NetApp Inc. (NTAP) reported results for the fiscal first quarter that were pretty decent, but after hours trading has seen the stock is down about 4%. The reason for the sell off in the stock is that the company neglected to give second quarter revenue or earnings guidance due to a lack of visibility. Uncertainty is not a friend to the market, and thus the sell off even though earnings were slightly better than expected.
Earnings came in at 22 cents per share (non-GAAP), which equaled the performance of a year ago and was better than analysts expected by two cents. On a GAAP basis, the company earned 15 cents per share, which was 49% better than a year ago. Revenue came in at $838 million which again beat the estimates even if it fell about 4% from a year ago. The results bested the consensus estimates, as analysts have been relatively uniform in upping their targets recently. In just the last 30 days, nine analysts have boosted their EPS estimates, with the understanding that the corporate IT spending environment was starting to thaw. That being said, NetApp was able to handily beat the improved estimates, but they were not yet ready to declare an improved operating environment just yet.
Also in this release, NetApp’s board named President and COO Tom Georgens as the successor to Dan Warmenhover as the company’s CEO. Warmenhover, who had been the Chief Executive for the past 15 years and presided over much of the company’s growth, will stay on as the Chairman of the Board. With Georgens promoted from the inside and Warmenhover staying on the management team, this succession plan should minimize any turbulence related to transition.
One other thing to note, NetApp was recently outbid by EMC Corp. (EMC) for Data Domain in a transaction that was completed in July 22nd. In the end, after a heated bidding war, NetApp was paid a termination fee of $57 million. The market seems unperturbed by this development as the stock has continued to climb from $19 despite losing its bid.
At Ockham, we are maintaining our Undervalued rating on NTAP shares. The company has been fairly resilient to the downturn in the market, and continues to be a leader in the data storage systems industry. As we see it, NetApp is near the bottom of the price range that we would expect to see it trade in and has the potential to continue rising into the low thirties. The company did not offer guidance for the upcoming quarter, but it did say that they are expecting improved margins as costs will continue to be restrained. Furthermore, they did say they expect earnings to be somewhere near where they were for this quarter. We think it is not necessarily unwise to refrain from guidance as the economy may be on a the verge of returning to growth but it is too early to tell.
