Barclays Capital said NetApp Inc. (NASDAQ: NTAP) seems poised to outline a compelling story at its June 30 annual meeting in New York. The brokerage reiterated its overweight rating on shares of NetApp with a price target of $67.
We believe NetApp may be starting another systematic beat and raise cycle - and it is important not to over-analyze the accounting change. We believe the acquisition, accounting change benefits, and health of the core business make even our raised estimates feel very conservative. As a result, NetApp could outline a very compelling investment case at its June 30th analyst meeting in New York, said Ben Reitzes, an analyst at Barclays Capital.
NetApp reported fourth quarter of 2011 EPS of $0.59 versus Reitzes estimate of $0.52 (consensus estimate of $0.53) with 22 percent year-over-year revenue growth to $1.43 billion, which was above his estimate of $1.38 billion (consensus estimate of $1.39 billion). Reitzes noted that NetApp’s reported revenue in fourth quarter of 2011 reflected a revenue recognition policy change that had a positive impact.
Reitzes said while some may be quick to say that this change added $48.2 million of revenue (and 2 cents to 4 cents to EPS), it seems NetApp managed the quarter differently given the new policy & just subtracting the $48.2 million does not provide an apples to apples comparison.
NetApp issued first quarter of 2012 revenue guidance of $1.46 billion to $1.55 billion versus consensus of $1.49 billion, and adjusted EPS of $0.52 to $0.57 (GAAP EPS of $0.31 to $0.36), while consensus estimate was $0.50.
Reitzes said the company’s guidance implies an increase of 2 percent to 8 percent sequentially (including Engenio and additional revenue attributed to its accounting change). Excluding these items, NetApp’s revenue was essentially in-line to slightly better than his expectations (he believes due to surprising strength in the public sector).
Reitzes also noted that EPS guidance includes about $0.01 of dilution attributed to the Engenio acquisition and it also continues to reflect increased shares from the company’s outstanding convertible notes and warrants (which do not include a hedge that should offset 80 percent of the expected dilution).
Reitzes said the company expects gross margins to decline in first quarter of 2012 to 62 percent to account for the impact from the Engenio business and operating margins to decline to 18 percent to 18.5 percent with a tax rate of 18.5 percent. NetApp still expects the Engenio business to contribute about $750 million in revenue in fiscal 2012.
Our new estimates account for the acquisition of Engenio and the accounting change. We believe the accounting change adds almost $100 million in revenue to fiscal 2012, while Engenio adds over $700 million in revenue. We are still confident in NetApp’s ability to gain share and benefit from the strong demand for networked storage and see our estimates as conservative given visibility from strong deferred revenue, said Reitzes.
The brokerage raised its 2012 first quarter adjusted EPS estimate for NetApp to $0.55 on revenue of $1.50 billion from $0.50 on revenue of $1.32 billion. The brokerage also increased its fiscal 2012 adjusted EPS estimate to $2.45 on revenue of $6.61 billion from $2.28 on revenue of $5.81 billion, and its 2013 estimate to $2.85 on revenue of $7.60 billion from $2.63 on revenue of $6.65 billion.
NetApp stock closed Thursday's regular trading up 6.92 percent at $55.31 on the NASDAQ Stock Market, while in the after-hours the stock rose 0.16 percent to $55.40.