NetApp Warns of Economic Uncertainty

NetApp posted a solid set of third quarter results in its earnings report last night, but the vendor warned that its fourth quarter figures could dip below Wall Street's estimates.

Speaking on a conference call last night, NetApp CEO Dan Warmenhoven described the third quarter as a "great quarter," but warned that economic conditions are becoming increasingly uncertain.

"Just looking at the macroeconomic conditions, I will have to argue that this quarter doesnt feel as robust as the last one," he said, pointing to a slowdown in some European markets, such as the U.K.

"It is not something that's global, it's not something that's across all verticals," added the CEO, pointing toward a slight rebound in the North American market, particularly on the East Coast.

The vendor's third quarter revenues were $884 million, a 21 percent hike on the same period last year and above analyst estimates of $877.8 million.NetApp reported third-quarter earnings per share of 29 cents on net income of $101.8 million, compared to 17 cents and $66.5 million in the year-ago quarter. On a non-GAAP basis, the vendor's EPS was 37 cents on net income of $131.7 million, up from 29 cents and $111.1 million in the same period last year. Analysts had estimated an EPS of 34 cents.

But NetApp expects fourth-quarter revenues between $915 million and $945 million and EPS of 35 to 37 cents, significantly lower than analyst estimates of $966.5 million and 38 cents.

Analysts have already warned that NetApp is particularly vulnerable to a slowdown in U.S. IT spending .

In an attempt to combat this situation, NetApp used last night's call to outline plans to boost its headcount this quarter, particularly in sales. "Going forward, our investments and operating expenses will continue to emphasize sales coverage hiring," said NetApp CFO Steve Gomo.

Execs on last night's call also explained that, after adding 271 new hires in the third quarter, NetApp plans to bring an additional 100 staff on board during this quarter, taking the firm's total headcount to over 7,200 employees.The vendor, which announced a major product refresh earlier this week, is clearly looking to expand its footprint well beyond the cash-strapped enterprise space, according to Citigroup analyst Paul Mansky.

"NetApp's plans to resume aggressive headcount growth as it shifts towards building out its down-market sales channels in the SME space is a message shift," he wrote in a note published this morning, warning that this is easier said than done. "Even when successful, this is typically not a two to three quarter fix -- this transition is all the more complicated by today's recessionary environment."

The uncertain economic climate also prompted some analysts to lower their estimates for NetApp this morning, notably Goldman Sachs, which adjusted its 2008 EPS estimate from $1.52 to $1.42. "NetApp adds another piece of evidence that overall tech demand is getting softer," wrote Goldman Sachs analyst Min Park, in a note released this morning. "With enterprise tech spending starting to crack and our estimates coming down, we do not see a compelling reason to buy NetApp shares at this point."

Citigroup also downgraded NetApp's shares to hold with a $26 target price, down from $31. "Solid quarter, but lackluster outlook and macro overhang likely weighs on the shares in the near-term," wrote analyst Paul Mansky.

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