Network Appliance: U.S. enterprise spending on the wane

Network Appliance, a leading network attached storage company, says U.S. enterprise spending among its top 22 largest commercial accounts is waning. However, the company is navigating the slowdown well.

The company reported its second quarter results on Wednesday and they were solid. The company reported net income of $83.8 million, or 23 cents a share, on revenue of $792.2 million, up 21 percent from a year ago. Excluding charges, Network Appliance reported earnings of $116.4 million, or 32 cents a share. The company said third quarter revenue will be between $872 million and $883 million. Earnings will be between 33 cents and 34 cents a share excluding items. Those results and outlook topped expectations.

More importantly, Network Appliance gave some good color on the enterprise spending landscape. Here are the big enterprise spending takeaways from the conference call.

• The federal government is spending heavily, representing 17 percent of Network Appliance's sales for the quarter. Federal spending was up 49 percent from a year ago.
• North American sales were sluggish. If you exclude the feds, Network Appliance said its U.S. business grew 9 percent in the second quarter compared to a year ago. "This weakness can be largely attributed to our 22 largest U.S. commercial accounts, our top enterprise accounts, which were down, down about 4 percent compared to Q2 a year ago," said Dan Warmenhoven, CEO of Network Appliance.
• Sales in Europe were solid, representing 30 percent of revenue. However, there was "some softness in Western Europe."
• Asia Pacific revenue was up 30 percent from a year ago.

Simply put, Network Appliance is seeing a mixed bag of enterprise spending. This outlook is in keeping with other reports of late from the likes of IBM and others.

Warmenhoven said:

(The enterprise spending weakness) is led by the financial services sector as you might imagine and they're quite substantial. But other companies are still as well. Texas Instruments has been a big customer for a long time. It was a challenge this year.

There is a variety of other stories outside of financial services, but across the board they're down on a composite sense 4 percent. I don't see any pattern other than the financial services meltdown and I would encourage all of you who are part of the financial services, especially broker-dealer organizations, please keep that among yourself.

Once you start exporting that set of problems to the rest of the economy, everybody is going to go in the tank. It is not a competitive issue. It is strictly financial services is just squeezing down.

That said, Network Appliance seems to be navigating any economic headwinds well. Analysts were generally upbeat about the second quarter results, but did fret about the economic headwinds.

"NetApp’s commentary around soft spending in financial services and certain large accounts is consistent with our belief that overall storage spending remains somewhat choppy, likely the result of cautious CIOs with excess capacity," said Credit Suisse analyst Robert Semple in a research note.