LSI Life Storage Inc

NetApp Inc. (NTAP) is scheduled to announce its fourth quarter 2011 results on May 25. Upward revisions to estimates reflect positive sentiments on the stock.

Third Quarter Overview

NetApp reported decent third quarter 2011 numbers, with earnings per share (EPS) exceeding the Zacks Consensus Estimate. However, revenue missed our estimate marginally.

A surge in product demand fueled by new product launches and enhanced customer satisfaction led to a 25.3% year-over-year increase in total revenue. Growth across other segments was also encouraging.

Tight cost control and a stable average selling price supported gross margin expansion. Operating margin, too, outperformed due to control on operating expenses, bringing in non-GAAP earnings of 45 cents, which was up from 33 cents in the year-ago quarter.

Fourth Quarter Outlook

NetApp expects revenues to be approximately $1.38 billion (+/- 2%), representing 7% to 11% sequential and approximately 15% to 20% year-over-year growth. NetApp expects further increases in product demand, but fears some supply constraints in the fourth quarter.

The expected GAAP EPS is between 38 cents and 42 cents and non-GAAP EPS is between 49 cents and 53 cents. The company also projects shares outstanding to be approximately 414 million.

Agreement of Analysts

Out of the 15 analysts providing estimates for the fourth quarter, 4 increased their estimates in the last thirty days, of which one was in the past 7 days. Out of the 17 analysts tracking the stock for fiscal 2011, 3 raised their estimates in the last thirty days, of which 2 were in the past 7 days. There was no movement noticed in the opposite direction for both the fourth quarter and fiscal 2011.

Some 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 drive revenue upside.

However, a few analysts prefer to remain cautious on account of margin contraction, which could be due to NetApp’s aggressive investing activities. Moreover, they believe that the integration of LSI Corp.’s (LSI) Engenio business could be challenging, as the OEM business model is very different from the company’s core model.

Magnitude of Estimate Revisions

The magnitude of revisions has been minimal since the company reported its third quarter results. Overall, estimates for the upcoming quarter remained constant over the last ninety days.

For fiscal 2011, estimates increased a cent to $1.68 over the past ninety days. For 2012, estimates went up from $1.82 ninety days ago to $1.87.

Recommendation

We remain encouraged by improved results in the third quarter and believe that the momentum will continue based on strong partnership programs and product launches. Moreover, we are optimistic about NetApp’s merger and acquisition strategy.

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

NetApp is currently rated Buy (Zacks #2 Rank).

 
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