By: Rachel Gunter
Cloud ERP expected to grow 10% annually until 2021
According to a new report by research firm MarketsandMarkets, the global enterprise resource planning (or ERP) market is set to expand at a healthy annual rate in the next few years. The global cloud ERP market was valued at a little over $18.5 billion in 2016, and it’s projected to increase to more than $29.8 billion by 2021, implying an average annual growth of 10% during the forecast period.
The healthy growth of the cloud ERP market should bring glad tidings to Oracle (ORCL). While Oracle isn’t the leading cloud vendor overall, research firm Gartner recently mentioned it as a leader in cloud ERP. Gartner describes cloud ERP leaders as those that have demonstrated characteristics such as a market-defined vision of how systems and processes can be supported and improved by migrating them to the cloud.
ERP gains are driving Oracle’s top line
Cloud computing and enterprise mobility are some of the factors driving growth of the cloud ERP market.
Oracle appears to be well-positioned for a strong demand for cloud ERP. While releasing its fiscal 1Q18 (August quarter) results, Oracle’s management stated that ERP is the company’s largest and most important cloud applications business. The company further said that it exited the latest quarter with 5,000 Fusion ERP customers and 12,000 NetSuite ERP customers on its cloud platform.
Gains in the cloud ERP market saw Oracle’s SaaS (Software as a Service) revenue rise 62% YoY (year-over-year) to $1.1 billion in 1Q18. That, in turn, boosted Oracle’s overall revenue to $9.2 billion, a 7.0% rise YoY, in the latest quarter.
How Oracle’s ERP rivals fared
In the ERP market, Oracle is competing for revenues with US-based (SPY) Microsoft (MSFT) and Workday (WDAY) and Germany-based (EWG) SAP SE (SAP). Microsoft reported revenue growth of 12% in fiscal 1Q18 (September quarter), Workday reported revenue growth of 40% in fiscal 2Q18 (July quarter), and SAP reported revenue growth of 4.0% in 3Q17.
Understanding Symantec’s Growth Pillar
Revenue grew 27%
Symantec (SYMC) reported fiscal 2Q18 (September quarter) revenue that rose in the double-digit percentage and topped the consensus estimate. Revenue of ~$1.2 billion rose 27% YoY (year-over-year) and surpassed the consensus estimate by ~$10 million. On an adjusted basis, Symantec generated revenue of ~$1.3 billion, a 26% rise YoY.
Symantec’s rival security vendors Proofpoint (PFPT), FireEye (FEYE), and SecureWorks (SCWX) reported revenue growth of 35%, 2%, and 12% YoY, respectively, in their quarters that correspond to Symantec’s fiscal 2Q18. Cisco Systems (CSCO), another security vendor, posted a 4.0% YoY fall in its fiscal 4Q17 (July quarter).
Consumer safety segment supported growth
Symantec’s Consumer Digital Safety segment was a notable growth driver in 2Q18. Adjusted sales in this segment rose 42% YoY to $575 million to contribute 45% of total revenue. In 2Q18, Symantec’s consumer safety business benefited from the strong adoption of its security products following the disclosure of the massive data breach at Equifax (EFX). Demand for Symantec’s LifeLock services soared in the wake of the Equifax breach.
High-profile hacks leading organizations to rethink their online safety
In the Enterprise Security segment, Symantec reported adjusted revenue of $701 million, a 15% rise YoY. Petya and WannaCry ransomware attacks and the Equifax breach continued to draw more enterprise customers to Symantec’s security products in 2Q18, boosting sales in this segment.
The rise of high-profile data breaches is leading a growing number of enterprises to rethink their online security, which could expand the market for security vendors such as Symantec.
Symantec posted 2Q18 adjusted EPS (earnings per share) of $0.40, a 33% rise YoY.
The Impact of Symantec’s Cost-Cutting Program
Symantec achieved cost milestones
For fiscal 2Q18 (September quarter), Symantec (SYMC) reported an operating margin and adjusted net profit that rose significantly from the year-ago quarter. Its operating margin was 34.1% in 2Q18, a 29.2% rise from the previous year, implying that its operating margin rose 4.9% YoY (year-over-year). Its adjusted net profit was $268 million in 2Q18, indicating an improvement of 40% YoY.
The margin and bottom line improvements that Symantec registered in 2Q18 were most likely the fruits of the company’s cost-reduction program. In 2Q18, Symantec reported achieving $550 million in cost synergies tied to the acquisition of security services vendor Blue Coat. Symantec also achieved $30 million in cost synergies tied to its acquisition of LifeLock, an identity theft protection service.
The cost milestones tied to Blue Coat and LifeLock were achieved ahead of schedule, implying strong execution by Symantec on the cost-cutting front.
Sale of website security business could save more costs
Symantec recently announced that it has completed the sale of its Website Security and PKI Solutions to DigiCert. The company sold the assets for $960 million in cash and stock considerations. Selling its Website Security business could lead to more cost-cutting opportunities for Symantec.
The company plans to use the proceeds from the sale of its Website Security business to repay debt. Symantec was carrying a long-term debt of ~$6.1 billion at the end of fiscal 2Q18. Proofpoint (PFPT) and FireEye (FEYE) were carrying long-term debts of $831.2 million and $770 million, respectively, at the end of their September quarters. But Fortinet (FTNT) and Check Point Software Technologies (CHKP), two other security vendors, didn’t carry any debt at the end of their September quarters.
Reducing its interest expense burden
Debt repayment could help Symantec reduce its interest expense burden, potentially leading to more profits.
Is Microsoft Winning the Cloud Computing War?
LinkedIn contributed $1.1 billion to top line
Microsoft (MSFT) said its cloud business exceeded $20 billion in annual revenue run-rate in fiscal 1Q18 (September quarter). That indicates that its cloud business has grown faster than the company expected.
According to Synergy Research Group, Microsoft is leading the enterprise SaaS (Software as a Service) subset of cloud computing. That indicates that Microsoft is sitting above Oracle (ORCL) and Alphabet’s (GOOGL) Google in the SaaS market.
Microsoft’s position in the enterprise SaaS market got a boost from its acquisition of professional networking site LinkedIn. Microsoft said LinkedIn contributed $1.1 billion to its top line in the latest quarter.
SaaS growth path remains long and wide
Since spending on SaaS is relatively small compared to on-premise enterprise software spending, Synergy says that SaaS growth will remain strong for many years. As such, Synergy forecasts that the SaaS market will double in size in the next three years. The SaaS market was estimated at $15 billion in 2Q17.
Given Microsoft’s leading position in the enterprise SaaS market and the projected robust growth of the SaaS market in the coming years, the company’s cloud revenue growth could accelerate.
Cloud revenue rose 14%
Microsoft reported Intelligent Cloud revenue of $6.9 billion in 1Q18, a 14% rise YoY (year-over-year). It’s in the Intelligent Cloud segment that Microsoft reports Azure sales, which rose 90% YoY.
Azure is Microsoft’s cloud business that’s most comparable to Amazon’s (AMZN) Amazon Web Services (or AWS), whose revenues rose 42% YoY to $4.6 billion in 3Q17. Oracle and International Business Machines (IBM) reported that their cloud revenues rose 51% and 20% YoY, respectively, in the quarters that are comparable to Microsoft’s fiscal 1Q18. Although Google doesn’t break out its cloud sales, its Google Other revenues, which include cloud sales, rose 40% YoY in its September quarter, the period comparable to Microsoft’s fiscal 1Q18
Why Microsoft’s Expenses Are Rising
R&D expenses rose 15% YoY
Some of Microsoft’s (MSFT) key cost items have increased consistently in the last four quarters. In fiscal 1Q18 (September quarter), its cost of revenue rose 6.0% YoY (year-over-year), its sales and marketing expenses rose 18% YoY, and its R&D (research and development) expenses rose 15% YoY.
In fiscal 4Q17 (June quarter), its cost of revenue rose 5.0% YoY, its marketing expenses rose 6.0% YoY, and its R&D expenses rose 9.0% YoY.
Operating expenses rose to $16.8 billion
In fiscal 1Q17, Microsoft’s cost of revenue rose 9.0% YoY, its marketing expenses rose 3.0% YoY, and its R&D expenses rose 5.0% YoY. Its marketing and R&D expenses have risen steadily since 1Q17.
The increase in its cost of revenue, marketing expenses, and R&D expenses saw Microsoft’s total operating expenses rise to $16.8 billion in 1Q18, compared to $15.2 billion in 1Q17.
LinkedIn at the center of rising costs
The increases in Microsoft’s expenses in recent quarters could be attributed to the acquisition of professional networking site LinkedIn. In recent quarters, the company has been citing LinkedIn as a primary driver of its costs tied to revenue, marketing, and R&D.
In 1Q18, LinkedIn generated $1.1 billion in revenue for Microsoft, but the business produced an operating loss of $294 million in the quarter. Among other ways, Microsoft monetizes LinkedIn through online advertising. LinkedIn’s advertising rivals Facebook (FB), Alphabet (GOOGL), Twitter (TWTR), and Yelp (YELP), which reported advertising revenues of $10.1 billion, $24.1 billion, $503 million, and $199.6 million, respectively, for their quarters that are comparable to Microsoft’s fiscal 1Q18
Is FireEye’s Cost-Cutting Bearing Fruit?
FireEye cut operating loss by 82% YoY
FireEye (FEYE) is continuing to watch for cost-saving opportunities. Regarding improving operating efficiency, FireEye’s CEO (chief executive officer) Kevin Mandia said in a statement that accompanied the company’s 3Q17 earnings release, “I believe we have done an excellent job of right-sizing our cost structure over the past year while innovating faster than at any time in our history.”
FireEye said it was able to cut its GAAP (generally accepted accounting principles) operating loss by 45% YoY (year-over-year) and its non-GAAP (adjusted) operating loss by 82% YoY in 3Q17.
FireEye trims more than $125 million in operating loss in three quarters
In the first three quarters of 2017, FireEye said it was able to reduce its GAAP operating loss by more than $200 million and its adjusted operating loss by more than $125 million, compared to a similar period last year.
FireEye views the cost reductions as paving the way to profitability. The company is expecting adjusted operating profitability in 4Q17.
EPS loss narrowed significantly despite tepid top-line growth
Since FireEye only posted slim revenue growth in 3Q17, cost reduction appears to have contributed to its strong YoY bottom-line improvement in the quarter. FireEye’s revenue rose 2% YoY to $189.6 million in 3Q17, but its adjusted EPS (earnings per share) loss narrowed significantly on a YoY basis. FireEye posted an adjusted EPS loss of $0.04 in 3Q17, compared to an adjusted EPS loss of $0.18 in 3Q16.
FireEye’s EPS loss for 3Q17 beat the consensus estimate by $0.03.
Proofpoint (PFPT), Check Point Software Technologies (CHKP), and SecureWorks (SCWX) beat their consensus EPS by $0.07, $0.04, and $0.01, respectively, in their quarters that correspond to FireEye’s fiscal 3Q17. Symantec (SYMC) missed the consensus EPS by $0.03 in a comparable period.
Can FireEye Keep Up with the Competition?
FireEye invested $64.2 million in R&D
Amid the rise of cyberthreats, cybersecurity providers can be seen directing more of their resources to innovations. In 3Q17, FireEye (FEYE) invested more than $64.2 million in R&D (research and development), compared to $60.8 million in the prior quarter and $62.7 million in the year-ago quarter. Symantec’s (SYMC) R&D budget was $241 million in fiscal 2Q18 (September quarter), compared to $233 million in the prior quarter.
Security vendors doubling down on R&D investment
Proofpoint (PFPT) invested $32.5 million in R&D in the September quarter compared to $32.3 million in the prior quarter. Check Point Software Technologies’ (CHKP) R&D budget for the September quarter was $47.3 million compared to $44.5 million in the prior quarter. SecureWorks (SCWX) invested $19.7 million in R&D in the September quarter compared to $19.5 million in the prior quarter.
With cybersecurity vendors doubling down on R&D investments to expand and strengthen their product portfolios, will FireEye be able to keep up with the competition and capitalize on the growing demand for cybersecurity? Time will tell.
A strong balance sheet
FireEye exited 3Q17 with a fairly healthy balance sheet, indicating that the company could continue to fund its R&D programs without much trouble in order to sharpen its competitive edge. FireEye had an $878.8 million cash balance at the end of 3Q17, offset by total debt of $770 million. FireEye also continues to generate cash from its operations. It generated cash flow from operations of $12.5 million in 3Q17, exceeding internal guidance that called for cash flow from operations of $1 million–$10 million.
Will NetApp Beat Analyst Estimates in Fiscal 2Q18?
What Analysts Expect from NetApp in Fiscal 2Q18
Average revenue estimate of $1.38 billion
Analysts expect US-based (SPY) storage tech (QQQ) firm NetApp (NTAP) to report revenues of $1.38 billion in fiscal 2Q18, which ended in October 2017. Wall Street has a high revenue estimate of $1.42 billion and a low estimate of $1.35 billion for 2Q18. If NetApp meets the analyst average revenue estimate of $1.38 billion, it would mean a YoY (year-over-year) rise of 3.2% compared with its revenues of ~$1.34 billion in 2Q17.
Its non-GAAP (generally accepted accounting principles) EPS (earnings per share) is estimated at $0.69 with a high estimate of $0.74 and a low estimate of $0.65. In fiscal 2Q17, NetApp reported EPS of $0.60, indicating that analysts expect EPS growth of 15% YoY in 2Q18.
NetApp has beaten the analyst EPS estimates in each of the past four quarters. It reported EPS of $0.62 in 1Q18, which was 12.7% above the analyst estimate of $0.55. The firm also announced EPS of $0.86 in 4Q17, which was 4.9% above the analyst estimate of $0.82. Its EPS of $0.82 in 3Q17 was 10.8% above estimates, while the firm’s EPS of $0.6 in 2Q17 was 11% above the average analyst estimate.
NetApp’s revenue rose 2% in fiscal 1Q18
In fiscal 1Q18, NetApp reported revenue of $1.3 billion, a rise of 2% YoY compared to revenue in 1Q17. NetApp’s net income was $136 million, or $0.62 per share, in 1Q18. Analysts estimated the firm would post EPS of $0.55 in fiscal 1Q18.
NetApp will be announcing its 2Q18 results on November 15, 2017.
Will NetApp’s Revenue Continue to Rise in Fiscal 2018?
Analysts expect NetApp’s revenue to rise 2.7% in fiscal 2018
Analysts expect NetApp’s (NTAP) revenues to rise 2.7% YoY (year-over-year) to $5.7 billion in fiscal 2018 compared with its revenues of $5.5 billion in fiscal 2017. NetApp’s revenues are also expected to rise 2.1% in fiscal 2019 on a YoY basis to $5.8 billion.
NetApp’s non-GAAP (generally accepted accounting principles) EPS (earnings per share) could rise 14% YoY in fiscal 2018 to $3.12 and 9% YoY to $3.40 in fiscal 2019. Analysts expect the revenues of storage firms such as Western Digital (WDC), Seagate (STX), and Pure Storage (PSTG) to rise 5.8%, -7.1%, and 38.7%, respectively, in their next fiscal years.
In the above chart, we can see that NetApp’s revenue has fallen YoY between fiscal 2013 and fiscal 2017. Analysts expect NetApp to return to revenue growth in fiscal 2018.
In order to offset difficult macro conditions and increase shareholder value, NetApp has increased its dividend yield every year since 2014. NetApp has a dividend yield of $0.20 per share per quarter, or an annualized payout of $0.80 per share, which indicates a dividend yield of 1.7% and a dividend payout ratio of 32.1%.
NetApp’s dividend yield has risen at a CAGR (compounded annual growth rate) of 35.1% since 2014. The company’s dividend yield has risen 7.2% since 2016. Western Digital (WDC), Seagate (STX), and IBM (IBM) have dividend yields of 2.3%, 6.7%, and 4%, respectively.
How Is NetApp Improving Profit Margins?
NetApp’s profit margins
Analysts expect NetApp (NTAP) to post a non-GAAP (generally accepted accounting principles) net margin of 11.6% with an operating margin of 18.6% in fiscal 2018. The firm reported a net margin of 9.2% with an operating margin of 17.2% in fiscal 2017.
Profit margins are, however, expected to rise further in 2019 and 2020, driven by NetApp’s improvement in operational efficiency. While analysts expect NetApp’s revenues to rise over 2% in fiscal 2019, its net margin is expected to rise to 12.4% with an operating margin of 19%. While NetApp’s operating margin is estimated to rise to 19.9% in 2020, its net margin might fall marginally to 11.4% compared with its revenue growth of 1% YoY.
NetApp’s net margin of 4.1% and operating margin of 13.5% in fiscal 2016 was the company’s lowest in the last five years. Peers Western Digital (WDC), IBM (IBM), Seagate (STX), and Pure Storage had operating margins of 20.6%, 16.4%, 13.8%, and -13.2%, respectively, at the end of their last reported fiscal years.
NetApp reduced its cost base by $400 million in fiscal 2017
NetApp’s improved profit margins have been driven by the firm’s transformational efforts, which have led to an increase in operational efficiency. While NetApp’s revenue is estimated to rise over 2.2% in fiscal 2018, its EPS (earnings per share) is expected to rise 15% YoY (year-over-year).
Last fiscal year, NetApp’s operating profit rose 26% YoY to $950 million from $750 million in 2016 compared to a 0.5% fall in revenue. In comparison, net income rose 21% YoY in fiscal 2017.
What Affected NetApp’s Enterprise Storage Market Share in 2Q17?
Worldwide Enterprise Storage Systems market rose 3% YoY in 2Q17
As seen in the below table, the worldwide enterprise storage systems market rose 2.9% YoY (year-over-year) in 2Q17 to $10.8 billion, up from $10.5 billion in 2Q16. Hewlett Packard Enterprise (HPE), in a joint venture with H3C Group, is the market leader in this space with a share of 20.1% in 2Q17 compared to 23.8% in 2Q16. Market research firm IDC has estimated that HPE’s revenue will fall at 13.2% YoY in 2Q17.
Dell-EMC lost its first position to HPE due to a significant fall of 26.7% in revenue to $2 billion in 2Q17. NetApp regained its third position and experienced a rise in revenue and market share during 2Q17. NetApp’s (NTAP) revenue rose almost 17% YoY in 2Q17 to $695 million, and its share rose from 5.7% in 2Q16 to 6.4% in 2Q17
IBM (IBM) and Hitachi were the other top players in this segment with market shares of 5.3% and 3.8%, respectively. Revenue from ODMs (original design manufacturers) rose 73% YoY to $2.5 billion from $1.5 billion in the same period, and this group accounted for 23% of total revenue at the end of 2Q17. ODMs sell directly to hyperscale data centers.
External enterprise storage and all-flash array
The external enterprise storage market fell 5.4% YoY to $5.3 billion in 2Q17 from $5.6 billion in 2Q16. Dell-EMC’s revenue fell 22.3% to $1.5 billion and its market share fell to 28.4% from 34.6%. NetApp’s revenue rose 16.7% to $694.6 million, and it is now the second largest player in this vertical with a share of 13% at the end of 2Q17, up from 10.6% in 2Q16.
The total all-flash array revenue rose 37.6% YoY to $1.4 billion in 2Q17
How Has NetApp Stock Performed since 2016?
NetApp’s stock returns
NetApp (NTAP) has generated returns of 40% in the trailing-12-month period and has risen ~31% since the start of calendar 2017 after rising over 36% in 2016. NetApp stock has risen 4.4% in the past month and risen 4.6% in the past five trading days. Among peers, Western Digital (WDC), Seagate (STX) and IBM (IBM) have generated returns of 52%, 8%, and -3%, respectively, in the trailing-12-month period.
NetApp will be banking on its all-flash array product portfolio to drive revenue growth and offset the decline in its legacy products. In fiscal 1Q18, NetApp’s product sales rose 10%, while its all-flash array revenue run rate rose 95%. If NetApp manages to beat revenue estimates in fiscal 2Q18, the share prices might rise.
On November 9, NetApp closed the trading day at $46.3. Based on that price, the stock’s moving averages are as follows:
- 10.1% above its 100-day moving average of $42.05
- 7.9% above its 50-day moving average of $42.9
- 4.2% above its 20-day moving average of $44.44
RSI and MACD
NetApp’s 14-day MACD (moving average convergence divergence) is 0.5. A stock’s MACD is the difference between its short-term and long-term moving averages. Since NetApp’s MACD is positive, it suggests an upward trading pattern.
NetApp has a 14-day RSI (relative strength index) score of 62, which shows that the stock is trading close to overbought territory. If an RSI is above 70, it means that a stock has likely been overbought, while an RSI figure below 30 suggests that the stock may be oversold.
What Analysts Recommend for NetApp
Of the 27 analysts covering storage technology (QQQ) company NetApp (NTAP), 13 gave it a “buy” recommendation, two recommended a “sell,” and 12 recommended a “hold.” The analyst stock price target for the company is $47.8 with a median target estimate of $49.5. NetApp is trading at a discount of 7% to median analyst estimates.
Peer storage companies such as Western Digital (WDC), IBM (IBM), and Seagate (STX) are trading at discounts of 33%, 6.5%, and 7%, respectively, to median analyst estimates.
Barclays and UBS recently upgraded NetApp
NetApp stock rose 1.3% in pre-market trading on November 9, 2017. Investment bank Barclays (BCS) upgraded NetApp to “overweight” from “underweight” and expects higher valuation multiples driven by improvement in profit margins and free cash flows. Barclays expects NetApp to increase its market share in business verticals such as all-flash arrays. Barclays increased the 12-month price target on NetApp to $52 from $38.
Last month, UBS Capital also upgraded NetApp to a “buy” from “hold” and then raised the 12-month price target on NetApp to $45 from $42. UBS is optimistic about NetApp’s execution over the long term and expects an improvement in product sales as well. In October 2017, Drexel Hamilton reiterated its “buy” rating on NetApp with a 12-month price target of $62.