IT spending: March 'air pocket' or something worse?
Network Appliance (NTAP) reported strong fiscal 2007 results, but cut its first quarter outlook due to a technology slowdown in March. Network Appliance, which sells storage gear, called March an "air pocket" and said business rebounded in April. However, officials declined to forecast the IT spending prognosis for May and beyond.
Now this March blip has surfaced in many quarters and has been mentioned by numerous technology vendors. Unfortunately, we won't know whether March was a fluke or something worse until companies report earnings again in July.
Worries about IT spending overshadowed any good news about Network Appliance's quarter. For the record, the company reported fourth quarter net income of $89.6 million, or 23 cents a share, on revenue of $801.2 million. The results were strong and for the year Network Appliance reported net income of $298 million on revenue of $2.8 billion.
For now here's what Network Appliance CEO Dan Warmenhoven had to say on a conference call:
It just took longer to close deals in the second half of the quarter, but our fundamentals remain intact with petabytes up, solid system sales, healthy software contributions, new low-end coming, and a competitive position that is as strong as it ever has been. So although our pace for the first quarter doesn't have the benefit of typical backlog going in, our pipeline points toward more normal business levels going forward. What remains to be seen is whether sales velocity is also returning to more normal patterns.
Later in the call, Warmenhoven added:
Through the first half of this Q4, it felt very much like Q4 of last year. We were running a little bit behind linearity but nothing real through a major. In fiscal year ’06, we saw the last six or seven weeks of the quarter get really strong and that never happened here until about the last four weeks. So everything kind of slowed down during the calendar month of March and I know we had a really good bookings activity. I think first time we booked 0.5 billion in the month in April, so it was really strong. But it wasn't enough to recover the shortfall that occurred in our fiscal month of March. And this slightly up selling with some of the other storage vendors, this is not unique to NetApp, right? The entire industry slowed down if you listen to the calls from some of the companies you follow, they referred to the same kind of thing and their growth rates were significantly lower, right?
My take: What caused the reticence in March? Was it the February stock market swoon? Unfortunately we don't know as those CIO IT spending surveys aren't turning up a lot. Meanwhile, NetApp isn't going to be a lot of help since May is when the company reorganizes its sales team. In a nutshell, May is a rough month regardless of the economy.
As the for April bounce, Warmenhoven noted that sales were juiced by incentives. The only thing Warmenhoven was sure about was that competitors weren't taking share from NetApp. "I'll tell you what I believe. It had nothing to do with any competitor. It had nothing to do with anybody like IBM. This is strictly macroeconomic," said Warmenhoven.
He added:
Hopefully everybody feels better about the economy now, if the stock market is an indication of that they've certainly recovered from the March periods, but if you'll recall a period of March, every vendor was seeing a slowdown, Greenspan was on the stage talking about probably a recession in the U.S. economy in the second half of the year and everybody was nervous about the impact to the consumer spending of the blow-up in the housing market, etcetera, and it's very clear that the U.S. enterprise accounts got very cautious.
Stay tuned.