LSI Life Storage Inc

NetApp Inc. (NTAP) reported first quarter fiscal 2012 adjusted earnings per share (EPS) of 44 cents, missing the Zacks Consensus Estimate by a penny. Adjusted EPS excludes amortization of intangible assets, acquisition-related expenses, non-cash interest expense as well as investments and tax gains, but includes stock-based compensation expenses. The underperformance could be due to a challenging macro environment, which affected the revenue growth to some extent. After the closing bell, NetApp's share price plunged 12.51%.

Revenue

NetApp reported first quarter revenues of $1.46 billion, up 26.4% from $1.15 billion in the year-ago quarter. The quarter’s revenue was roughly in line with the lower end of the company’s guided year-over-year growth rate. The improvement was driven by a surge in demand for its storage products as well as a change in the revenue recognition policy. While product revenues grew the most, other segments also improved on a year-over-year basis. But revenue growth was badly affected by the slowing demand from its biggest customer and the U.S. federal government, reflecting budget constraints. The U.S. federal government's budget crisis and financial problems across Europe are hurting technology spending.

Product revenues were $965.7 million in the quarter, up 30.9% from $737.5 million reported in the year-ago quarter and accounted for about 66.2% of the total revenue. The improvement was attributable to successful product launches during the quarter. New storage solutions leveraging the technology of its newly acquired Engenio business from LSI Crop. (LSI) also supported the improvement.

Software Entitlement & Maintenance revenues were $198.2 million, up 13.8% from $174.2 million in the year-ago quarter. The segment’s revenues represented around 13.6% of the total revenue.

Service revenues were $294.3 million, up 21.6% from $242.0 million reported in the year-ago quarter. The segment accounted for 20.2% of the total revenue.

Operating Results

NetApp reported gross profit of $896.9 million, representing a 21.6% year-over-year increase. Gross margin dropped 250 basis points (bps) year over year to 61.5%.

Total operating expenses surged 28.7% from the year-ago quarter to $720.7 million. This was mostly driven by higher research and development expenses. Operating income dropped marginally (0.8%) from the year-ago quarter to $176.2 million. Operating margin fell 330 bps year over year to 12.1%.

Net income on a GAAP basis was $139.5 million, or 34 cents per share, compared with $150.7 million, or 40 cents per share in the prior-year quarter. The quarter’s result was within the company’s guided range.

Excluding the above-mentioned special items, but including stock-based compensation, adjusted net income was $177.0 million or 44 cents per share, compared to $161.5 million or 43 cents a year ago.

Balance Sheet & Cash Flow

NetApp exited the quarter with cash, cash equivalents and investments of $4.7 billion, down from $5.2 billion in the previous quarter. Receivables were $597.0 million, down from $742.6 million a quarter ago. Inventories increased $29.7 million from the prior quarter to $138.2 million. The company bears no long-term debt.

Cash generated from operations in the quarter was $240.6 million, down from $458.8 million in the prior quarter. Capital expenditure in the quarter was $98.3 million, up from $72.9 million in the year-ago quarter.

Guidance

NetApp expects second quarter 2012 revenues in the range of $1.5 billion and $1.6 billion, representing 3% to 10% sequential and approximately 20% to 28% year-over-year growth.

Non-GAAP gross margins are expected to be roughly 63.5%, while non-GAAP operating margins are projected at roughly 18.5%. GAAP EPS is expected to range between 38 cents and 42 cents, while non-GAAP EPS is expected between 58 cents and 62 cents. The company estimates shares outstanding of approximately 392 million.

Our Take

The quarter’s results were modest, with the bottom line marginally missing the Zacks Consensus Estimate. Management has guided its next quarter cautiously, keeping in mind the ongoing macro uncertainty caused by European debt crisis and federal budget cuts.

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

NetApp is performing impressively, despite macro concerns and stiff competition from industrial heavyweights like International Business Machines Inc. (IBM) and EMC Corporation (EMC).

NetApp currently carries a Zacks #3 Rank (short-term Hold recommendation).

 
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