Network Appliance Maintains Its Streak of Negative Guidance

Network Appliance Inc. (NTAP) reported results for its fiscal third quarter after the bell on Wednesday, and they were better than expected. The data storage provider said that excluding items, net income rose to $131.7 million or $0.37 per share on revenue of $884 million that was by and large above expectations. But ultimately, it comes down to the guidance, and that's where the company failed again.

Network Appliance sees fourth quarter earnings in the range of $0.35 to $0.37 per share on revenue of between $915 and $945 million, which is below the previous analyst consensus of earnings per share of $0.38 on revenue of $963 million. The projected estimates mean that the company would post its lowest sequential growth rate for the April quarter since 2003.

On the call, Chief Executive Dan Warmenhoven said that by simply "looking at the macroeconomic conditions" he would argue that "this quarter doesn't feel as robust as the last one." But what was really disconcerting was the unpredictability of earnings going forward, evidenced by an exchange with a Caris research analyst. Warmenhoven said that his customers' budgets were uncertain because of potential cuts in tech spending, and because of that phenomenon he told analysts "to just take a very conservative posture on your expectations for Q4."

While that could mean the company is lowballing the numbers and creating for very low expectations, the environment is too uncertain for anyone to make a leap of faith on this one. Network Appliance shares are pricing in the potential downside with a move lower by 4.3%, but it doesn't mean that the bar can't be lowered again. On Thursday morning, Goldman Sachs analyst Min Park summed it up perfectly in a note to clients. In reiterating our thesis on Network Appliance, Min Park said:

With enterprise technology spending starting to crack and our estimates coming down, we do not see a compelling reason to buy Network Appliance shares at this point, despite a valuation that remains below historical trough levels.