Earnings Preview: NetApp Inc. - Analyst Blog
November 14 2011 - 9:30AM
Zacks
NetApp Inc. (NTAP)
is scheduled to announce its second quarter 2012 results on
November 16. We find limited movement in the analyst estimates so
far.
First Quarter
Overview
NetApp reported modest first
quarter 2012 numbers, with earnings per share (EPS) missing the
Zacks Consensus Estimate by 2 cents.
Revenue grew 26.4% from the
year-ago quarter to $1.46 billion and 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.
Growth across the other segments was also encouraging.
But revenue growth was badly
affected by the slowing demand from its biggest customer and budget
constraints at the U.S. federal government. The U.S. federal
government's budget crisis and financial problems across Europe are
hurting technology spending.
For further details on the
quarter’s performance please see: NetApp Misses, Guides
Cautiously.
Second Quarter
Outlook
Management has guided cautiously
for the next quarter, keeping in mind the ongoing macro uncertainty
caused by the European debt crisis and federal budget cuts. 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.
On a non-GAAP basis, the gross
margin projection is roughly 63.5% and operating margin is roughly
18.5%. The GAAP EPS is expected to range between 38 cents and 42
cents, while non-GAAP EPS is expected to be between 58 cents and 62
cents. The share count is expected to be approximately 392
million.
Agreement of
Analysts
Prior to the earnings release,
let’s see what the analysts are saying about NetApp’s
performance.
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 drive 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 33%
contribution) and the U.S. public sector (~15%). These two sectors
are fighting with debt issues and constrained budgets,
respectively, putting a lid on NetApp’s revenue growth
trajectory.
This exposure, the lackluster
revenue growth and expected deterioration of margins on account of
proposed R&D and headcount increases have made some analysts
cautious. The integration of LSI Corp.’s (LSI)
Engenio business could also be challenging according to some, as
the OEM business model is very different from the company’s core
operating model.
Though we witnessed a mixed
sentiment from the analysts, movements in their estimates were
limited. Out of the 13 analysts providing estimates for the second
quarter, just one raised estimates, while another lowered in the
last thirty days. A similar movement was noticed among the 14
analysts tracking the stock for fiscal 2012. There was no movement
noticed in the past 7 days.
Magnitude of Estimate
Revisions
The magnitude of revisions has been
huge since the company reported its first quarter results. Overall,
estimates for the upcoming quarter and fiscal 2012 were lowered
over the last ninety days.
For the second quarter and fiscal
year 2012, the Zacks Consensus Estimates decreased 2 cents and 13
cents, respectively, to 49 cents and $2.02 over the past ninety
days. For 2013, the estimate went down from $2.50 ninety days ago
to $2.34.
Recommendation
Though we are confident about
NetApp’s strong business momentum, the company’s cautious guidance
based on the ongoing macro uncertainty caused by European debt
crisis and federal budget cuts keeps us on the sidelines. Moreover,
we fear that NetApp may face some storage supply disruptions due to
the recent flood in Thailand.
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. Hence, we expect NetApp to beat our estimates.
NetApp is performing impressively,
despite stiff competition from technical behemoths such as
International Business Machines Inc. (IBM) and
EMC Corporation (EMC) in the data storage and
management software segments.
The Zacks rank on NetApp shares is
currently #3, or a Hold rating in the short-term (1-3 months).
EMC CORP -MASS (EMC): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
LSI CORP (LSI): Free Stock Analysis Report
NETAPP INC (NTAP): Free Stock Analysis Report
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