NetApp Beats the Street, Names New CEO

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A little more than a month after losing a bidding war for Data Domain to EMC (NYSE: EMC), NetApp (NASDAQ: NTAP) today named a new CEO — and the data storage company also released better-than-expected quarterly results.

NetApp said Tom Georgens will become its new president and CEO, while Dan Warmenhoven, who had served as chief executive for the last 15 years, will remain as chairman of the board.

Warmenhoven said that the transition has been planned for some time. “My goal was to transition out of the CEO by age 60, which is only five quarters from now,” he said.

NetApp also posted better-than-expected earnings of $0.22 per share for the company’s first fiscal quarter of 2010, which ended July 31. That beat analyst estimates by two cents, according to Thomson Reuters, and matched per-share earnings for the same quarter a year ago.

“The business environment appeared to stabilize somewhat in Q1,” said NetApp CFO Steve Gomo.

Net income totaled $52 million, or $0.15 per share for the quarter, compared to $35 million, or $0.10 per share, for the same period last year.

Revenues of $838 million were down 4 percent from revenues of $869 million a year ago, but that was better than Wall Street analysts expected and better than competitors such as EMC have done. Increased sales and maintenance revenue compensated for a sharper decline in product sales, which were $478 million, down from $548 million last year.

The company declined to issue formal guidance for the current quarter, however, citing “reduced visibility caused by the recent changes in the macroeconomic environment.”

“Given the economic backdrop, NetApp performed well in the first quarter,” Georgens said. “With year-over-year revenue growth roughly flat, our revenue performance clearly outpaced the storage industry at large.”

NetApp’s cash position remained stable, and in a positive sign, it sharply reduced its accounts receivable from $447 million a year ago to $332 million. NetApp reduced accrued compensation from $204 million a year ago to $136 million, also a positive sign.

The company also received a $57 million breakup fee from Data Domain as part of its unsuccessful bidding war against EMC. Thanks to the one-time benefit, net proceeds from merger termination were recorded as $41 million.

However, a sizable one-time charge weighed on the quarter’s results. NetApp took a $128 million charge to settle allegations of fraud in government contracting. The U.S. government said that NetApp had not informed it of discounts offered to other customers, even though its government contract required it to do so.

Comparisons with other quarters were further complicated by the fact that the company’s quarter was 14 weeks long, with revenues outpacing costs in only the final week, according to Gomo.

NetApp did not give guidance for the upcoming quarter, but Gomo said that previous years’ gains of about 5 percent from Q1 to Q2 might not be repeatable, especially since the next quarter will be 13 weeks long.

Executives also described other conditions that make for an uncertain near future.

“There was frustration as people had budgets but could not get deals approved,” Georgens said. “They couldn’t get the signoffs. Budgets are a bit more predictable now, but they’re not back to normal. We still see a lot of ‘no decision made.'”

Gomo added that the company is selling short-term service contracts, which is not a positive economic indicator.

“We’re still seeing a lot of one-year renewals for service and support as people stretch their capital as far as they can, though the one year renewals came down slightly from last quarter,” he said.

Dedupe a Bright Spot

The company emphasized the positive news, saying that deduplication gives it a strong niche position in the storage industry.

“For the quarter, NetApp customers continue to adopt deduplication at a rapid pace,” the company said in a statement.

NetApp’s new CEO also pointed to the company’s growing success.

“I am honored to follow in Dan’s footsteps,” Georgens said in a statement. “In just 15 years, NetApp has grown from a $14 million startup with 45 employees into a recognized market leader in networked storage and data management with $3.4 billion in annual revenues and approximately 8,000 employees around the world.”

In a statement, outgoing CEO Warmenhoven added, “I am very proud that NetApp has achieved a leadership position in the storage market and now look forward to supporting Tom as he takes the company through the next stages of growth.”

The company is changing its product mix, sending professional services leads to partners, according to Gomo. “We are focusing investment on the higher-leverage areas of our business,” he said.

He added that both the company’s operating margins and its operating expenses were higher than planned. The company added 66 people in the quarter to handle increased sales volumes and also transferred some personnel from professional services to sales, he said.

Executives also dropped hints about NetApp’s plans to embrace cloud computing.

“Cloud computing and the rise of infrastructure service providers will change the landscape for our products,” Warmenhoven said. “It seems wise to make this change at the beginning of an era. Tom is ready to step into the CEO role.”

Analysts during today’s earnings call were eager to hear about the company’s plans for the cloud and about the progress of a beta test for version 8 of the company’s Data ONTAP operating system. But executives deferred comment on the efforts until NetApp’s analyst day in October.

NetApp officials today also reflected on the failed bid to win Data Domain — and said the company now chiefly expects to grow organically.

“Our Onaro acquisition has been successful,” he said. “We continue to look at opportunities in software and management. Data Domain gave us an opportunity to enter an adjacent market and would have impacted our overall growth rate as a company, but everything has a price and this was beyond reasonable.”

“There’s no void that we feel a compelling need to fill. We can grow organically or through investment,” he added. “Our core business is healthy but if there’s a good opportunity, we will pursue [an acquisition]. We’re not gun shy.”

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