some good info here from lehman bro's take on the fourth quarter.
everyone enjoy the lengthy respite (from the market). i'm calling it
a day and am off to the kemper open. (hey, look for me on the tube --
i'll be the guy with the tanq & tonic [two limes, please] checking
NTAP on a nextel cell. ha!)
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Network Appliance: Posts Healthy Quarterly Results
Author: George Elling, CFA (212)526-3823, Louis Miscioscia, Sabrina Ricci
Rating: 2
Ticker : NTAP
Rank (Old): 2-Outperform
Rank (New): 2-Outperform
Price : $53 7/8
52wk Range: $67-16
Price Target (Old): $50
Price Target (New): $60
Today's Date : 05/19/99
Price (As of 5/18): $53 7/8
Revenue (1999): 289.4 Mil.
Return On Equity (99): 32.3%
Shares Outstanding: 74.6 Mil.
Dividend Yield: N/A
Mkt Capitalization: 3.65 Bil.
P/E 1999; 2000 : 117.1X; 79.2X
Current Book Value: $1.82/sh
Debt-to-Capital: 0.1%
Disclosure(s): C, A
------------- Conclusion -------------
Netapp had a solid quarter with strong revenue growth. We believe the company has a sound
strategy and should continue to show excellent results.
------------- Comments ---------------
Revenue (Mil.): Revenues were stronger than we expected, with especially robust US demand.
Gross Margin (%): Gross margins were in-line with our projections.
Operating Margin %: Operating margins were slightly below estimates, as Netapp invested in
sales, marketing and R&D.
EPS: EPS was in-line, but excluding negative currency translation, would have been about
$0.14.
Reporting Period --------------- Earnings Review --------------------
4Q99 -- Expected -- -- Reported -- 1Q00
$ % $ % Old New
Revenue (Mil.) : 84.00 66.8 90.80 80.3 - -
Gross Margin (%) : - 59.0 - 59.1 - -
Operating Margin % : - 18.8 - 18.7 - -
EPS : 0.13 54.5 0.13 54.5 - 0.14
EPS Consensus : 0.13 - - - - -
Other : - - - - - -
-----------------------------------------------------------------------------
Highlights:
* Network Appliance reported excellent 4Q99 revenue growth of 80% to $90.8M,
versus the $50.3M reported a year ago, and $7M above our expectations.
* Reflecting healthy margin performance, the company reported in-line EPS of
$0.13, an increase of 55% compared to the $0.09 reported in 4Q98.
* Orders were excellent, and the company reported a book to bill of over 1
and an increased backlog.
* For the entire FY99, Netapp reported very favorable results with revenue
growth of 74% to 289M. EPS gained 57% y/y to $0.46.
* We are raising our FY00 earnings estimate to $0.68 per share. Our first
quarter estimate calls for sequential revenue growth of 7%-8% and we project
earnings of $0.14 per share compared with the $0.10 reported in 1Q99.
* The outlook for storage products including filers and NetCache remains
bright, and we expect Network Appliance to maintain its leadership position
in the market. We reiterate our 2 Outperform rating and have raised our
price target to $60 per share.
-----
Investment Conclusion. 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 (EMC $105 3/8 2-Outperform), 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% is
achievable. 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 we maintain our 2
outperform rating.
QUARTERLY HIGHLIGHTS
Gross Margins Remain Strong. Reflecting excellent product demand, efficient
production capability, and a unique product offering, Network Appliance again
reported excellent gross margins of 59.1%, compared with the 59.2% reported
in the third quarter of fiscal 1999, and the 59.6% reported a year ago.
Looking ahead to fiscal 2000, we expect some overall margin compression as
the company builds up its SG&A and R&D capabilities. Accordingly, we look
for pretax margins somewhat below the 19% reported in the fourth quarter.
Nonetheless, we anticipate a 2-percentage point drop in the company's tax
rate and expect Netapp to effectively manage its assets and balance sheet.
Product Momentum. The company saw excellent demand for its filer products,
with particular strength for its 700 series. The company's cluster failover
features represented just under 20% of filer sales. While down from 33% in
the prior quarter this has been expected due to pent-up demand in Q3.
Once again, fiber channel storage was dominant in the quarter (75% of systems
revenues) and 7% of revenues came from add-on software licenses. A healthy
percentage of its customers continue to buy filers utilizing multiprotocol
and in 4Q better than 40% purchased systems that included at least two
protocols. Within filers, approximately 8% were purchased in Windows-only
environments and approximately 6% were dedicated to database applications.
NetCache represented 8% of total revenues although unit volumes gained 20%.
Total ASPs declined approximately 20%, mainly because 60% of shipments were
low end. This reflected the fact that a higher percentage of sales went to
corporate accounts. Among major companies buying from Network Appliance
during the quarter were customers such as Texas Instruments (TXN $114 1/8
nr), Nokia (NOKA 1-Buy), Nortel (NT $75 1-Buy), etc. Overall, fiber channel
represented 75% of systems revenues versus 80% in the third quarter. The
reason for the modest decline was the mix shift toward NetCache products.
Geographic Performance. In a reversal from the prior quarter, US demand was
particularly strong with revenues representing 74% of the total compared with
59% in the prior quarter. The company had an excellent new business quarter
as the company added more than 250 new accounts, up 35% versus 190 in the
prior quarter. Although European revenues were down sequentially and
represented 17% of the total versus 33% in the prior quarter, it should be
noted that European revenues returned to more normal levels. In the
company's second fiscal quarter, Europe represented 19% of the total. Asia
Pacific showed sequential growth to 9% of total revenues.
New Products. At the end of 4Q99, two new features of SnapShot were added to
NetApp's filers. One feature, SnapRestore allows administrators to rapidly
undo an entire file system, and to add the feature costs from $2k to $9k,
depending on the filer used. The second feature, SnapMirror, enables a NetAppfiler to
mirror another server at a remote site, and is useful in case of system shutdown or
outages. The SnapMirror costs $10k for the low end,
and $50k for the deluxe.
Marketing. Reflecting strong North American gains, Netapp's indirect
channels represented only 25% of the total versus 31% in the prior quarter.
The reason for this relates to the fact that North America is more concentrated
in direct channel sales, while international sales tend to tap the indirect
channels.
Operating Expenditures. Operating expenditures rose to 40.3% of revenues
with R&D up half a point to 10.8%, marketing flat at 26.1% and G&A 3.4%
versus 3.5% in the prior quarter. Netapp saw a negative currency impact of
approximately $700,000 in the quarter. Looking ahead, we anticipate other
income to stabilize at approximately $1.5 million per quarter in fiscal 2000.
Alliances and Partners. Both Fujitsu and Dell (DELL $44 1/6 nr) have
recently introduced products based on Netapp's technology. Dell recently
introduced its PowerVault filer which, we believe, will begin to generate
revenues starting in the second quarter of fiscal 2000. We are also hopeful
that Fujitsu will contribute to top and bottom line gains in future years.
Outlook. Looking ahead to the beginning of FY2000, we believe Network
Appliance is well positioned to show another excellent quarter from both a
revenue and earnings standpoint. We project strong growth for Netapp in
fiscal 2000 and currently project revenue growth of 55% to $450 million. We
are raising our earnings estimate to $0.68 per share. Our first quarter
estimate calls for sequential revenue growth of 7%-8% (which is a 70%
increase y/y) and we project earnings of $0.14 per share compared with the
$0.10 reported in first quarter of fiscal 1999.
-----
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. |
