NetApp to Downsize Employee Strength - Analyst Blog

Per a SEC filing by NetApp Inc. NTAP, the network storage provider is set to downsize its employee strength by 600 as part of its business realignment plan. The company expects to complete the global workforce reduction program by the end of fiscal first-quarter 2015. The current spate of job cuts comes after the company slashed 900 jobs last year. 

NetApp cited soft demand from the U.S. Federal agencies and constricted IT spending as the primary reasons behind rightsizing the workforce. The majority of the charges related to the job cuts, approximately $35.0 to $45.0 million, will be incurred in the fourth quarter of fiscal 2014. The company expects to pay these charges in cash.

However, the current one-time cash charges related to employee severance will have a near-term impact on the company's operating expenses in turn lowering profitability. Nonetheless, NetApp has a strong cash flow generating ability and healthy cash balance of over $5.0 billion. Moreover, the company has a regular buyback plan which would lend support to the earnings per share.

For the current quarter, NetApp expects non-GAAP earnings in the range of 77 to 82 cents per share, up from 69 cents reported in the year-ago quarter. The Zacks Consensus Estimate is pegged at 62 cents.

It is worth noting that NetApp's revenues in the third quarter decreased 1.2% primarily due to decline in original equipment manufacturer (OEM) revenues. Product revenues were also down on a year-over-year basis. However, driven by efficient cost management and share repurchase initiatives, the company's earnings improved year over year.

Nonetheless, we believe NetApp's innovative product line-up, frequent updates and shareholder-friendly activities will boost profitability, going forward. Moreover, the company's partnership with Oracle ORCL and Verizon VZ, and rapid adoption of its ONTAP system are the positives.

However, we believe uncertain IT spending outlook and stiff competition from EMC Corp EMC remain the primary headwinds, going ahead. Moreover, tepid revenue guidance for the coming quarter will remain an overhang on the stock.

NetApp, currently, carries a Zacks Rank #3 (Hold).