Found interesting article in Information Week Aug 31 98
Taking Stock:
Switched-On Appliance
As IT's demand for data storage capacity skyrockets,
Network Appliance, a provider of data-access services,
should continue growing rapidly
By William Schaff
when you hear the word appliances, low-tech companies such
as Maytag and Whirlpool come to mind. But don't let Network
Appliance Corp.'s name turn you off. The company manufactures
and markets high-performance data-access products aimed at
businesses with large networks handling massive amounts of data.
And it's got a bright future.
Network Appliance (NTAP-Nasdaq) is the leading provider of
dedicated network data-access servers, often known as filers,
which deliver shared-file service for Unix and Windows networks, as
well as the World Wide Web. The company's revenue has grown
close to 93% per year since it went public in November 1995. Can it
continue to grow aggressively?
Current business trends certainly favor the company. According to
one independent study of the data storage market, demand for data
storage capacity will increase sixfold by 2000. Network Appliance's
products also offer IT departments good value for the money. Its
core filer products are optimized for data access using embedded
software. This substantially reduces overhead. For example, by
integrating the filer's operating system with a RAID (redundant
arrays of independent disks) storage subsystem, IT executives get
higher reliability and performance at a lower cost. In addition,
applications can be scaled easily because they remain separate
from the data-storage system. This also makes installing and
managing data storage simpler.
Network Appliance recently launched its fifth-generation file-server
architecture, the F700 series, which should help the company
maintain its competitive edge. Demand for its Fibre Channel
products is also growing rapidly as more IS managers try to match
their disk-access speed with their network speed.
The company continues to do well in the core Unix market, but it will
run into more competition from PC vendors in the Windows NT
market. And as Network Appliance migrates toward the commercial
enterprise market, it will bump into larger competitors, such as EMC
Corp. and Hewlett-Packard. Fortunately, today's market is big
enough for everyone, and the company continues to win more than
70% of the contracts on which it bids.
Another exciting business segment is Network Appliance's
Web-caching appliance, NetCache. It's earned close to $10 million
in its first two quarters on the market, and is projected to account for almost 10% of Network Appliance's revenue by the end of the fiscal
year. So far, the bulk of sales have come from overseas because
Web caching can save international Internet service providers a
bundle on communications. Web caching could become more
important to domestic ISPs when high-speed access technologies,
such as asymmetric digital subscriber lines, become more widely
adopted because Web caching will let them boost performance.
CEO Daniel Warmenhoven is an experienced leader who's held
senior positions at HP, IBM, and Network Equipment Technologies.
His biggest challenge will be to manage the company's rapid
growth. The direct sales force alone is expected to double to almost
140 by the end of fiscal 1999.
Historically, Network Appliance has delivered consistently strong
financial results with gross margins of close to 60% and operating
margins of almost 20%. For fiscal 1998, which ended April 30,
revenue was $166.2 million. The company earned 58 cents per
share. It has no debt, and cash on the balance sheet has increased
in line with revenue, allowing the company to fund its growth
internally.
I'm projecting earnings of 86 cents a share for fiscal 1999 and
$1.20 per share in fiscal 2000. At $48, the company's stock is
trading at 40 times expected 2000 earnings. That's reasonable for
a company expected to increase earnings per share 35% to 40%
annually. Network Appliance has strong technology and the financial
wherewithal to stay around for the long haul. I wouldn't chase the
stock, but I would buy on any dips.
William Schaff is chief investment officer at Bay Isle Financial
Corp. in San Francisco, which manages the InformationWeek 100
Stock Index. You can reach him at bschaff@bayisle.com.
Ed Perry |
