NetApp: New Solutions Will Lead to Long-Term Growth

Data management and cloud storage solutions company NetApp (NTAP) is down 27% in 2015, and its recent results didn't help matters either. Last week, NetApp released its first-quarter results, posting a 10% decline in revenue on a year-over-year basis. Going forward, the company estimates second-quarter revenue in the $1.4 billion to $1.5 billion range, which will be a drop of 7% from the prior-year period. In addition, NetApp forecasts second-quarter earnings per share in the $0.55 to $0.60 range, down from $0.70 per share in the prior-year period.

The company is seeing a drop in both its top and bottom lines primarily due to the negative impact of unfavorable currency translations.

But, despite these headwinds, it is possible that NetApp could make a comeback going forward, driven by a fast-expanding client portfolio and new contract wins.

Positives and negatives

NetApp is adding new customers and extending the adoption of its portfolio by increasingly implementing innovative architectures. These measures include the introduction of hybrid cloud, converged and software defined models. Moreover, the company is executing a highly-focused portfolio management approach across all the key aspects of its businesses, including customers, technology and go-to-market, in addition to enhancing configuration and scrutiny.

Moreover, the need for superior digital capabilities and innovative cloud-based solutions will accelerate NetApp's growth going forward. The good thing is that NetApp is making good progress in the cloud environment, as it is focused on consolidating data all through its internationally value chain, assisting customers with efficient data management.

However, investors should not ignore the fact that the change in the end-market is going to negatively affect NetApp's legacy offerings. For instance, the continued adoption of new storage technology is reducing customers' spending on older storage systems, and thus putting pressure on the company's ONTAP 7-Mode business. NetApp witnessed the 7-Mode storage operating system shipments in just 35% of FAS units during the quarter, a reduction from approximately 75% during last year.

The rapid transition of enterprise customers from legacy-based storage technologies to highly-advanced cloud-based storage systems will put pressure on the company's revenue from older technologies in the short run. However, by investing in new products, NetApp will be able to improve its sales going forward, though the transition is expected to take time.

New products and solutions will drive growth

NetApp's clustered Data ONTAP solution targets enterprise customers by providing a highly competent, multi-boarder, continued shared storage infrastructure. This will help customers replace older stovepipe designs for enterprise applications such as eCommerce, VDI, virtualization, and databases.

NetApp has successfully deployed clustered ONTAP on 65% of the FAS systems delivered during the first quarter, an increase of approximately 25% over last year. The unit shipments of Clustered ONTAP systems increased nearly 115% last quarter, marking the 13th successive quarter of triple-digit growth.

More importantly, NetApp is aggressively shifting its installed base of customers to Clustered ONTAP and capturing new customers in highly-competitive scenarios. The number of customers utilizing Clustered ONTAP increased over 130% during the first quarter over the same period last year. Importantly, new NetApp customers grew at an impressive pace of about 225%.

The healthy adoption of cloud-based computing technology across all the key enterprises throughout the globe is will increase NetApp's growth prospects, allowing it to capture this key growth opportunity and develop a niche for cloud-based storage platform.


Finally, from a valuation point of view as well, NetApp is well-positioned. The company has a trailing P/E ratio of 21.8, while its forward P/E is lower at 11.1. This indicates that an improvement is expected in NetApp's earnings going forward. Additionally, from a financial perspective as well, NetApp is well-positioned. The company has a cash position of $4.95 billion, which is higher than its total debt of $1.49 billion. Thus, NetApp is well-placed to continue making investments in its business in order to capture more customers.

Hence, given the arguments presented above, I think that NetApp's drop is an opportunity for investors to buy more shares.

Published on Aug 25, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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