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NetApp revenues fall $61M short of forecast

NetApp announces that its revenues are down 15% from last quarter, blaming a continued decline in data storage spending.

Network Appliance Inc. (NetApp) announced Thursday that it will miss its financial goals for the the first quarter...

of its fiscal year 2008 by significant amounts on both the revenue and profit front.

Revenues for the April to June period are down "approximately 14% to 15%" compared with the previous quarter. Those preliminary results are below the company's targets of a sequential revenue increase of 6% to 7%, which would have represented between $745 and $753 million in revenue. Instead, revenues are expected to wind up in the range of $684 million to $688 million. On the bright side, that's still up 10% to 11% over the same quarter a year ago.

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Profits are similarly short for the quarter. NetApp expects earnings to fall $61 million short of forecast.

"The most shocking aspect of this announcement is the size of the miss -- almost 10%," wrote Brian Babineau, analyst for the Enterprise Strategy Group, to in an email, although he added that the dismal financial results will probably be "an aberration."

The company's bookings in April were $500 million, close to an all-time record, which was interpreted as a rebound from a spending decline in the prior quarter. However, it turned out to be the result of normal end-of-fiscal-year spending patterns.

On a somber conference call Thursday night, CEO Dan Warmenhoven said that the company "did not appreciate the scope of the spending slowdown that we were facing" from the relatively small number of accounts on which the company's sales have been focused. The spending slowdown hit NetApp hard because it has been focused on relatively few vertical markets and about 40 top enterprise accounts around the world, rather than acquiring new accounts. Spending at the 22 largest accounts for NetApp in the U.S., other than the federal government , was down 12% from the same quarter last year.

This does not mean that the competitive picture has changed, Warmenhoven emphasized, saying that the company's win rates and profit margins remain solid. "It wasn't a matter of losing deals, we just aren't in enough deals to sustain our desired growth rate." The company will be more aggressively pursuing top storage buyers in the global "Storage 5000."

The company expects some recovery in the next quarter, as "customers have indicated they are still absorbing prior period purchases and will begin buying from us again once they have fully deployed that capacity."

NetApp may well be experiencing what storage managers said in Storage magazine's most recent Purchasing Intentions survey done in March, 2007. According to 680 respondents, storage buyers are adding the same amount of capacity this year as last year -- the first time in five years that no increase was seen -- and focusing more on building out existing arrays with more drives than buying new frames. Favorable pricing from vendors, a strong economy and growth in disk-based backup have been bouying NetApp's bottom line over the last few years, according to Babineau. "At some point, customers have to take a step back and figure out where they are from a storage utilization standpoint, and this hesitation could be happening now."

In the meantime, Babineau said, NetApp "is at a challenging point in its evolution" as it heads toward the $5 billion mark, expands its product portfolio and hires new employees as it continues to grow. "Getting new sales and technical resources up to speed .. takes time and this can have an adverse impact on productivity and results," Babineau wrote.

Shares of NetApp dropped $5.22 to $23.49 in after-hours trading following the announcement. The full NetApp earnings report is scheduled for Wednesday, Aug.15.

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