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NetApp Q1 Earnings Preview

August 12, 2014 | About:

External storage solutions provider NetApp (NASDAQ:NTAP) is set to release its first-quarter 2015 results on August 13. Typically, the storage vendor’s first quarter is seasonally weak and the quarter’s performance wouldn’t therefore be exceptional. NetApp’s fourth-quarter 2014 was a mixed-bag with top line missing the Street’s expectation, but bottom line beating it. Let’s have a roundup on how NetApp is preparing for its first quarter release.

Key takeaways from the last quarter

In the previous three-month period (fourth quarter), revenue fell 4% year over year to $1.65 billion mainly on account of 33.7% drop in original equipment manufacturer (OEM) revenues and 0.8% decline in branded revenues. Product revenues dropped 8.4%, which was partially compensated by 8% improvement in service revenues.

Despite soft revenue, NetApp’s margins expanded nicely on account of solid operating performances. Improved sales of high-margin products and strict cost-reduction strategies helped the company’s cause.

First-quarter outlook

Revenue is expected in the range of $1.42billion-$1.52 billion, reflecting a 7% decline to flat sales compared to the first quarter of 2014. GAAP earnings per share (EPS) are expected in the range of $0.32 to $0.37, which would be up 39.1%-60.9% versus the year-ago quarter. Non-GAAP EPS is expected in the range of $0.53 to $0.58, which is flat to a rise of 9.4% from the same period last year.

Growing ONTAP demand could be of great support

NetApp is one of the key players in the network storage operating software space. IT research firm Gartner believes that growing demand for NetApp’s Clustered Data ONTAP operating system is helping the company to achieve above-industry growth, outshining storage giants EMC Corp (NYSE:EMC), IBM (NYSE:IBM) and Hewlett-Packard (NYSE:HPQ).

Last year, NetApp secured the third position in external controller-based (ECB) disk storage market in terms of market share. NetApp’s market share of 11.8% was up from 11.3% in 2012 and its year over year revenue growth was 6.3%. The company’s growth outperformed the market’s overall growth of 1.4%.

NetApp observed steep growth in Clustered Data ONTAP deployments through its fiscal 2014, driven by the increasing awareness for the product portfolio and its efficiency in handling complex cloud operations. Moreover, attach rates for the product lines had increased 50% year over year during the previous quarter.

The company recently announced the latest version of its Clustered ONTAP, and it’s expected that the rapid acceptance of the operating software will rope in higher revenues.

Selling Storage Hardware Could be Difficult

NetApp’s major reselling partner IBM will not be selling its storage products anymore. IBM is targeting the external storage market with its own offerings, and the decision is a major challenge for NetApp. As IBM is its largest OEM customer, NetApp anticipates its OEM business to take a hit.

Lower technology spending could hurt revenues

Gartner’s lowered forecast for global tech spending could add to the pain. The firm has lowered its forecast citing a tough competitive scenario, which might pressurize technology vendors to reduce prices. As per the firm’s current expectation, technology spending could grow 2.1% year over year in 2014, down from 3.2% previously expected.

According to the firm, spending for data center system could be the slowest among others in 2014, increasing merely by 0.4%. This could put pressure on the sales of NetApp’s offerings targeting the data center customers.

On the whole

NetApp’s revenue growth could remain challenged due to weak product revenues. However, growing popularity of ONTAP portfolio could be of good support. It’s expected that the company’s operating performance will continue to improve with higher sales of high-margin software solutions and services.

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