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Earnings Bar Too High for Network Appliance

The bulls are tempered despite quarterly profit growth of 72%.
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Updated from May 24

Network Appliance


delivered strong top- and bottom-line growth in the fourth quarter, but couldn't quite clear the bar set by bullish momentum investors.

In recent trading on Wednesday, shares of the storage networking provider were off $1.65, or 5.4%, to $28.75.

Network Appliance said late Tuesday that it pushed earnings up by 34%, showing a profit of $63.4 million, or 16 cents a share, compared with $36.4 million, or 10 cents a share, a year ago. Revenue was $451.8 million, a year-over-year increase of 72%.

Excluding items, the company earned a profit of $66.6 million, or 17 cents a share. Analysts polled by Thomson First Call were forecasting a 17-cent-a-share profit on sales of $447.27 million.

Service revenue was 11% of total sales, increasing 54% year over year. Add-on software and software subscription upgrades increased more than planned, the company said, accounting for almost 36% of total revenue. Software sales exclude revenue from software bundled with hardware.

The company expects to earn 17 cents to 18 cents a share in the first quarter on sales of $465 million to $479 million. Analysts were expecting an 18-cent profit on sales of $473.23 million.

Shares of NetApp, as the company is often called, ran up strongly before the earnings announcement. But with the expectations for a very strong July quarter unmet, and concerns that the company does not have much leverage, "shares will fall back into a more normal trading range of $26-$30 based on a small discount to today's P/E applied to our FY06 estimate," wrote Goldman Sachs analyst Laura Conigliaro in a note to clients on Wednesday. Goldman Sachs has an investment banking relationship with Network Appliance.

Leverage also concerned Baird analyst Daniel Renouard, who noted that operating expenses grew faster than revenue sequentially, driven by added headcount, sales compensation and bonuses. He added, however, "We believe management's position is likely correct that long-term shareholders are best served by focusing on growing the business (vs. focusing on short-term margin)." Baird is seeking banking business with Network Appliance.

NetApp's upcoming deal that will have



selling NetApp products is likely to be a plus, analysts say.