Network Appliance beats Street

February 8, 2001: 6:08 p.m. ET

Storage-system maker exceeds 3Q profit target on softer revenue

NEW YORK (CNNfn) - Network Appliance on Thursday reported a fiscal third-quarter profit that beat the Street's consensus estimate by a penny on revenue that came in below expectations.

And the data-storage hardware maker's top executives said the company remains on track to hit its revenue targets for the current fiscal year, which ends in April, as well as the year ahead.

After the close of trading, Network Appliance reported an operating profit of $38.9 million, or 11 cents per share, during the quarter ended Jan. 26, excluding extraordinary charges and other special items.

That's up from $20 million, or 6 cents per share in the same period a year earlier and is a penny better than the 10 cents per share analysts surveyed by earnings tracker First Call had expected.

At $288.4 million, Network Appliance's revenue was up more than 90 percent from $151.3 million in the year-ago quarter but was shy of the $292.7 million in revenue analysts had expected the company to log in the most recent quarter, according to the First Call survey.

Network Appliance (NTAP: Research, Estimates) shares fell $3.44 to a 12-month low of $35.19 on Nasdaq ahead of the earnings news

. They rose $2.56 to $37.75 in after-hours trade.

The company's shares have fallen under tremendous pressure in recent weeks amid a raft of downgrades from analysts who are concerned about its ability to compete against market leader EMC (EMC: Research, Estimates).

Network Appliance specializes in network-attached storage, or NAS, products, that are connected directly to a local area network rather than to a server.

EMC, the No. 1 supplier of data-storage systems, recently threw its hat into the NAS ring. In December, EMC rolled out a low-priced NAS product, aiming it directly at the market its smaller rival currently dominates.

The new competitive threat from EMC, combined with a slowing economy that has caused many companies to reduce their information technology spending, has prompted several analysts to sound the alarm on Network Appliance.

Most recently, Credit Suisse First Boston downgraded its rating on Network Appliance's shares to "hold" from "buy." That was on Feb. 1.

Other brokerages that recently have downgraded the company's stock include: Salomon Smith Barney, which changed its rating to "outperform" from "buy"; Goldman Sachs, which assigned a "market outperform" rating and removed the stock from its "recommended list"; and Robertson Stephens, which downgraded the shares to "attractive" from "buy."

But in a teleconference with analysts Thursday evening, Dan Warmenhoven, Network Appliance's chief executive, said the company is holding its own against the competition.

"This quarter marked by a number of new competitive product introductions aimed at our market, but the competitive environment in the quarter was basically the same as in prior quarters," Warmenhoven said. "The new storage networking products have not materially effected the competitive environment, and our win rate against all competitors remain in the 80 percent-plus range."

And Network Appliance executives said they expect to continue to do so moving ahead.

Jeffry Allen, the company's chief financial officer, said Network Appliance will post sequential revenue growth in the fiscal fourth-quarter on the low end of its 10-to-15 percent targeted range and will finish the fiscal year ending in April with roughly $1.1 billion in revenue, which is in line with analysts' current expectations.

While he said gross margins will decline moderately over the next several quarters as the company expands its product mix, 2002, Allen said the company is standing by its previous annual revenue growth forecast in the range of 55-to-60 percent in 2001.

Network Appliance's actual net income for the fiscal third-quarter -- including charges related to in-process research and development, amortization of intangible assets and stock compensation -- was $34.1 million, or 9 cents per share, compared with $19.8 million, or 6 cents per share in the same period a year earlier.