Before discussing how NetApp's (Nasdaq: NTAP) business fared last quarter, let's take a moment to think about the early release incident.
The second-quarter report was slated to appear just after the closing bell on Wednesday, in keeping with NetApp's reporting habits. Instead, enterprising reporters at Bloomberg reportedly unearthed the financial data on NetApp's website more than an hour ahead of time. "We found the release posted on the company's website without any required password or firewall," Bloomberg said. "The company failed to respond to multiple calls from us to verify the information on their website before we published our story." So Bloomberg published it -- and the stock instantly cratered, much as Walt Disney (NYSE: DIS) did in a similar early release debacle last week.
While it's not unheard of to schedule earnings releases in the middle of the trading day, this type of slip-up gives a very temporary advantage to the unscrupulous eagle-eyes who happen to catch the unreleased data before its time. The reported trick here is that enterprising Bloomberg journalists use web addresses from previous earnings releases and adjust the address to reflect the new quarter to find if companies have posted releases early.
I'm all for consistent web page addresses, and it's sound business practice to stage new content online ahead of time so you can make sure it looks and acts right -- but when that practice opens the door to unseemly trading mishaps, it's probably best to publish the data under some unguessable address scheme. This one was way too easy.
NetApp quadrupled its average trading volume yesterday, and most of the trades took place in-between the data leak and the actual release. That's more than a billion dollars trading hands on information that shouldn't have been public yet. Day traders rejoiced; automated trading algorithms raised approximately 3.14159265 cheers over the incident. The majority of individual investors had nothing to cheer about. We should expect better security practices out of a major IT firm like NetApp.
Then again, perhaps we didn't lose out too badly. NetApp is trading more than 5% above that artificially deflated closing price in early action as investors had a chance to sleep on the report, so many of the pre-release sellers are losing out today. The company delivered 33% year-over-year revenue growth to $1.2 billion and 56% higher GAAP earnings at $0.42 per share. That's faster sales growth than what competitors Hewlett-Packard (NYSE: HPQ) or EMC (NYSE: EMC) can muster, and management expects to keep stealing market share in the coming quarter and fiscal year. Yes, growth will slow down a bit, which is presumably why the early traders sold or shorted NetApp shares, but the company remains well-positioned within its industry.
One analyst firm upgraded the stock this morning, two others raised their target prices, and yet another added NetApp to its "short-term buy list," for whatever that's worth. This is a strong business in unabashed growth mode, and it's just a pity to see it stumbling when it comes to handling its own data.
What else could NetApp possibly have done better? Discuss in the comments below.
