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Technology Stocks : Network Appliance -- Ignore unavailable to you. Want to Upgrade?

To: Gregory Rasp who wrote (3360)	5/19/2000 1:31:00 PM
From: slacker711	Read Replies (2) \| Respond to of 10934

NTAP: NetApp Significantly Beat Expectations, Raising Rating To Buy. Salomon Smith Barney Friday, May 19, 2000 -------------------------------------------------------------------------------- --SUMMARY:--Network Appliance--Computer Storage Based on 1) some of the feedback from our recent storage conference, 2) NetApp's financial performance, 3) our belief that NetApp dominates the NAS market, and 4) robust NAS market forecasts, we are raising our rating on NetApp to a 1H from a 2H. NetApp reported F4Q00 revenues of $200.0 million, representing 120% yoy growth and 32.2% sequential growth. EPS for F4Q00 were $0.07, representing 105.7% yoy growth and 20.7% sequential growth. This beat our estimate of $0.06 by 13.7%. Revenues for fiscal 2000 were $579.3 million, representing 100% yoy growth. EPS for fiscal 2000 were $0.21, representing 87% yoy growth. We have raised our F2001 rev est to $1.1 billion and EPS est to $0.35. We are reiterating our $120 price target. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 04/99 EPS $0.02A $0.03A $0.03A $0.03A $0.11A Previous 04/00 EPS $0.04A $0.05A $0.06A $0.07A $0.21A Current 04/00 EPS $0.04A $0.05A $0.06A $0.07A $0.21A Previous 04/01 EPS $0.07E $0.07E $0.08E $0.09E $0.30E Current 04/01 EPS $0.08E $0.08E $0.09E $0.10E $0.35E Previous 04/02 EPS $N/A $N/A $N/A $N/A $N/A Current 04/02 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1H Prior:2-H Price (05/18/00)....:$69.00 P/E Ratio 04/00.....:328.6x Target Price..:$120.00 Prior:No Change P/E Ratio 04/01.....:197.1x Proj.5yr EPS Grth...:50.0% Return on Eqty 99...:N/A% Book Value/Shr......:N/A LT Debt-to-Capital(a)0.3% Dividend............:$N/A Revenue (00)........:550.30mil Yield...............:N/A% Shares Outstanding..:300.9mil Convertible.........:No Mkt. Capitalization.:20762.1mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ Valuation --------- Based on some of the feedback from our recent storage conference, NetApp' s recent financial performance and our belief in the below outlined points, we are raising our rating on NetApp to a 1H from a 2H. We believe: NetApp dominates the NAS market The NAS market will experience exceptional growth well into the future NAS has gained broad based acceptance NetApp has demonstrated the ability to effectively deliver simplified and robust storage solutions for file level data NetApp will soon launch larger, more robust systems We are reiterating our $120 price target. Raising Our Estimates --------------------- We are increasing our F2001 revenue estimate to $1,070.0 million from $907 million. We are increasing our F2001 EPS estimate to $0.35 from $0.30. Rev EPS F1Q01 $220mm $0.08 F2Q01 $245mm $0.08 F3Q01 $275mm $0.09 F4Q01 $330mm $0.10 FY01 $1.1B $0.35 Financial Results ----------------- Revenues for fiscal 2000 were $579.3 million, representing 100% yoy growth. EPS for fiscal 2000 were $0.21, representing 87% yoy growth. Revenues for the quarter were $200.0 million, representing 120% yoy growth and 32.2% sequential growth. This significantly beat our F4Q00 revenue estimate of $171.0 (which we believe was in the middle of Street expectations). We feel NetApp's performance is a clear sign that HDD-NAS (Hard Disk Drive-Network Attached Storage; often referred to as NAS) has established itself as an important solution which reliably simplifies some of the increasing complexities in today's computing environments. NetApp reported F4Q00 EPS of $0.07, representing 105.7% yoy growth and 20.7% sequential growth. This beat our estimate of $0.06 by 13.7%. Other Financial Data -------------------- DSO's were 50 for the quarter, down from 60 last quarter and 57 a year ago. CapX increased significantly to $18.3 million for the quarter from $9.3 million in the prior quarter. We believe this increase was largely a result of the cost of NetApp's new facility which has been customized with new research and development equipment. NetApp hired about 250 people in the quarter, bringing total head count to 1450. Market Projections ------------------ Dataquest projects the HDD-NAS market will grow from $562.5 million in 1999 to $6.7 billion in 2003, representing a 75.2% CAGR. NatApp is the dominant player in this market with over a 40% market share. Competition ----------- Competition is certainly heating up in the NAS market. Every player from Compaq to Sun to Cisco to Intel is planning on getting into the NAS marketplace as early as this summer. We do not feel this competition will negatively impact NetApp, nor do we expect it to create pricing pressure. We believe increased competition will lead to further validation of the NAS architecture and enact a catalyst toward further NAS understanding and acceptance. In other words, we believe increased competition will increase the size of the pie, not reduce the size of the slices. The companies we believe could effectively enter the mid-range and high-end NAS markets in the next 6 months are: Sun, Hewlett-Packard and Compaq. No Pricing Pressure In Sight ---------------------------- We have not seen pricing pressure in the NAS market; in fact, NetApp has consistently increased its ASPs (from about $70,000 per unit a year ago, to about $80,000 currently). We believe NetApp has further upside potential to its current ASPs. It is our belief that customers are demanding higher functionality NAS appliances. This typically gets delivered in software which we believe could result in 1) higher ASPs and 2) higher gross margins. (Note: we are not implying that NetApp's gross margins are on the rise overall, we discuss this later.) Note that EMC's Celerra, which we would categorize as high-end NAS, has ASPs around $350,000 (without the any storage, which could be another $350,000 to $500,000). Gross Margins ------------- We believe NetApp will have a tough time continuing to drive gross margins higher than current levels. In F4Q00 gross margins were 59.8% versus 59.4% last quarter and 59.1% a year earlier. Historically, NetApp' s gross margins have been in the range of 58% to 59%. We believe NetApp has been able to increase gross margins as a result of increasing its software content as a percentage of overall revenues (which was 15% for the quarter versus 7% a year ago). With software becoming flattish as a percentage of overall revenue recently (between 14-15% over the past 3 quarters) and trending flat going forward, we believe NetApp would have to develop additional software applications in order to raise margins above current levels. NetApp's soon-to-be announced 3 Terabyte (TB) appliance will have a higher disk portion than current systems. Since disk drive packaging and reselling is low margin business, we believe this could lead to reduced margins overall. NetApp has historically reduced prices of older systems in conjunction with newer product introductions. We believe NetApp's 1.4 TB appliance could drop to an ASP of about $60,000 from an ASP of about $80,000 currently. On the other hand, we believe the new 3 TB appliance will be introduced with an ASP of about $120,000. We project that higher ASPs will carry higher margins. In our estimation, the net effect will be a slight positive. In the end, we believe gross margins will be flattish going forward.