From SSB today,
SUMMARY
* NetApp reporting after the close today (11/13).
Although our est. has been lowered to $184.4mm for the
Q (Street at $192.2mm), we believe the market is
expecting greater than $200mm which would make it up
qoq. Our EPS est. is $0.00, in line with the Street.
* GMs will be a big focus. With NetApp at 56.1% last Q
(61.9% a yr ago) and EMC at 30.0% in the Sept Q, the
pressure could be on. Although the market shrugged off
QLogic's recent GM decline (from 62.7% to 60.1% qoq),
we think the it would take a NetApp GM decline more
seriously. We est. it will be down about 100 bps qoq.
* Another expectation is that guidance will be up qoq.
We don't anticipate the company getting too aggressive
here. Maybe up 5-10% qoq.
* Also, CEO on CNBC's Market Wrap at about 4:15pm ET,
before the EPS call.
INVESTMENT THESIS
We expect NetApp stock will continue to be under pressure due to 1) its
exposure to dot-com and telco spending; 2) its decelerating growth; 3)
increased competition in the space; and 4) increased pricing and margin
pressure. We believe the stock will continue to be under pressure until
investors can see a solid quarter of increasing Filer unit shipments and
domestic growth. We expect to see NetApp have softness across product
segments, including filers, caching and software. Although we are seeing
NetApp competing in enterprise accounts more often recently, the business
spigot just hasn t been turned on and many of NetApp s larger, more promising
deals just aren t closing. Although NetApp has stabilized its balance sheet
by ratcheting down DSOs slightly (75 to 70 days qoq) and increasing cash a
bit ($557.8 million to $568.6 million qoq), the negative points were that
inventory levels continued to increase ($22.5 million to $23.8 million qoq)
while revenues continued to decline. We believe that the lack of significant
balance sheet improvement, combined with the potential for margin erosion
(driven by weak economic conditions and competitive pressures), will continue
to hold the stock back from proving that it has finally lifted off the
bottom. Also, we expect competition for NetApp to get tougher, not easier,
in the near term. While we are not concerned about other NAS offerings per
se, we view NetApp as a mid-range storage company (not just a NAS company).
Therefore, as it enters the enterprise more aggressively to supplement
deteriorating Internet and Telco spending, it is going to more squarely
compete head-to-head with EMC, Hitachi and IBM. This could bring about
greater pricing pressure for NetApp going forward, resulting in further
margin erosion and pressure on the stock. Management agreed that margins
were more likely to go moderately down than up in the near term. Management
stated they would not lose business based on price.
COMPANY DESCRIPTION
In 1992, Network Appliance helped originate the Network Attach Storage (NAS).
Although Network Appliance may not have been the sole inventor of the NAS
concept, it has been one of the marquee NAS companies. Network Appliance
also offers a family of Web-caching products, but a large majority of its
revenues are currently derived from its family of file servers for NAS.
Network Appliance s strategy is to remove the Input/Output (I/O) burden of
file accessing from application servers with a separate dedicated file
storage appliance that connects directly onto the Local Area Network (LAN).
Network Appliance s NAS products, which it calls Filers, are essentially a
high-speed front end to large numbers of disk drives. Today, these Filers
can hold as much as 12 terabytes (one terabyte is equal to 1,000 gigabytes)
of information. NetApp Filers feature built-in RAID, clustered failover and
redundant components for increased reliability. |
