Network Appliance edges Q3 estimates

On the bright side, it left earnings-per-share estimates for fiscal 2001 and fiscal 2002 unchanged at 41 cents and between 55 cents and 60 cents, respectively.

First Call Corp. consensus expected the network storage firm to earn 10 cents a share in the quarter on sales of $290 million.

Network Appliance (ntap) shares closed off $3.38 to a 52-week low of $35.25 ahead of the earnings report before moving up to $39.09 in after-hours trading.

The $288.4 million in sales represents a 91 percent improvement from the year-ago quarter when it earned $20 million, or 6 cents a share, on sales of $151.3 million.

Chief Financial Officer Jeff Allen told analysts during a conference call that "sequential sales will come in at the low end of the 10 percent to 15 percent range in the next two quarters."

Allen said the company posted a book-to-bill ratio of 1-to-1 in the quarter despite what he called "uneven" sales in the later part of the quarter.

"We experienced a slower-than-normal start in January," Chief Executive Officer Daniel Warmenhoven said during the conference call. "That's why revenue was skewed to the end of the month."

In the quarter, Network Appliance enjoyed gross profit margins of 60.6 percent, down 1.3 percent from the second quarter primarily as a result of its new product mix.

Sales into Europe were exceptionally strong, accounting for 27 percent of the company's total sales in the quarter. Sales to other international customers represented 13 percent of sales while sales to North American customers accounted for 60 percent of sales this quarter.

"So far, we're seeing slowing IT spending confined to the U.S.," Warmenhoven said. "Total international sales represented 40 percent of our sales this quarter, up from 33 percent last quarter."

Warmenhoven reiterated the company's guidance of 55 percent to 60 percent sales growth in fiscal 2002.

Ahead of the earnings report, Wit SoundView analyst Glen Ingalls predicted Network Appliance would earn 10 cents a share on sales of $290 million. He maintains a "buy" recommendation on the stock.

He said the stock's recent deterioration is more a reflection of the macroeconomic climate rather than an indictment of the company's execution or growth prospects.

"This correction has gone too far," he said. "This is still a well-run company with top-notch products in a market that's fundamentally healthy."

Several analysts questioned whether the company would be able to hit its fourth-quarter estimates in light of delayed or reduced spending by North American customers.

"We've seen tough fourth quarters in the past and our sales team has typically blown past those estimates," Warmenhoven said.

First Call Corp. consensus expects the company to earn 12 cents a share in the fourth quarter and sales of $331.2 million.

As far as the competition goes, especially from EMC, Network Appliance isn't too concerned.

"Our win rates in the quarter versus all competition was 80 percent of more than 1,600 opportunities," Warmenhoven said. "The competitive environment is the same as we've seen in the past."

Network Appliance shares, which peaked at $152.75 in October, have come under pressure lately following a downgrade from CS First Boston, emerging competition from EMC (NYSE: EMC) and likely reductions in corporate IT spending in the first half of 2001.

Last quarter, the company Network topped analysts' estimates when it returned a profit of $36.6 million, or 10 cents a share, on sales of $260.8 million.

Twenty of the 22 analysts tracking the stock rate it either a "buy" or "strong buy."