NetApp Gains Momentum

The storage technology company, NetApp Inc.’s (NTAP - Snapshot Report) shares are up 94.2%, year-to-date, outperforming the S&P 500. The company shares are currently trading at a premium to its peers.
 
NetApp provided robust earnings and revenue guidance for its second and third fiscal quarters at the analyst meeting held on Oct 8.
 
The company expects to post earnings of 29 to 30 cents per share and revenues of $870 – $885 million for the second quarter. The revenue increase represents a sequential growth of 5%.
 
For the third quarter, NetApp expects to post earnings of 35 to 36 cents per share and revenues of $910 – $930 million. The revenue increase represents a sequential and year-over-year growth of 5%.
 
For the second quarter, gross margin is expected to be 63.5%. Operating expenses are expected to decline sequentially to approximately $439 million or 50% of total revenues. First quarter operating expenses were 53% of total revenues. As a result, operating profit margin is expected to increase sequentially to 13.5% in the second quarter from 10.6% in the previous quarter. For the third quarter, the company expects operating profit margin to increase sequentially to 16.0%, thereby achieving its long-term goal.
 
NetApp has a strong margins and the company’s operating efficiency is expected to drive growth. Moreover NetApp is benefiting from its strength in lower priced storage products, which may help the company take mark et share from its rivals EMC Corp. (EMC - Analyst Report) and Hewlett-Packard (HPQ - Analyst Report).
 
NetApp also said that it expects free cash flow to be approximately 17% to 22% of revenues and revenues to grow more than 10% in the long-term.
 
The guidance indicates improving corporate IT spending and stabilization in demand for storage hardware products. Management said at the meeting that the company recorded 150 Storage 5000 customers. We believe that NTAP is well-positioned to benefit from an improvement in storage spending.
 
The company failed to acquire Data Domain Inc. (DDUP), which was later taken over by EMC. While, NTAP might have lost Data Domain to EMC, the company’s performance in recent quarters indicates that its growth momentum remains strong.
 
Thus we have a Neutral rating on the stock.