susan, et al.
below are excerpts from a lehman bro's sell-side report a couple of weeks old. most of it you're probably already aware of, but there are some nice details on revenue breakdown under "product momentum."
do note the two disclosures (legend at the end). despite the 'hype,' these analysts aren't putting their money where their mouth is.
-chris.
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Network Appliance: Another Excellent Quarter
Author: George Elling 1(212)526-3823 Lou Miscioscia 526-3472
Rating: 2
Company: NTAP
Rank (Old): 2-Outperform
Rank (New): 2-Outperform
Price : $42 3/8
52wk Range: $57-13
Price Target (Old): $50
Price Target (New): $50
Today's Date : 02/18/99
Return On Equity (99): 31.6%
P/E 1999; 2000 : 94.2 X; 65.2 X
Current Book Value: $0.80/sh
Convertible: No
Debt-to-Capital: 0.0 %
Disclosure(s): C, A
* For the third quarter, Network Appliance reported excellent revenue growth to $75.6 million, compared with $44.0 million a year ago. Overall revenues were $3 million above our expectations and gained 15% sequentially.
* Reflecting continued strong margin performance, Network Appliance reported net income growth of 69% to $0.12 per share, versus the $0.08 reported in the third fiscal quarter a year ago.
* Network Appliance operations remain robust, and the company reported a book to bill above 1 and an increased backlog.
* As a percentage of sales, operating expenses represented 40.1% of revenues compared with 39.7% a year ago and 40.1% in the second fiscal quarter.
* The outlook for storage products remains excellent, and we expect Network Appliance to maintain its leadership position in the market. We maintain our 2-Outperform rating and our price target of $50 per share.
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We believe an investment in Network Appliance should be valued on the company's future opportunity as a pioneer in the new appliance marketplace focusing on system storage. First, we believe system storage represents one of the fastest-growing segments in the computer marketplace, and companies, such as EMC, that solve customer's needs have continued to show exceptional growth. In the case of Network Appliance, the company's growth opportunities
over the next few years would appear to be excellent, and we believe a growth rate exceeding 50% would appear to be reasonable. Accordingly, we believe the high PE to growth should be expected and despite the stocks current high valuation, the shares should be looked at as an investment in a possible "franchise stock" of the future. Accordingly, we believe the shares represent attractive value and maintain our 2 outperform rating.
QUARTERLY HIGHLIGHTS
Gross Margins Remain Strong. Reflecting strong product demand, efficient production capability, and a unique product offering, Network Appliance again reported excellent gross margins of 59.2% versus 59.0% reported in the second quarter of fiscal 1999 and the 59.3% a year ago. Although we expect gross margins to modestly trend downward in the future, we believe management can sustain margins within a narrow range of current trends.
Geographic Breakdown. Network Appliance reported particularly strong international revenues, which represented 41% of total revenues, a significant increase from 26% in the prior quarter. Europe represented 33% of the total and the Far East 8%. Domestic revenues gained 38.6% to $44.5 million from $32.1 million a year ago. U.S. revenues represent approximately 59% of the total. International business was again extremely strong, up 161% to $31.1 million from $11.9 million. Europe represented 23% of revenue, with strong demand for both NetCache and Cluster failover systems. Several customers, including BMW, Renault, and Ericsson, placed orders for over $1 million. U.S. orders came on strong late in the quarter, and we expect revenues to be strong in the fourth fiscal quarter. We also expect Europe to return to a more normal trend.
Product Momentum. NTAP saw excellent demand for its filer products, with particular strength for its 700 series. Demand for the company's cluster failover feature also remains strong, and 20% of its filers shipped with that capability. NetCache products represented 8% of revenues versus 5% in the prior quarter, and the combination of the cluster failover product and NetCache proxy server systems seemed to be the major impetus for strong international gains. Fiber channel exceeded 80% of total shipments.
When assessing shipments, the company noted that 40% of its systems that were sold as file servers were shipped with multiple protocols, whereas UNIX-only systems declined slightly. Database represented 7% of product bookings versus 6% in the previous quarter. NetCache products did extremely well as 100 units were shipped, which represented 80% growth on a sequential basis. As of the third quarter, 8% of revenues were derived from NetCache-based products versus 5% in the prior quarter. In addition, NetCache accounted for 30 new name accounts, mostly in the Internet space. Geographically, 30% of the NetCache systems shipped were in the United States versus less than 20% in the prior quarter.
NetApp began shipments of its 18 gigabyte drives, which represented 30% of the drives shipped and 45% of the total from a capacity standpoint. Although international business was the major revenue driver in the quarter, North American results were also quite good, with excellent new account growth of 190 new names. This represented 20 more than was achieved in the previous quarter. New accounts represented 40% of North American bookings, a more normal percentage, compared with 33% in the prior quarter.
Marketing. Both direct and indirect marketing showed strong gains. Internationally, indirect revenues gained a strong 125%, whereas direct business showed growth of 80%. At the present time, direct sales channels represented 53% of the total versus 58% in the prior quarter, and 47% was from indirect channels versus 42%. Indirect revenues now represent 31% of the corporate total versus 22% in the prior quarter.
Alliances and Partners. Within the past few quarters, Network Appliance has established OEM agreements with several major companies, including Dell and Fujitsu. In addition, the company has partnered with Oracle to augment its database application capabilities. The Dell agreement did not generate any significant revenues in the third quarter, but we believe it will represent an enormous opportunity for the company beginning in the next fiscal year. We expect Network Appliance to make other strategic partnering deals in an effort to further solidify its industry position.
Outlook. For the fourth fiscal quarter, we believe Network Appliance is well positioned to show another excellent quarter from both a revenue and earnings standpoint. Our estimates call for revenue gains of nearly 67% to $84 million and EPS of $0.13. For fiscal 1999, we are maintaining our EPS estimate of $0.45. For fiscal 2000, we project revenue growth of approximately 50% to $415 million and EPS of $0.65.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. |
