Shares of NetApp Inc. (NTAP - Analyst Report) went down 8.1% in after-hours trading yesterday, after the company posted dismal fourth-quarter fiscal 2015 results. Also, a tepid first quarter fiscal 2016 guidance impacted the share price.

The company reported adjusted earnings (including stock-based compensation but excluding amortization and other one-time items) of 47 cents, which missed the Zacks Consensus Estimate of 55 cents. Also, adjusted earnings decreased from 71 cents reported in the year ago-quarter.

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Quarter Details

NetApp’s revenues decreased 6.6% year over year to $1.54 billion and missed the Zacks Consensus Estimate of $1.59 billion. The year-over-year decline was primarily due to weakness in Americas commercial sales geography and unfavorable foreign exchange rates. Also, a 7% drop each in original equipment manufacturer (OEM) revenues and Branded revenues impacted the quarter’s revenues.

On an operating segment basis, Product revenues (59% of total revenue) decreased 12.4% from the year-ago quarter to $913.4 million. Software Maintenance revenues (15%) were almost flat year over year at $227 million.

Nonetheless, Hardware Maintenance & Other Services (26%) increased 5.6% year over year to $399.8 million. Within Service revenues, hardware maintenance support contracts revenues increased 10% from the year-ago figure, which more than offset the decline in revenues from Professional & Other Services (down 9.8% year over year).

The company witnessed strong demand for its storage operating system — Data ONTAP — and flash solutions.

Adjusted gross margin (including stock-based compensation but excluding amortization and other one-time items) contracted 240 basis points (bps) from the year-ago quarter to 61.7%. The decrease came primarily on the back of lower product and Software maintenance gross margins. Also, a lower revenue base negatively impacted the gross margin.

Adjusted operating expenses (including stock-based compensation but excluding amortization and other one-time items), as a percentage of revenues, increased 300 bps to 50.2%.

Adjusted operating margin (including stock-based compensation but excluding amortization and other one-time items) contracted 530 bps to 11.5% from the year-ago quarter, primarily due to higher operating expenses, as a percentage of revenues and lower gross margins. Net income (including stock-based compensation but excluding one-time items and related tax effect) came in at $148.2 million compared with the year-ago figure of $235.6 million.

Balance Sheet & Cash Flow

NetApp exited the quarter with cash, cash equivalents and investments of $5.33 billion, compared with $5.25 billion in the previous quarter. Receivables were $778.9 million versus $666.3 million in the last quarter. The company has a long-term debt balance of $1.49 billion.

NetApp generated cash from operations of $396.6 million compared with $274.6 million in the earlier quarter. During the quarter, the company repurchased stocks worth $246 million and paid $51 million as dividend.

Guidance

For the first quarter of fiscal 2016, NetApp expects revenues in the range of $1.275 to $1.375 billion (mid-point $1.325 billion). The Zacks Consensus Estimate is pegged at $1.465 billion. Management expects non-GAAP earnings per share to come between 20 cents and 25 cents (mid-point 22.5 cents). The Zacks Consensus Estimate stands at 41 cents.

Our Take

NetApp reported dismal fourth-quarter results and provided lower-than-expected guidance for the next quarter. Also, year-over-year comparisons on both the counts were unfavorable. The year-over-year decline was primarily due to weakness in Americas commercial sales geography and unfavorable foreign exchange rates.

Nevertheless, the company is gaining momentum in flash-based solutions with the newly introduced all-flash array, which will help it to gain traction in the storage market. The recent product launches and product refreshes will drive revenues and stringent cost controls will ensure margin expansion.

However, we believe that an uncertain IT spending outlook and competition from EMC Corp. (EMC - Analyst Report) and Hewlett-Packard Company (HPQ - Analyst Report) remain headwinds. A persistent decline in OEM revenues further adds to the woes.

NetApp currently carries a Zacks Rank #4 (Sell). A better-ranked stock in the technology sector is Cirrus Logic Inc. (CRUS - Snapshot Report), sporting a Zacks Rank #1 (Strong Buy).

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