately 7.5% in the afterhours trading session.

In the fiscal first quarter, NetApp’s adjusted earnings (including stock-based compensation but excluding amortization and other one-time items) of 28 cents per share beat the Zacks Consensus Estimate of 18 cents and witnessed a whopping seven-fold year-over-year jump.

On a GAAP basis, NetApp posted earnings of 23 cents per share. In the prior-year quarter, the company had reported a loss of 10 cents. The year over year strong bottom-line performance was mainly attributable to the company’s stringent cost control initiatives.

NETAPP INC Price, Consensus and EPS Surprise

NETAPP INC Price, Consensus and EPS Surprise | NETAPP INC Quote

Quarter in Details

The company’s net revenue of $1.294 billion surpassed the Zacks Consensus Estimate of $1.264 billion as well as the mid-point of its own guidance range of $1.20 billion to $1.35 billion (mid-point $1.275 billion). However, on a year-over-year basis, the top line witnessed a decline of 3.1%.

On an operating segment basis, Product revenues (51% of total revenue) dipped 0.6% year over year to $660 million, while Software Maintenance revenues (19%) decreased 2.8% to $241 million. Revenues from Hardware Maintenance & Other Services (30%) dropped 7.1% to $393 million. Within Service revenues, hardware maintenance support contract revenues fell 6.6% to $323 million, while Professional & Other Services’ revenues tanked 9.1% to $70 million.

Adjusted gross margin contracted 90 basis points (bps) to 62.1% primarily due to lower product gross margin and a lower revenue base.

Adjusted operating expenses declined 14.2% to $699 million. As a percentage of revenues, the figure contracted 700 bps to 54% mainly due to the company’s ongoing cost reduction initiatives.

Consequently, adjusted operating income surged four folds to $104 million. Adjusted operating margin improved 610 bps to 8% primarily due to lower operating expenses as a percentage of revenues.

Balance Sheet & Cash Flow

NetApp exited the quarter with cash, cash equivalents and investments of $4.421 billion, compared with $5.303 billion as of Apr 29, 2015. Receivables were $501 million compared with $813 million in the previous quarter. The company has a long-term debt balance of $1.491 billion.

NetApp generated cash from operations of $228 million during the quarter, compared with $129 million in the prior-year quarter. Further, NetApp repurchased shares worth $175 million and paid $53 million as dividends in the first quarter.

Guidance

NetApp has issued its outlook for the second quarter of fiscal 2017. The company expects revenues in the range of $1.265 billion to $1.415 billion. The Zacks Consensus Estimate is pegged at $1.34 billion. GAAP earnings per share are anticipated to be between 31 cents and 36 cents, while non-GAAP earnings per share are projected in the range of 51 cents to 56 cents. The Zacks Consensus Estimate stands at 34 cents.

Our Take

NetApp started fiscal 2017 on a strong note with better-than-expected results for the first quarter. Both its top line and bottom line surpassed the respective Zacks Consensus Estimate. Although, revenues witnessed a year-over-year decline, adjusted earnings increased seven times mainly on the back of stringent cost control initiatives.

Further, despite challenging macroeconomic conditions and tepid IT spending environment, NetApp provided an optimistic outlook for the second quarter.

The company is expected to gain momentum in the flash-based solutions space, with the newly introduced all-flash array, which will help it to establish its presence in the storage market. The recent product launches and refreshes will drive the top line, while cost reduction initiatives will facilitate margin expansion over the long run.

However, the recent forecast for worldwide IT spending by Gartner raises concerns about NetApp’s near-term performance. Competition from EMC Corp. (EMC - Analyst Report) and HP Inc. (HPQ - Analyst Report) add to its woes.

NetApp currently carries a Zacks Rank #4 (Sell). A better-ranked stock in the broader technology sector is Datalink Corp. (DTLK - Snapshot Report) , sporting a Zacks Rank #1 (Strong Buy).