Daniel Del'Re
"We've just picked ourselves off the mat," said Warmenhoven in a conference call Wednesday after announcing the earnings. "We believe the underlying market forces driving demand for our solutions remain intact."
The company also is taking measures to hold up past profit levels. A greater contribution of sales from software helped hold gross margins above 60% despite lackluster sales and pricing pressure on the company's core hardware products. And management is scaling back hiring plans to return its operating margin to its target rate of 16%. What's more, management said it will buy back an additional $1 billion in stock on top of the $200 million remaining for share repurchases. This could help stem the fall in earnings per share as the company works through an uncertain sales environment and tightens its cost structure. Despite its profitability problems, Network Appliance has steadily generated cash, which could be used for the buybacks if problems roiling the credit markets make debt unaffordable. Over the past few years, Network Appliance's cash flow has grown at a 38% compounded annually. First-quarter cash flow from operations rose 22% to $200 million, helped by faster collection of accounts receivable. Free cash flow, which subtracts big-ticket investments such as machinery, rose 18%. "I think the market has been inordinately harsh on Network Appliance," said Jay Hingorani, a Standard and Poor's analyst. "Based on our outlook, expected share repurchases, our view of a strong balance sheet and continued free cash flow generation, we see Network Appliance shares attractively valued." He expects tech spending to pick up as IT managers place orders that they've been putting off. Standard and Poor's has no business relationship with Network Appliance, and Hingorani doesn't own the company's shares. Stephen Jue of mutual fund manager RCM, a long-term Network Appliance investor, says that company's prospects look promising because data storage remains high on the list of priorities cited by corporate information technology managers. He too says the shares are attractively valued, given the recent selloff. Network Appliance's outlook did little for other data storage companies. Shares of its chief rival, EMC (EMC Quote - Cramer on EMC - Stock Picks), were recently trading down 67 cents, nearly 4%, to $17.47.
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