NetApp, Inc. (NASDAQ:NTAP) Q1 2020 Earnings Conference Call - Final Transcript

Aug 14, 2019 • 05:30 pm ET


NetApp, Inc. (NASDAQ:NTAP) Q1 2020 Earnings Conference Call - Final Transcript


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Ronald J. Pasek

the P&L, software maintenance and hardware maintenance revenue of $523 million decreased 1% year-over-year, and was flat when adjusting for currency. Deferred revenue, which was up 8% year-over-year in Q1, continues to be a strong indicator of the health of our installed base. As we mentioned on the Q4 call, and to provide greater insight into the dynamics of our business, we have updated our strategic and mature product view. Strategic product revenue includes add-on software, private cloud solutions and all products related to all-flash arrays. Mature product revenue now includes OEM and all products related to disk and hybrid arrays. A historical recast of the strategic mature breakout can be found on our website. As a reminder, cloud data services revenue is included in software maintenance.

Gross margin of 67.2% was above the high end of our guidance range and includes approximately a 0.5 point of currency headwind. Product gross margin was 53.4% which is an increase of 2.8 points year-over-year when adjusting for ELAs. The increase was driven by sales force discipline and cost reduction and includes nearly a point of currency headwinds. Q1 was the 10th straight quarter we increased product margins year-over-year when adjusting for the benefit of ELAs.

The combination of software and hardware maintenance and other services gross margin of 82.1% increased by 50 basis points year-over-year.

Q1 operating expenses of $652 million were flat year-over-year. Operating margin was 14.4%. EPS of $0.65 was above the preliminary estimate we provided on our August 1st call, but below our original guidance range.

We closed Q1 with $3.5 billion in cash and short-term investments. Our cash conversion cycle was a negative 10 days, up 10 days year-over-year. DSO of 40 days was up 2 days year-over-year and down 30 days sequentially. The underperformance in revenue in the quarter drove DIO to 25 days, an 8-day increase year-over-year. We expect our cash conversion cycle to remain negative throughout fiscal 2020.

Despite the revenue shortfall in the quarter, cash flow from operations was $310 million. Free cash flow of $278 million represented 22% of revenues and was up approximately 6% year-over-year.

During Q1, we repurchased 3.9 million shares at an average price of $64.87 for a total of $250 million, which is consistent with our planned run rate heading into fiscal 2020. Weighted average diluted shares outstanding were $243 million, down $26 million year-over-year, representing a 10% decrease. During the quarter, we paid out $115 [Phonetic] million in cash dividends. In total, we returned $365 million to shareholders representing 131% of free cash flow generated in the quarter. Our fiscal Q2 cash dividend is $0.48 per share.

Now onto guidance. As we discussed on our August 1st call, we expect revenues for fiscal 2020 to be down between 5% and 10% year-over-year. We continue to expect sequential growth within the year to be consistent with our normal seasonal patterns except for the volatility introduced by ELAs. For fiscal 2020, we now expect gross margin to be in the