Network Appliance Posts Gain in Revenue and Profits - TheStreet

Updated from 5:03 p.m. EST

Network storage vendor

Network Appliance

(NTAP) - Get Report

reported Tuesday that revenue and earnings increased strongly during its third quarter of fiscal 2003.

And the company appears to be on track to better last year's results, despite the overall slump in the technology sector.

Quarterly revenue was $228.5 million, an increase of 15% from the same quarter last year and a 6% sequential increase, the company said.

Network Appliance earned $19.7 million, or 6 cents per share, this quarter, according to generally accepted accounting principles, compared with $7 million, or 2 cents a share, a year earlier.

Revenue for the first nine months of the current fiscal year totaled $650.5 million, compared with $593.5 million in the first ninth months of fiscal 2002.

Network Appliance bested Wall Street's revenue expectations by 2.4% and equaled earnings projections. Analysts polled by Thomson Financial/First Call had expected $223.11 million in revenue during the January quarter.

In trading Tuesday, Network Appliance closed up 29 cents, or 2.8%, to $10.82.

Looking forward, the company expects fourth-quarter revenue to range from $233 million to $244 million, compared to Wall Street expectations of $232.5 million. Earnings, the company said, will range from 6 cents to 7 cents a share, as much as 1 cent better than expectations.

"I feel like we're gaining share and gaining momentum," CEO Dan Warmenhoven said during a call with analysts.

Service revenues have been growing both absolutely and as a percentage of revenue. In the January quarter, the company recorded service revenues of $23.4 million (10% of total revenues), compared to $17.7 million (9% of revenue) year over year. Similarly, service revenue for the first nine months of the fiscal year increased to $65.3 million, or 10.2% of revenue, from $48.8 million, or 8% of revenue in fiscal 2002. Because service margins, (at 27.8% for the quarter) are lower than hardware margins, the company said, overall gross margins for the company will drop from 61.3% in the January quarter, "to the high 50s" over time.

Network Appliance is viewed as a strong player in the growing enterprise storage space. But the stock may be too pricey (42 times calendar '03 estimated EPS) to offer immediate investor value, said analyst Sabrina Ricci of Deutsche Bank.

"Network Appliance's valuation is rich by any metric? We have difficulty creating a realistic scenario in which results exceed estimates enough to make current valuations attractive," Ricci said. Deutsche Bank has no current banking relationship with Network Appliance, but was part of the syndicate that took it public.