Earnings Preview: NetApp Inc. - Analyst Blog

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NetApp Inc. ( NTAP ) is scheduled to announce its fourth quarter 2012 results on May 23, 2012. We see some upward movement in analyst estimates over the past 7 days.

Third Quarter Overview

NetApp reported modest third quarter 2012 numbers, with earnings per share (EPS) of 41 cents missing the Zacks Consensus Estimate by 3 cents.


Revenue grew 21.4% from the year-ago quarter to $1.57 billion. The revenue was within the company's guidance and modestly above the Zacks Consensus Estimate of $1.563 billion.

The improvement was driven by a surge in demand for its storage products and solid geographical contribution, which was partially offset by slowing demand from its biggest customer and budget constraints at the U.S. federal government.

Despite a 7.4% increase in gross profit, unfavorable mix, high warranty costs and price discounts led to a 760 basis-point margin contraction. Operating expenses were also on the rise.

Detailed analysis of third quarter earnings are available on: NetApp Misses EPS, Guides Modestly

Fourth Quarter Outlook

For the fourth quarter of 2012, NetApp expects revenues in the range of $1.645 billion to $1.725 billion, representing 5.0% to 10.0% sequential and approximately 15.0% to 21.0% year-over-year growth.

Non-GAAP gross margins are expected to be roughly 59.0%, while non-GAAP operating margins are projected to be roughly 17.0%. GAAP EPS is expected to range between 38 cents and 43 cents, while non-GAAP EPS is expected to be between 60 cents and 65 cents. The company estimates shares outstanding of approximately 378 million.

Agreement of Analysts

Let's see what the analysts are saying about NetApp's performance in the next quarter.

On the whole, analysts believe that NetApp's core competencies in Network Attached Storage and Internet-based storage networking protocol will position the company well to benefit from further adoption of server virtualization, unified storage and the shift toward 10G Ethernet infrastructure.

Moreover, increasing storage spending, strong exposure to midrange systems and overall share gains would help NetApp generate revenue upside.

Some analysts are also positive about the new low-range FAS product line. They believe that these products, being more aggressively priced than competing products, should generate additional demand for NetApp.

But NetApp is in a vulnerable position due to its high exposure to Europe (roughly 30% contribution) and the U.S. public sector. These two sectors are fighting with debt issues and constrained budgets, respectively, putting a lid on NetApp's revenue growth trajectory.

Although NetApp is well positioned in the enterprise storage market, some analysts fear margin contraction and EPS erosion. The reason behind this concern is the weak macro-economic environment; contraction in data storage spending, rise in competition and launch of the new attractively priced EMC Corp ( EMC ) products.

Moreover, customer response to the recently-launched ONTAP 8.1 from NetApp was lukewarm. This could also have a negative impact on revenue and margins.

But some analysts believe that earnings growth potential exists, mainly due to the on-time execution capabilities, leadership in mid- and low-end markets, and rise in storage demand from the healthcare, financial, manufacturing and retail sectors.

Though we witnessed a mixed sentiment from the analysts, estimate revisions were limited. The majority of analysts preferred to maintain their estimates. Out of the 10 estimates available for the fourth quarter, there were two upward revisions and no downward revisions in the last 7 days.

But among the 10 estimates for fiscal 2012, there was one downward revision in the last 30 days. There was no movement noticed in the past 7 days.

Magnitude of Estimate Revisions

The magnitude of revisions has been minimal since the company reported its third quarter results. The Zacks Consensus Estimate for the upcoming quarter was up by a penny to 49 cents, while the estimate for fiscal 2012 remained unchanged at $1.81 over the last ninety days.

Recommendation

Though we are confident about NetApp's strong business momentum and the company's modest guidance, ongoing macro uncertainty caused by the European debt crisis and federal budget cuts keeps us on the sidelines.

But we believe that NetApp will be able to sustain its growth story and remain a key player in the virtualization and network storage market based on product launches and strategic acquisitions. With its latest Engenio takeover, NetApp will now be able to address the video storage market as well as high performance computing applications like genomics sequencing.

We are also positive on the company's tie up with Cisco Systems Inc. ( CSCO ) for the purpose of introducing a new cloud product expected to help more customers accelerate their transition to the cloud.

NetApp is performing impressively, despite stiff competition from technical behemoths such as IBM Corp. ( IBM ) and EMC Corporation ( EMC ) in the data storage and management software segments.

Currently, NetApp shares carry a Zacks Rank #3, implying a Hold rating in the short-term (1-3 months).


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CSCO , EMC , EPS , IBM , NTAP

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