NetApp Keeps Pedal to Metal

Network Appliance Inc. (Nasdaq: NTAP) yesterday posted its sixth consecutive quarter of year-over-year revenue growth, but pouty investors dragged the stock down in spite of the solid performance.

For the second fiscal quarter of 2004, NetApp's revenues were $275.6 million, up 28 percent year-over-year and up 6 percent sequentially. Net income was $48.4 million -- more than triple the same period in the prior year -- which included a nonrecurring tax benefit of $16.8 million associated with a favorable tax ruling in the Netherlands.

And the company expects its momentum to continue, projecting revenues for the current quarter to grow sequentially by 3 percent to 7 percent, with net income of $0.10 or $0.11 per share.

But investors had been expecting to see an even bigger blowout for the quarter -- and as a result, NetApp's stock was down 7.8 percent in midafternoon trading today, to $21.60.

NetApp "continues to choose growth over earnings upside," writes Goldman Sachs & Co. analyst Laura Conigliaro, in a research note today.Still, by many measures, the quarter was one of the NAS vendor's best. NetApp CEO Dan Warmenhoven, on a conference call yesterday, said the company had, for the first time in its history, shipped more than 10 petabytes of storage capacity in a single quarter, shipping a total of 11.5 petabytes (or 11,500 Tbytes).

Several Wall Street analysts remain bullish on its prospects. Robert Montague, an analyst with RBC Capital Markets, maintains an Outperform rating on NetApp. He says there's evidence to suggest that the rate of disk drive density improvements is flattening, which should result in improving year-over-year revenue growth for storage system vendors. "We believe the blue chip storage system vendors offer the purest opportunity to exploit this trend given the opportunity for accelerating EPS growth via margin expansion," he writes in a research note.

In discussing NetApp's quarter, Warmenhoven again touted strong user acceptance of iSCSI, claiming that more than half of the low-end FAS250 units in the field have enabled the iSCSI protocol (see NetApp Squares Off With Redmond). NetApp continues to believe that iSCSI, the industry standard protocol for sending block-level storage, represents a chance for it to grab meaningful share in the SAN market.

The adoption of iSCSI by NetApp customers "actually exceeds my expectations," he said. "iSCSI has been more rapidly deployed, I think, in some of our customers than I expected."

Warmenhoven acknowledged that the technology is still nascent, noting that NetApp's iSCSI initiative is "not material from a revenue standpoint." But he hinted that the company may be considering charging for IP SAN support in the future: "iSCSI, for instance: Should that be an add-on feature at a separate price? Or should that be a native feature in the system? We'll make those decisions in terms of what we think is best for the business."Other items from NetApp's quarter:

Todd Spangler, US Editor, Byte and Switch

For more on this topic, see the current Byte and Switch Insider report: NAS Market Update