Earnings Preview: NetApp Inc. (NTAP)

NetApp Inc. (NTAP) is scheduled to announce its third quarter 2011 results on February 16. Upward revisions to estimates reflect positive sentiments on the stock.

Second Quarter Overview

NetApp reported solid second quarter 2011 numbers, with both earnings per share and revenue exceeding the Zacks Consensus Estimates.

A surge in product demand fueled by new product launches and enhanced customer satisfaction led to a 32.6% year-over-year increase in total revenue. Extended partnership programs with VMware Inc. (VMW) and Fujitsu also contributed to revenue growth.

Despite higher revenue, the gross margin was slightly down from the year-ago quarter due to lower average selling price. However, operating margin outperformed due to tight control on operating expenses, bringing in non-GAAP earnings of 52 cents, which was up from 27 cents in the year-ago quarter.

NetApp expects third quarter 2011 revenues in the range of $1.24 billion to $1.29 billion, representing growth in the range of 23% to 28% year over year and 3% to 7% sequentially. The expected GAAP EPS is between 39 cents and 41 cents and non-GAAP EPS is between 48 cents and 50 cents. The company also projects shares outstanding to be approximately 408 million. NetApp commented that third quarter forecasts are somewhat conservative, given slowing business trends in Europe.

Agreement of Analysts

Out of the 16 analysts providing estimates for the third quarter, 2 increased their estimates in the last thirty days, while there was no downward revision. Out of the 17 analysts tracking the stock for fiscal 2011, 2 raised their estimates in the last thirty days, while there was no movement noticed in the opposite direction.

Some 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, the analysts are positive on the new mid-range storage product launch. Since the mid-range products account for a greater share of total revenue, the launch is expected to boost revenue growth.

Magnitude of Estimate Revisions

The magnitude of revisions has also been minimal since the company reported its second quarter results. Overall, estimates for the upcoming quarter remained constant over the last ninety days.

For fiscal 2011, estimates increased 3 cents to $1.67 over the past ninety days. Over the past thirty days, estimates increased by a penny. For 2012, estimates went up from $1.84 ninety days ago to $1.85.

Recommendation

We remain encouraged by improved results in the second quarter and believe that the momentum will continue on strong partnership programs. Moreover, we are optimistic about NetApp’s merger and acquisition strategy.

NetApp is performing impressively, despite stiff competition from technical behemoths such as International Business Machines Inc. (IBM) and EMC Corporation (EMC) in data storage and management software spaces.

NetApp is currently rated as a Zacks #2 Rank (short-term Buy) stock.

NETAPP INC (NTAP): Free Stock Analysis Report

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