Markets & Finance

Another Setback for NetApp


Shares of the maker of networked storage gear tumbled Friday after it cut its fiscal first quarter outlook for the second time

Hopes for a revival in corporate spending on computer storage products were crushed again for Network Appliance (NTAP). The Sunnyvale (Calif.) company cut its outlook for its fiscal first quarter for the second time, sending its stock tumbling to a new low for the year. The problem: continued softness in enterprise storage spending in the U.S. and parts of Europe.

NetApp, which makes advanced networked storage products, said it now sees first quarter non-GAAP earnings per share coming in at 19 to 20 cents and GAAP EPS of 8 to 9 cents, on revenue of $684-$688 million. This is below its previously lowered guidance issued on May 23 of $745 to $753 million in revenue, non-GAAP EPS of 24 to 25 cents and GAAP EPS of 14 cents to 15 cents (see BusinessWeek.com, May 24, 2007, "Hard Knocks for NetApp"). Network Appliance will report its full first-quarter results on Aug. 15.

"We are disappointed with our Q1 results. We believe our performance was impacted by some continued softness in enterprise storage spending, most notably in our existing customer accounts in the U.S. and parts of Europe," said Dan Warmenhoven, CEO of Network Appliance in a release. "However, these same enterprise customers who have slowed their spending tell us that our value proposition remains the best in the industry and we did not see any decline in our competitive win rates."

NetApp shares skidded 20% to close at $22.97, after touching a new 52-week low of $22.63 in the Aug. 3 session.

One highly-regarded analyst, Andrew Neff at Bear Stearns, downgraded the stock to underperform from peer perform. Neff cited "continued business deterioration (pre-announced 2Q08 after already lowering its outlook in May), diminished prospects for a resumption to historic growth, concerns over execution/competitive issues, and likelihood for further downward revisions, which should collectively trigger p-e multiple compression." He added: "Despite aftermarket weakness, we see further downside to our fair value of $20."

Neff said even though the company's bookings were strong, it built a substantial backlog, and "win rates" remained high, he remains concerned about "execution missteps and contradictory feedback from other major storage vendors." He said in his Aug. 3 note: "Though NTAP was previously confident about resuming its 25%-30% growth trajectory after reducing its outlook in May, its second straight disappointment could be a harbinger of deeper problems."

However, other analysts see a brighter future. Citigroup analyst Paul Mansky upgraded NetApp shares to buy from hold. “While it will take several quarters to rebuild investor confidence, those with a 12 month horizon should capitalize on the expected weakness and build positions," he said in a note.

Mansky thinks the company should still be able to maintain annual revenue growth of 20%. He also noted that he expects the company to repurchase 10% or more of its shares in the near term.

Standard & Poor's equity analyst Jawahar Hingorani kept his buy opinion and target price of $34 on NetApp stock. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies.) "We think improved economic conditions in the second half will drive revenue growth, reflecting our expectation of resumed enterprise spending," he said in a note. "In our view, NTAP benefits from the spread of virtualization and increased need for storage efficiency."

Right now, though, it looks like NetApp needs to see some improvement in spending trends before investors get excited about the stock.

McCormack is senior producer for BusinessWeek.com's Investing channel.

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