NetApp (NASDAQ:NTAP) posted its Q3 earnings on February 13, up slightly y-o-y with revenues coming in at $1.63 billion. The revenue was in line with the guidance provided in Q2. Net income came in at $158 million, or $0.430 per share, compared to GAAP net income of $120 million, or $0.32 per share last year. NetApp designs solutions for storing, managing and protecting business data through enterprise storage and data management software, and it also provides hardware products and services. NetApp also estimates Q4 revenues to be in the range of $1.7-$1.8 billion, and EPS is expected to be $0.65 to $0.70 a share. 
We explain some key business developments below.
Services And Software Growth Outpacing Hardware Decline
Storage hardware is the most valuable division of NetApp, constituting nearly 40% of its value while Software and Consulting Services constitute nearly 30% of its current value, with cash making up for the rest. On a y-o-y basis, product revenue fell very slightly from $1.063 billion in 2011 to $1.06 billion in 2012. This decline was however negated by growth in software revenues which climbed from $203 million to $230 million, and services revenue which grew from $300 million to $340 million. This trend is likely to help margins as we estimate product gross margins to be in the low 50% range while services margins are slightly higher nearing 60% and software margins are much higher nearing the 90% mark. The downturn in hardware revenues is short term and is likely to pick up as IT spending improves.
The software business was driven by Data ONTAP, the #1 storage operating system, which according to NetApp, represents the vast majority of the storage market opportunity. ONTAP 8, saw strong customer adoption as almost 50% of the global installed base has moved to ONTAP 8, with a majority already shifting to version 8.1, launched in mid 2012. 
Flash Storage Key Growth Driver
NetApp has a strong flash portfolio and as of Q3 2013, it has shipped over 36 petabytes of flash deployed over 20,000 systems worldwide. Flash provides high speed data performance and the company has introduced a portfolio of hybrid and SSD based solutions, which has seen strong traction in the market. In Q3, bookings for systems with Flash pools, a hybrid disk and SSD solution, grew 67% sequentially despite the costs associated with it as companies are willing to pay for the enhanced performance. We can see the hybrid solutions becoming a major driver in 2013.
We currently have a $37.50 Trefis price estimate for NetApp, which is slightly higher than its market price.Notes: