NetApp Pre-Earnings: Services And Software Growth Help Offset Hardware Weakness

by Trefis Team
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NetApp (NASDAQ:NTAP) is set to announce its Q3 results on February 13. Cautious IT spending and the slowdown in Europe weighed on the storage products maker in Q2, with revenues coming in at $1.541 billion, up slightly y-o-y with revenue in line with guidance. NetApp is involved in designing solutions for storing, managing and protecting business data through enterprise storage and data management software as well as hardware products and services. In Q3, NetApp estimates revenues to be in the range of $1.575-$1.675 billion, EPS is expected to be $0.29 to $0.34 a share. [1]

See our full analysis on NetApp

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 the rest.

Services And Software Growth Outpacing Hardware Decline

On a y-o-y basis, product revenue fell slightly from $1.016 billion in 2011 to $996 million in 2012. This decline was, however, negated by growth in software revenues, which climbed 10% from $198 million to $219 million and services revenue which grew 12% from $293 million to $326 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.

Cloud Storage, Big Data And StorageGRID Key for 2013

Product revenues took a hit in Q2 due to seasonality and macro-economic factors, but hardware maintenance contracts showed robust growth and is likely to positively impact margins. StorageGRID software now comes with the cloud data management interface (CDMI) standard. This is developed by the Storage Networking Industry Association (SNIA) and involves the  interaction of applications with cloud storage. It covers activities such as the creation, retrieval and deletion of data elements from the cloud and is an open standard for self-provisioning and accessing cloud storage. This is a shift away from proprietary API’s and interfaces that ties clients to its storage vendors as CDMI is a more open approach aimed at reducing vendor dependability. In essence, a company can change cloud storage vendors easily and is not dependent on a single vendor. Currently, NetApp is one of the few large storage vendors that supports the standard, and we expect this to drive its revenues as it will be able to better manage clients’ storage needs. [2]

We currently have a $37.50 Trefis price estimate for NetApp, which is slightly higher than its market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. NetApp Q2 Results,, Nov 14, 2012 []
  2. NetApp StorageGRID,, August 13, 2012 []
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