Wells Fargo analyst, Maynard Um, published a NetApp (NASDAQ: NTAP) earnings preview and expects an inline quarter with Street estimates as Federal seasonality offsets secular weakness in other areas. However, he also expects the company to guide below consensus unless aggressive cost cutting takes place which he is currently modeling. No change to Market Weight rating or $31-$35 valuation range.

NTAP’s guide implies above seasonal sequential growth of 8.6%, it has easier seq. comps from FQ1 (Asia Pacific region was down 13% seq. vs. 3-yr avg of down 4%.

US Public sector was down 26% seq.vs. 3-yr avg of down 14%) and still implies a 6% y/y decline.

Um expects lower gross margins due to mix but expect product gross margin to increase 230bps seq due to volumes, Federal mix, and lack of an inventory write-down which occurred last quarter.

Wells forecasts EPS of $0.60 at the high-end of $0.55-$0.60 guide (Street: $0.57) driven by tight expense actions.

Despite management’s commentary that it expects to return to its targeted op. margin of 18%-20% in FH2, they believe absent significant cost reductions, this may be challenging and expect NTAP’s FQ3 guide to be below Street consensus of $1.48B/$0.70.

For an analyst ratings summary and ratings history on NetApp click here. For more ratings news on NetApp click here.

Shares of NetApp closed at $31.49 yesterday.