Virtualization Boosts NetApp's Q1

NetApp posted strong first quarter results last night, reporting revenues of $869 million, a 26 percent hike on the same period last year. Although the first quarter figures were down 7 percent sequentially, NetApp comfortably beat analyst estimates of $861.6 million, underlining the comparative health of the storage sector.

Like Brocade, which reported its third quarter results earlier this week, NetApp has managed to side-step the spending slowdown that has hit many tech sector firms.

"We do not see any significant changes in the general spending patterns of our customers or prospects," said NetApp CEO Dan Warmenhoven, during a conference call last night. "While there is broad concern about the global economic environment, most enterprises continue to invest in their infrastructure to improve operating efficiency."

The vendor reported first quarter earnings of 11 cents on net income of $38 million, compared to 9 cents and $34 million in the same period last year. On a non-GAAP basis, NetApps earnings were 22 cents on net income of $76 million, compared to 20 cents and $76 million in the first quarter of 2007. Analysts had estimated earnings of 22 cents.

NetApp was widely expected to post good results this week, buoyed by healthy demand for storage.The company’s CEO explained that the vendor did not see any significant changes in the competitive landscape during the first quarter and is seeing "increased volumes" from partners such as IBM, Arrow, and Avnet. "We’ve also seen some improvements in our top U.S. accounts," he added.

Analysts on last night’s call nonetheless grilled NetApp about virtualization, with one analyst suggesting signs that there has been a slow in adoption of the technology.

"No, I don’t see any slowing," said Tom Georgens, the NetApp president and COO. "In fact, I see more in accounts that we’re actively participating [in], particularly our big accounts, including a lot of them in New York City."

At least one analyst feels that NetApp is ideally positioned to reap the growing demand for virtualization.

"We view server virtualization as a key theme and driver for NetApp in the coming years," wrote R.W. Baird analyst Jayson Noland, in a note released earlier today. "NetApp’s strength in NAS and iSCSI protocols has received a higher adoption rate in virtualized environments than we initially expected."NetApp used last night’s conference call to reiterate its second quarter revenue guidance of between $910 million and $940 million. The vendor also expects GAAP EPS of between 16 cents and 19 cents.

"The company is executing well, growing at more than two times the market growth rate," wrote Pacific Growth Equities analyst Kaushik Roy, in a research note released this morning, but added a word of caution. "The growth rate expectations may a little high - NetApp’s biggest competition is EMC and they also have good products and are executing well. NTAP’s second biggest headache is HP, which is also executing well."

The analyst also warns that NetApp’s rapid growth brings additional challenges.

"We are a little concerned if NetApp can grow more than two times the market rate by gaining share over its competitors," he explained. "We believe that the risks are higher now - we are maintaining our Buy rating although we believe that revenue and EPS expectations for FY2009 may be a little too optimistic."

NetApp, which announced a stock repurchase program yesterday, also faced questions about its long-term capital strategy on last night’s call.”Don’t read into that that we have a particular acquisition in mind or that we have any particular change in terms of stock repurchase,” replied Warmenhoven. “Neither one of those would be an accurate interpretation.”

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