NetApp drops outright, expands on hedge after warning; EMC falls with NetApp, up on hedge

By Rebecca Melvin

New York, May 24 - NetApp Inc.'s convertibles traded down outright, but expanded on a dollar-neutral, or hedged, basis on Thursday, after the Sunnyvale, Calif.-based data storage company posted earnings with a disappointing outlook, blaming increasing uncertainty in the global economy for its view.

The NetApp bonds added 2 to 3 points on hedge as the underlying shares slumped depending on the amount of delta used for the bond holding. At 43% delta, the paper expanded about 2 points, a New York-based trader said.

EMC Corp. moved down in sympathy with the NetApp warning, market sources said. The EMC bonds, which are generally held on a much higher delta than the NetApp bonds, were better by 0.5 point on hedge, a trader said.

"All the volume is NetApp and EMC," or $120 million of bonds and $163 million of bonds changing hands, respectively, a West Coast-based trader said. The next largest volume name Thursday was Intel Corp. with $40 million of bonds exchanged.

Outside of tech names, activity tapered off.

Annaly Capital Management Inc.'s 5% convertibles due 2015 remained fairly active and appeared to be flat to lower, after having moved lower 0.25 point to 0.5 point on Wednesday.

One market source reported a seller of a large chunk of Illumina Inc. 0.25% convertibles. But it wasn't known if the paper actually traded.

Meanwhile, Exterran Holdings Inc. received a ratings cut from Standard & Poor's, which lowered the corporate credit rating on the Houston-based oil and natural gas equipment and services company to B+ from BB.

S&P lowered the rating on Exterran's 4.25% convertible to B+ from BB. The recovery rating on the convertibles is 4, indicating 30% to 50% expected recovery in a default.

The Exterran convertible wasn't heard in trade, but it was reported down nearly 0.5 point at 97.125, according to data provided by Trace.

S&P said the Exterran ratings reflect the company's participation in the highly competitive, capital-intensive natural gas compression services industry, leveraged financial profile, deteriorating operating and credit metrics and exposure to weak natural gas.

Overall, the market limped along with the broader markets as investors grapple with the possibility of Greece's exit from the euro zone and as the prospects for global and U.S. demand weighed on sentiment.

Traders seem to be braced for more of the same for the foreseeable future, pointing to Greek elections set for June 17 as a moment when some of the uncertainty will be removed.

In the United States, equity markets ended mixed to little changed, with the Dow Jones industrial average regaining positive territory to end up 33.60 points, or 0.27%, at 12,529.75, while the Nasdaq stock market remained negative, down 10.74 points, or 0.4%, to 2,839.38. The S&P 500 stock index ended up 1.82 points, or 0.14%, at 1,320.68.

NetApp expands 2 or 3 points

NetApp's 1.75% convertibles due 2013 traded down to 109.245 versus an underlying share price of $28.20 early Thursday, which was down around 10 points on an outright basis but higher by 2 or 3 points on a swap basis.

Shares of the Sunnyvale, Calif.-based data storage company slumped $4.04, or 12.3%, to $28.82 in very heavy volume.

"It was a very active name today," one trader said of the NetApp convertible. An East Coast-based buyer said, "Nice one on swap!"

RBC Capital downgraded NetApp to "sector perform," or hold, and Deutsche Bank wrote that some analysts are concerned that business spending on equipment and software is experiencing some slowdown.

NetApp's warnings combined with a disappointing outlook from Dell this week and Cisco Systems Inc. last week have renewed worries about the health of the corporate tech sector.

NetApp said that the deteriorating economic and debt crisis in Europe may be making corporations more cautious, causing them to curb spending on technology.

The low quarterly outlook was for earnings of 10 cents to 15 cents a share, on revenue of $1.4 billion and $1.5 billion. Excluding one-time items, NetApp forecast a profit between 34 cents and 39 cents a share. Analysts had forecast the company to earn 59 cents a share, on $1.61 billion for NetApp's first quarter.

For the just passed quarter, NetApp reported profit of $181 million, or 47 cents a share, on revenue of $1.7 billion, which compared to $161 million, or 40 cents a share, on $1.43 billion in revenue in the year-earlier period.

Excluding items, NetApp would have earned $252 million, or 66 cents a share, which compared to analysts' estimates of 63 cents a share on $1.68 billion in revenue.

EMC trades in sympathy

EMC's 1.75% convertibles due December 2013 were closed Thursday by one big bank at 155 and three-teenies versus the closing share price of $24.23.

The bonds also traded during the session at 158.25 versus an underlying share price of $24.80, according to a New York-based trader.

Trace reported the paper down nearly 8 points at 153.857.

Shares of the Hopkinton, Mass.-based information storage and software company shed $1.22, or 4.8%, to $24.24 in ultra-heavy trading on Thursday.

The EMC bonds were said to have expanded about 0.5 point on a dollar-neutral basis, using a delta of about 90%.

"The stock was moving down on the NetApp headlines and earnings," a trader said.

Mentioned in this article:

Annaly Capital Management Inc. NYSE: NLY

EMC Corp. NYSE: EMC

Exterran Holdings Inc. NYSE: EXH

Illumina Inc. Nasdaq: ILMN

Intel Corp. Nasdaq: INTC

NetApp Inc. Nasdaq: NTAP

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