NetApp Headed to $51 Though Macro Conditions Weigh on Growth
NetApp (NASDAQ:NTAP) posted moderate revenue growth in line with analyst expectations in its most recent earnings report. The moderate growth came despite a very strong start during the first two months of the quarter as NetApp‘s business softened dramatically during the last few weeks of July under the weight of the debt ceiling crisis and macroeconomic uncertainty. Earlier this year, NetApp gained significant share in the external disk storage market against arch rivals EMC (NYSE:EMC), IBM (NYSE:IBM) and HP (NYSE:HPQ).
Taking into account the expected near term slowness in demand, we have revised our Trefis price estimate for NetApp to $51.80, which is still about 25% above the market price as we believe NetApp is a highly potential player in a very lucrative market.
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During July, NetApp witness slowness in federal business on the backdrop of the debt ceiling dispute. The U.S. public sector generated $168 million or 12% of revenue, a decrease of 27% sequentially and an increase of only 3% year over year. Among its commercial sector clients in the US, NetApp saw weakness in business in the financial services sector as macroeconomic uncertainty loomed. All of the six financial services firms in NetApp’s major accounts program saw booking declines.
The situation could become even graver in the short term as the environment remains unsettled and negatively impacts NetApp’s revenues during the year presenting some downside risk.
Innovation and New Products to Drive Long Term Outlook, Not Without Risks
NetApp’s new E-Series product line delivered strong OEM revenue and this was one of the highlights of the quarter. E-Series OEM revenues came well over the planned $157 million with better than expected product cost performance. Backed by the introduction of the new E-Series lines of products, NetApp was able to acquire large number of customers in Q1 and also closed a Full-Motion Video deal, its first ever.
It is however important to note that E-Series OEM revenue carries a significantly lower gross margin than NetApp branded products and since they are likely to form increasing greater mix of products going forward this could have a negative impact on the company’s margins.