NetApp's Cautious Commentary Sparks Fears Of Sector Slowdown

Tech stocks sold off more than the broader market Thursday after NetApp Inc.'s (NTAP) weak sales and cautious commentary raised further concerns about the entire data-center sector and other companies exposed to federal spending.

NetApp on Wednesday said the weak U.S. economy weighed on its federal and financial services businesses, cutting into the Sunnyvale, Calif., storage maker's fiscal first-quarter revenue growth and second-quarter guidance. The company said business softened "dramatically" in July under the weight of the debt-ceiling crisis and macroeconomic uncertainty.

"The trajectory weakened as the last month [of our quarter] was roughly half the growth rate of the first, causing us to come in lower than where we had anticipated," Chief Executive Tom Georgens said. "Economic conditions remain uncertain, but they are clearly different than they were 90 days ago."

That caution led to worries about the rest of the sector. Many data-center companies reported strong results for their most-recently ended quarters, but most concluded a month before NetApp said it started seeing weakness and before macroeconomic worries accelerated.

NetApp shares recently tumbled 20% to $33.51, the biggest decliner in the S&P 500. Rival EMC Corp. (EMC) also sank, down 10% to $20.19, and data warehousing provider Teradata Corp. (TDC) fell 9.8% to $47.23.

Networking-related stocks trading lower included Cisco Systems Inc. (CSCO), down 5%, and Riverbed Technology Inc. (RVBD), down 16%. F5 Networks Inc. (FFIV) dropped 9.5% and Juniper Networks Inc. (JNPR) slid 6.6%.

Enterprise software companies also declined, including Citrix Systems Inc. (CTXs), down 9.3%; VMware Inc. (VMW), down 11%; and Salesforce.com Inc. (CRM), down 6.5%.

Disk-drive makers Western Digital Corp. (WDC) and Seagate Technology Inc. (STX) also were among the steepest decliners, with S&P Equity noting demand for hard-disk drives has deteriorated.

In all, the Morgan Stanley Technology index fell 5.9%, worse than the approximately 4% declines in the S&P 500 and Dow Jones Industrial Average.

NetApp and similar companies have posted strong growth in recent quarters because of the increasing need for space to store data as well as the move to cloud computing and virtualization, which makes data centers more efficient by running multiple computers' operations on a single server. But macroeconomic worries are causing customers to be more cautious with spending.

NetApp hasn't been alone in voicing recent caution. Dell Inc. (DELL), which provides storage and servers along with PCs, on Tuesday lowered its outlook for the full year on slowing sales to consumers and the U.S. government. The company, whose quarter ended July 29, said it saw some softness during the last month of its second quarter and moving into the third.

And Brocade Communications Systems Inc. (BRCD) earlier this month cut its guidance for its fiscal third quarter amid weaker sales at its storage business. Its shares recently were off 7.8% to $3.44.

"It has become difficult to dismiss mounting evidence that industry fundamentals for IT hardware have materially changed in the last 45 days, with shortfalls in the last two weeks alone by Brocade, Dell and NetApp," Pacific Crest analyst Brent Bracelin said as he cut his rating on several IT systems and networking companies.

"The NetApp shortfall was particularly worrisome because of the magnitude and rapid deceleration in order growth rates that were cut in half in July relative to May," he added.

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; shara.tibken@dowjones.com

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