Updated from May 18

Network Appliance

(NTAP) - Get Report

boosted fourth-quarter revenue by nearly 40% year over year and increased net income by 47%, the storage vendor said after the closing bell on Tuesday.

Although the robust top line was a surprise, the big jump in earnings was in line with expectations, and investors seemed disappointed that the Sunnyvale, Calif., company couldn't cough up more.

On Wednesday, shares of Network Appliance were recently off 61 cents, or 3%, to $20.09, continuing a slide that began immediately after results were released.

During a call with analysts and investors, Network Appliance executives sounded pleased, and analysts said the company is trading short-term profits for longer-term growth.

"NTAP is poised to deliver the best organic revenue growth rate in the sector

in calendar 2004, but the stock's performance should continue to depend on how the balance is struck between operating leverage and top-line upside," Goldman Sachs analyst Laura Conigliaro wrote Wednesday morning. "As has been the case for at least a year now, NetApp continues to use its near-term strength to make significant investments in its long-term business model." (Goldman Sachs as an investment banking relationship with Network Appliance.)

On a generally accepted accounting principles basis, the company earned a profit of $36.4 million, or 10 cents per diluted share, on sales of $337 million. On a pro forma basis, Network Appliance earned $43.5 million, or 12 cents a share, equal to Wall Street's expectations.

Sales were well above the consensus of analysts polled by Thomson First Call, who were expecting revenue of $320.6 million for the quarter, and better than the company's guidance.

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The disparity between the top and bottom lines is consistent with the company's repeated statements that it would emphasize revenue growth and gains in market share. And when the company gave guidance for the first quarter of fiscal 2005, it did not diverge from that strategy.

The company told investors to expect first-quarter pro forma earnings of 12 cents to 13 cents a share on sales ranging from $350.48 million to $357.22 million. Wall Street was expecting a 12-cent-a-share profit on revenue of $333.09 million.

CEO Dan Warmenhoven said on the call that the company expects to boost its spending for marketing as it seeks to make its brand better known and hire more people and tries to grab shares from the competition, including larger, higher-profile

EMC

(EMC)

.

Analyst Brent Bracelin of Pacific Crest Securities said that the tradeoff between market share and earnings makes sense for a company that is moving from the role of niche player to the mainstream network storage industry. "At the end of the day, fundamentals are improving," he said during an interview. (Pacific Crest does not have a current investment banking relationship with Network Appliance.)

He also noted that "accelerating revenue without accelerating profitability" is a recurring story in technology recently. "Not all investors buy it," he said.

The company's service margins declined sequentially in the quarter from 16.3% to 12.7%, partly as a result of increased hiring in the services division, said analyst Kaushik Roy of the Susquehanna Financial Group. The drop probably hurt the company's share price, said Roy, who nonetheless called the quarter "quite solid."

Also troubling to the market is the company's relatively high valuation. Based on the company's guidance of a per-share profit of 52 cents to 54 cents in fiscal 2005, Network Appliance is now trading at about 38 times forward earnings. EMC, by contrast, trades at some 30 times calendar 2004 earnings. "Given the company's great execution and leadership

in its market, the premium is justified," he said. (Susquehanna does not have a banking relationship with the company.)

Network Appliance also said its board has approved a $200 million stock-buyback plan, a move that generally indicates the company thinks its shares are somewhat undervalued.