NetApp Reports Q1, Nudges Forward

NetApp announced its first-quarter results last night, beating analyst estimates as the vendor attempts to emerge from a tough spending climate. (See NetApp Announces Q1, Spending Slowdown Slams NetApp, and NetApp Reports Preliminary Q1.)

That spending climate was blamed when NetApp cut its Q1 guidance earlier this month, as large enterprises tightened their purse strings. (See Storage Spending Knocks NetApp, HP's Storage Slowdown, Storage Shades Sun's Q4, and Overland Struggles With 'Softness'.)

NetApp's first-quarter revenues were $689.2 million, up 11 percent on the same period last year and up over analyst estimates of $685.22 million. GAAP earnings were 9 cents per share on net income of $34.3 million, down from 14 cents and $54.7 million in the first quarter of fiscal 2007.

On a non-GAAP basis, NetApp's earnings were 20 cents on net income of $76 million, down from 25 cents and $96.6 million in the year-ago quarter. Analysts had estimated earnings of 19 cents.

Speaking on a conference call last night, NetApp CEO Dan Warmenhoven called the last few months difficult. "A number of our top enterprise accounts and many of our enterprise accounts paused a meaningful portion of their spending in the first quarter," he said, adding that the number of deals over $1 million dropped 27 percent sequentially.For the first time in a number of years, NetApp reported that petabytes shipped also decreased, down 12 percent sequentially to 111 Pbytes, but up 52 percent year over year.

NetApp's sales of high-end FAS6000 devices were down more than 30 percent sequentially, and sales of the OnTap Gx operating system were also down quarter-to-quarter, despite some wins outside of that product's core high performance computing market. (See NetApp Scales Up, NetApp Paints Rosy Picture, The Outer Limits of NAS, NetApp: 'We're Winning', NetApp Ships Data Ontap GX, and NetApp's GX Targets HPC.)

To make matters worse, NetApp's first-quarter bookings wound up in the back-end of the quarter. "This resulted in many orders being received too late to be converted to revenue and ending up in backlog as we exited the quarter," said Warmenhoven.

Despite these factors, the exec expects better things from the coming months. "I think most of the enterprise accounts are feeling pretty bullish on the second half," he explained. "As long as the macro economic conditions don't absolutely implode."

As part of a long-term plan to steady its financial ship, the vendor also announced a billion-dollar stock re-purchase plan yesterday. (See NetApp Repurchases Stock.)A number of analyst reports suggest that NetApp is emerging from under its first-quarter cloud. "The company is through several one-time negative factors and the company is now feeling much more optimistic about the second half of this calendar year," wrote Caris & Company analyst Shebly Seyrafi in a guidance note released this morning. "The $1 billion stock repurchase only adds to the story."

Goldman Sachs analyst Laura Conigliaro also described NetApp's first-quarter results as "more encouraging" in a guidance note today. "NetApp noted that its largest customers are maintaining stronger second half spending patterns, consistent with a number of our own checks that show no impact from credit-related issues affecting the financial services markets."

Despite a poor showing from the FA6000, RBC Capital Markets analyst Tom Curlin feels that the hardware could nonetheless prove key in getting NetApp back on track. (See NetApp's Kidd Talks Turkey.) "The FAS6000 remains a key enabler for NetApp," he wrote in a note today. "We continue to believe IBM's reselling of the FAS6000 (rebranded NS7000) bodes well for future account penetration up market."

The analyst also highlighted strong performance from NetApp's 3070 product as helping the vendor get back on its feet. (See NetApp Sharpens SAN Focus.) "We believe this product is helping NetApp realize midrange SAN penetration momentum, with block-based storage representing 44 percent of the company's business in Q1."

On last night's call, Warmenhoven was keen to explain that NetApp's first-quarter problems were all about enterprise spending, as opposed to rival vendors. "Its not a competitive situation. It really is a spend rate," he said, avoiding a repeat of the firm's analyst day earlier this year, when he launched a stinging attack on clustering rival Isilon. (See NetApp Stokes Competitive Fires, Faceoff in the Vertical, and Isilon's Losses Roll On.)For the second quarter, NetApp expects revenues between $752 million and $768 million, above analyst estimates of $743 million. The vendor expects earnings per share of between 16 and 18 cents.

In trading today, NetApp shares rose $2.15 (8.9 percent) to $26.31.