UPDATE: FBN Securities Reiterates on NetApp as Strong Product GM Countered Light Revenue

In a report published Thursday, FBN Securities analyst Shebly Seyrafi reiterated a Sector Perform rating on

while raising the price target from $40.00 to $42.00. In the report, FBN Securities says "We retain our Sector Perform rating on NTAP and raise our PT from $40 to $42. Revenue was indeed light (overall revenue grew by only .6% Y/Y, with product revenue down 4% Y/Y and US Public revenue down by 8% Y/Y). However, NTAP was able to counter this with strong product GM (57.3%, higher than 53.3% the prior quarter and our 54% estimate) due to mix (higher branded % vs. OEM), more highly configured systems, and supply chain management. Branded revenue grew 5% Y/Y, but OEM (which is lower-margin) declined by 28% Y/Y (worse than our -20% expectation) as sales to Teradata (TDC) weakened as that company's sales weakened (TDC had a 5% revenue shortfall last quarter). As we were concerned, NTAP provided a relatively weak FQ3/Jan. guide (revenue of $1.575-$1.675B, below the $1.69B consensus) partly due to concerns about lingering weakness in US Public. Note that NTAP's FQ2 revenue was right below the low-end of its guidance (i.e. revenue of $1.55B compared to $1.56-$1.66B consensus). If NTAP hits the low-end of its new guidance for FQ3, then revenue would be down 3% Y/Y (with product revenue down more than the 4% decline in FQ2). We continue to be concerned about weak federal spending, a weak storage market (which declined by 3% Y/Y in CQ3, we estimate), and increasing competition from EMC's VNX2 in CQ4/FQ3. We are raising NTAP's NG EPS estimates, however, to reflect the strong margin performance. Still, we think that investors would ascribe a lower multiple to this earnings stream as product revenue growth remains anemic. We also think that CSCO's weak guide (January quarter revenue growth -8% to -10% versus consensus of +2%) last night will negatively impact NTAP's stock and other technology stocks today." NetApp closed on Wednesday at $41.29.