NetApp Inc. (NTAP - Analyst Report) is scheduled to announce its first quarter 2013 results on August 15, 2012. We see limited upward movement in analyst estimates over the past 7 days.
Fourth Quarter Overview
NetApp reported decent fourth quarter 2012 numbers, with earnings per share (EPS) of 55 cents surpassing the Zacks Consensus Estimate by 6 cents.
Revenue grew 19.2% from the year-ago quarter to $1.70 billion. The reported revenue was within the company’s guidance and modestly above the Zacks Consensus Estimate of $1.68 billion.
The increase from the year-ago quarter was driven by a surge in demand for its storage products across geographies, which was partially offset by slowing demand from its biggest customer and budget constraints at the U.S. federal government.
Despite a 7.2% increase in gross profit, unfavorable mix, high warranty costs and price discounts led to a 660 basis point margin contraction. Operating expenses were also on the rise.
Detailed analysis of fourth quarter earnings is available on: NetApp Tops, Stock Falls on Outlook
First Quarter Outlook
For the first quarter of 2013, NetApp expects revenues in the range of $1.4 billion to $1.5 billion, a decline of 12.0% to 18.0% sequentially. Non-GAAP gross margins are expected to be in the range of 60.0–61.0%, while non-GAAP operating margins are projected at roughly 11.5% (+/- 5.0%). The GAAP EPS is expected to be between 10 cents and 15 cents, while non-GAAP EPS is expected to be between 34 cents and 39 cents.
Agreement of Analysts
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 spending on storage, strong exposure to midrange systems and overall share gains would help NetApp generate 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 30% contribution) and the U.S. public sector. These two sectors are fighting with debt issues and constrained budgets, respectively, thus limiting NetApp’s revenue growth.
Although NetApp is well positioned in the enterprise storage market, some analysts fear margin contraction and EPS erosion. The reason for this concern is the weak macro-economic environment; contraction in data storage spending, rise in competition and launch of the attractively-priced EMC Corp (EMC) products. Moreover, customer response to the recently-launched ONTAP 8.1 from NetApp was lukewarm. This could also have a negative impact on revenue and margins.
However, some analysts believe that cost control measures and lower share count could give EPS a cushion.
Though we sense a mixed sentiment among analysts, estimate revisions were limited. The majority of analysts preferred to maintain their estimates. Out of the 11 estimates available for the first quarter, 2 were raised and no downward revisions were made in the last 7 days. But, among the 12 estimates for fiscal 2013, there was 1 downward revision in the last 7 days.
Magnitude of Estimate Revisions
The magnitude of revisions has been minimal since the company reported its fourth quarter results. The Zacks Consensus Estimate for the upcoming quarter remained unchanged at 25 cents, while the estimate for fiscal 2013 moved down a penny to $1.54 over the last 7 days. However, estimates declined a respective 44.4% and 29.0% in the last 90 days reflecting NetApp’s lackluster guidance.
Though we are confident about NetApp’s long-term growth prospects, the company’s lackluster first quarter guidance, ongoing macro uncertainty caused by the European debt crisis and federal budget cuts keeps us on the sidelines.
We believe that NetApp will be able to hold its own in the difficult operating environment 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.
We are also positive about the company’s tie up with Cisco Systems Inc. (CSCO - Analyst Report), for the purpose of introducing a new cloud product, which is expected to help more customers accelerate their transition to the cloud.
NetApp is performing impressively, despite stiff competition from technical behemoths such as IBM Corp. (IBM - Analyst Report) and EMC in the data storage and management software segments.
Currently, NetApp shares carry a Zacks Rank #3, implying a Hold rating in the short-term (1-3 months).