Federal spending concerns weigh on NetApp forecast

By Lehar Maan (Reuters) - Data storage equipment maker NetApp Inc forecast current-quarter revenue below analysts' expectations, flagging concern around the U.S. government's spending cuts. NetApp shares fell almost 3 percent after the bell. The company, which competes with EMC Corp, Hewlett-Packard Co and IBM Corp in the storage equipment business, forecast third-quarter adjusted earnings of 68-73 cents per share. Analysts on average were expecting 73 cents per share, according to Thomson Reuters I/B/E/S. NetApp said it expects revenue to be between $1.58 billion and $1.68 billion, below the $1.69 billion analysts were expecting. "Certainly we are being conservative as we build our guidance on the federal sector going forward," Chief Financial Officer Nicholas Noviello told Reuters. "We believe that injects another element of uncertainty into the macroeconomic environment," Noviello added. Noviello said the company generated 16 percent revenue from its public sector in second quarter, which also includes sales to the federal agencies. NetApp does not break down revenue under the public sector. "I think there is going to be some lingering issues in terms of federal spending for the next quarter or two, which makes me concerned about NetApp, which has relatively high exposure to the U.S. public market," FBN Securities analyst Shebly Seyrafi told Reuters. Rival EMC Corp also cut its full-year forecast in October due to the two-week U.S. government shutdown. Automatic federal spending cuts — known as sequestration — that began earlier this year, and the 16-day partial U.S. government shutdown that commenced in October have weighed on NetApp's revenue. Noviello also said the revenue from original equipment manufacturers (OEM) was down more than expected due to fewer orders from customers. OEM contributed a tenth of total revenue. The company sells more than 80 percent of its products indirectly through value-added resellers, systems integrators, distributors, original equipment manufacturers and strategic business partners. Two brokerages downgraded NetApp's stock and at least seven lowered their price targets after the partial government shutdown started. NetApp's net income rose to $166.8 million, or 48 cents per share, in the second quarter from $110 million, or 30 cents per share, a year earlier, helped by growth in its high-margin branded business. Excluding items, the company earned 66 cents per share, above analysts' expectation of 63 cents per share. Revenue for the quarter ended October 25 was $1.55 billion, while analysts had estimated $1.60 billion. Shares of the Sunnyvale, California-based company closed at $41.29 on the Nasdaq on Wednesday. (Additional reporting By Soham Chatterjee in Bangalore; Editing by Joyjeet Das)