Shares of enterprise storage vendor NetApp (Nasdaq: NTAP) fell more than 12% yesterday on heavy volume following weaker-than-expected guidance for the July quarter. Blaming macro factors, management said it lacked visibility beyond the current quarter and would not offer guidance for fiscal 2013 (ending April).

Yesterday's slide brought the market cap down to $10.4 billion. The stock might have fallen even more except for the fact that NetApp is sitting on $5.4 billion in cash and investments (half is located in the US). Taking into account debt on the balance sheet, net cash stands at roughly $3.9 billion, or 37% of the recent market cap.

Management cited a few reasons for the cautious outlook, including softness in the Europe, Middle East, and Africa (EMEA) region, which represents 31% of total revenue; weakness in the US public sector; and a slowdown in the important US financial services vertical. I would add another reason: EMC (NYSE: EMC) has really stepped up its competitive game with the VNX product line in midrange storage, a segment NetApp used to dominate.

Not all of the news out of NetApp was negative though, as commercial revenue in the Americas in the fiscal fourth quarter (ended April) rose 30% year-over-year and the company added the highest number of new large-enterprise accounts in more than three years. Revenue from the Asia Pacific region (12% of total revenue) advanced 55% year-over-year and 14% sequentially. The EMEA region still managed to show revenue growth of 8% year-over-year.

Unit shipments of the recently refreshed 2000-series systems (aimed at smaller customers) rose 23% from a year ago, while 6000-series unit shipments advanced 58%, indicating increased deployments at the high end (business-critical datacenter workloads).

Cash flow from operations rose 27% year-over-year to a record $583 million. Deferred revenue of $2.8 billion was up 22% year-over-year and 11% sequentially.

The fiscal first quarter (ending July) is a seasonally weaker one for NetApp, so it's not unusual for the company to see revenue decline 9% to 10% sequentially. But the midpoint of the guidance range for the current July quarter of $1.4 billion to $1.5 billion indicates a sequential decline of 15%. With operating margin expected to drop sharply to a range of 11% to 12% from 17.9% in the April quarter, per-share earnings are forecasted to come in at just 34 cents to 39 cents, well below the consensus estimate of 59 cents.

On the earnings conference call, one analyst pointed out that NetApp management in the past promised to hold the line on operating margin at 16%, cutting expenses if necessary. CEO Tom Georgens responded by saying no action would be taken on operating expenses yet in case this was just a short-term situation.

I agree with analysts from ISI Group when they suggest NetApp should make a move on the expense line right away. Assuming July quarter revenue of $1.45 billion and gross margin at 60.5% (in line with guidance), the firm says NetApp could cut spending by 5% on a sequential basis (as opposed to holding it steady), delivering earnings of about 45 cents a share, above the guidance midpoint of 37 cents.

One risk with NetApp is that the company might use some of its big cash stake on a pricey acquisition. When asked on the conference call about NetApp's commitment to newer, flash-based storage technology, Georgens said flash represents a significant portion of current R&D spending and that the flash attach rate on some NetApp systems is already above 50%. Georgens said NetApp would expand in flash both organically and inorganically. I expect the company to do some M&A in the near term, especially because EMC already has its flash roadmap in place.

Given that NetApp's price-to-sales valuation (taking into consideration the net cash position) is just 1.1x fiscal 2012 revenue of $6.23 billion, some analysts started speculating that the company itself could be a takeover target for the likes of IBM (NYSE: IBM) or Oracle (Nasdaq: ORCL). I'd caution that NetApp has been a rumored buyout target for years, and would not count on a takeover end game.