NetApp, Inc. — Form 10-Q Summary
Business context and reporting period
NetApp provides data-management software, storage systems and services. This unaudited filing covers the fiscal second quarter and six months ended October 24, 2014; comparable periods ended October 25, 2013.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $1,542.5 million, down 0.5% | $3,031.7 million, down 1.1% |
| Gross profit / margin | $982.5 million / 63.7% (62.3% prior year) | $1,920.6 million / 63.4% (61.2% prior year) |
| Operating income / margin | $192.5 million / 12.5% (12.1% prior year) | $352.4 million / 11.6% (9.3% prior year) |
| Net income | $159.8 million, down from $166.8 million | $248.2 million, essentially unchanged from $248.4 million |
| Diluted EPS | $0.49, up from $0.48 | $0.76, up from $0.70 |
| Operating cash flow | $381.4 million, up from $362.5 million | $596.9 million, down from $648.3 million |
Six-month investing cash flow was positive $250.7 million, including net investment maturities and sales; financing cash flow was negative $212.6 million. Cash and cash equivalents were $2.905 billion and short-term investments were $2.364 billion at quarter-end. Working capital was $4.0 billion, and days sales outstanding fell to 37 from 47 at April 25, 2014.
Long-term debt carrying value was $1.494 billion, representing $1.5 billion principal. NetApp issued $500 million of 3.375% senior notes due 2021 during the period. No borrowings were outstanding on its $250 million revolving credit facility; the company reported compliance with debt covenants.
Material changes versus prior comparable periods
- Product revenue fell 3% in the quarter and 4% in the six-month period; software entitlements and maintenance revenue declined 3% in both comparisons. Service revenue grew 7% and 8%, respectively, led by hardware maintenance contracts.
- Configured system unit volumes increased, but lower average selling prices and weaker non-configured product sales, including OEM and add-on storage, weighed on product revenue. Management linked the add-on mix shift partly to a pricing change that reduced hardware prices and charged separately for operating-system software.
- Gross margins improved, supported by lower product costs, warranty expense and inventory write-downs, as well as improved service margins. Operating income increased despite higher sales and marketing and general and administrative expenses.
- Six-month net income was affected by a 28.8% effective tax rate versus 12.7% a year earlier. The 2014 period included a $47.4 million tax provision related to settlement of the IRS examination of fiscal 2005–2007 returns.
- NetApp repurchased 18.4 million shares for $718.9 million in the six months and paid $105.5 million of dividends. Average diluted shares declined year over year.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. NetApp expected $100 million–$150 million of capital expenditures for the remainder of fiscal 2015 and stated that available liquidity should meet requirements for at least 12 months.
- The company planned to complete the remaining $405.9 million stock-repurchase authorization by May 2015, subject to market and business considerations. A $0.165-per-share dividend was declared after quarter-end.
- On October 27, 2014, NetApp acquired Riverbed’s SteelStore product line for approximately $80 million in cash; the acquisition was not material enough to present pro forma results.
- NetApp cited uncertain IT spending and storage-market changes, product-transition and customer-acceptance risks, competition, channel and distributor concentration, supply-chain dependence, pricing and margin pressure, and variability in bookings and shipment timing. Arrow Electronics and Avnet accounted for 24% and 17% of quarterly revenue, respectively.
- Approximately $4.4 billion of cash, cash equivalents and short-term investments was held by foreign subsidiaries and generally intended to remain permanently reinvested abroad; repatriation could incur taxes. Other exposures include foreign exchange and interest-rate risks, auction-rate securities, customer financing guarantees, and ongoing tax audits. Gross unrecognized tax benefits were $274.5 million; the filing also describes a pending Danish tax dispute.
- Non-cancelable purchase commitments included $253.2 million with contract manufacturers, $73.3 million in capital purchases and $197.0 million in other purchases. The maximum potential payments under customer financing guarantees were $214.1 million, offset by $197.4 million of associated deferred revenue. The filing reported no accrued legal contingency liability because losses were not considered probable and/or reasonably estimable.
Most important facts for investors to verify
- Whether product and maintenance revenue stabilize, and whether service growth and margin improvements continue.
- How the tax-audit provision, future audit outcomes and effective tax rate affect earnings and cash taxes.
- Whether operating cash generation sustains dividends and repurchases, especially given the overseas concentration of liquidity and the new debt.
- Whether distributor concentration, product transitions, pricing changes and supply commitments create additional revenue or margin pressure.
- Progress integrating SteelStore and the actual capital expenditure and repurchase pace against management’s stated plans.