F3Q13 Preview: Signs of Improvement
■ Results on February 13; maintain Neutral. For F3Q13, we forecast NetApp
revenue/EPS of $1.65bn (+5.3% y/y, +7.0% q/q)/$0.58, in line with consensus
and guidance of $1.58-$1.68bn/$0.53-$0.58. Recent data points suggest a
tempered improvement in the storage market and NTAP's position. Long term
we fear that competitors are shrinking NetApp’s technology lead, which will
moderate the company’s share gains and top line growth. We reiterate our
Neutral rating and $33 target price.
■ Key focus areas. Key areas of focus include: i) management outlook on storage
spending as we progress through 2013; ii) customer acceptance of ONTAP
8.1.1; iii) the outlook for gross margins due to abating HDD price pressure and
pricing pass-alongs; iv) SSD product portfolio and traction.
■ Data points are more upbeat for NetApp. While still present Department of
Defense (DoD) exposure raises concerns, cyclical and fundamental factors point
toward an improving outlook for the company. Our detailed storage survey,
published January 7, 2013 in our “IT Hardware: 2013 Outlook”, points to
persistent NetApp share gains over time. NetApp continues to benefit from
virtualization adoption and positive sentiment around its ONTAP 8.1.1 software.
This comes amid potential improvement in storage spend, with survey
respondents pointing to a back half acceleration and EMC’s mid-tier growing 5%
y/y versus flat growth in the quarter prior. While all these factors are a positive,
we fear increasingly more able competitors will moderate NetApp growth.