NetApp, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2016, ended October 30, 2015; comparisons are with periods ended October 24, 2014. NetApp provides data-storage systems, software and related services. Fiscal 2016 is a 53-week year, with an extra week in its first quarter, which affects year-to-date comparisons.
Financial performance
| Metric | Three months ended Oct. 30, 2015 | Year-over-year change | Six months ended Oct. 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $1.445 billion | Down 6% | $2.780 billion | Down 8% |
| Gross profit / margin | $884 million / 61% | Margin down 3 percentage points | $1.700 billion / 61% | Margin down 2 points |
| Operating income / margin | $145 million / 10% | Down from $193 million / 13% | $119 million / 4% | Down from $353 million / 12% |
| Net income | $114 million | Down from $160 million | $84 million | Down from $248 million |
| Diluted earnings per share | $0.39 | Down from $0.49 | $0.28 | Down from $0.76 |
| Operating cash flow | $145 million | Down from $381 million | $274 million | Down from $597 million |
- Quarterly product revenue fell 12% to $815 million; software maintenance rose 4% to $233 million and hardware maintenance and other services rose 2% to $397 million. For the six months, product revenue fell 18%, while the two maintenance/services categories grew 8% and 6%, respectively.
- Quarterly results were pressured by foreign-exchange movements, increased discounting and unfavorable product mix. Management also cited competitive pricing pressure and customer transition to newer storage architectures.
- At October 30, cash, cash equivalents and short-term investments totaled $4.814 billion, down from $5.326 billion at April 24. Long-term debt was $1.489 billion carrying value ($1.5 billion principal); debt was 50% of stockholders’ equity. No borrowings were outstanding on the $250 million revolving credit facility, and the company reported covenant compliance.
- Working capital was $3.6 billion; days sales outstanding were 37 days, versus 46 days at fiscal year-end. Deferred revenue and financed unearned services revenue totaled $3.046 billion, down from $3.197 billion.
Changes, outlook and notable items
- Revenue weakness was concentrated in products: quarterly configured-system revenue declined 6%, while non-configured product revenue declined 21%. Configured-system unit volume rose 9% in the quarter, but lower average selling prices reflected foreign exchange, discounting and mix. Year-to-date configured-system volume fell 4%.
- Management attributed product-market pressure in part to customers moving from older Data ONTAP 7-Mode products to clustered Data ONTAP, and to broader shifts toward hybrid cloud and changing storage architectures. The filing provides no specific revenue or earnings guidance.
- Management expected $100 million–$150 million of capital expenditures for the remainder of fiscal 2016 and stated that available liquidity and expected operating cash flows should meet requirements for at least 12 months. It also planned to complete the remaining $1.8 billion share-repurchase authorization by May 2018, with the first $1 billion expected by the end of May 2016; the program may be suspended or discontinued.
- The company repurchased 19 million shares for $613 million during the six months and paid $107 million in dividends. A $0.18-per-share dividend was declared November 18, 2015, payable January 20, 2016.
- A May 2015 realignment reduced the global workforce by approximately 3%; related six-month charges were $28 million, and the activities were substantially completed by quarter-end. An $11 million charge fully impaired CacheIQ developed technology after the company discontinued its use.
- Six-month income taxes included $23 million of discrete charges related to IRS transfer-pricing and other audit settlements and uncertain tax positions. Gross unrecognized tax benefits were $209 million; tax audits and the Danish withholding-tax dispute remain matters to monitor.
- Key risks include technology-transition and product-acceptance challenges, competition and discounting, reliance on distributors and outsourced suppliers, foreign-exchange exposure, and potential tax costs if foreign-held funds are repatriated. About $4.1 billion of cash and investments was held internationally and management intended to keep those funds permanently invested abroad. The filing reported no pending legal proceedings and no accrual for other legal claims, which were not considered probable and reasonably estimable.
Investor verification priorities
- Track product revenue, configured-system demand and pricing, and customer adoption of clustered Data ONTAP and newer offerings.
- Assess whether recurring maintenance revenue can offset product weakness, and whether gross and operating margins stabilize.
- Review operating cash generation, deferred-revenue trends, working capital and the effect of buybacks and dividends on liquidity.
- Monitor the tax audits, unrecognized tax benefits and potential cost of repatriating foreign-held liquidity; confirm the timing and execution of planned repurchases.