NetApp, Inc. — Form 10-Q Summary
Business and period. NetApp supplies enterprise storage and data-management hardware, software, and services. This unaudited filing covers the 13-week second quarter and six months of fiscal 2012 ended October 28, 2011; comparisons are with the periods ended October 29, 2010. Amounts are in U.S. dollars.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $1,507.0 million, up 20% | $2,965.2 million, up 23% |
| Gross profit and margin | $913.0 million; 60.6% (65.3% prior year) | $1,809.9 million; 61.0% (64.6% prior year) |
| Operating income and margin | $192.4 million; 12.8% (17.0% prior year) | $368.6 million; 12.4% (16.2% prior year) |
| Net income | $165.6 million, down from $175.4 million | $305.1 million, down from $326.1 million |
| Diluted EPS | $0.44, versus $0.45 | $0.78, versus $0.85 |
| Operating cash flow | Not presented for the quarter alone | $610.8 million, versus $533.1 million |
- Quarter revenue included $182.4 million from Engenio; six-month revenue included $339.5 million. Engenio was acquired for $480 million cash in May 2011.
- Product revenue rose 23% for the quarter and 27% for the six months; software entitlements and maintenance rose 12% and 13%, while services rose 17% and 19%, respectively.
- Cash and cash equivalents were $2.269 billion; short-term investments were $2.373 billion. Together they totaled $4.642 billion at quarter-end, down from $5.175 billion at April 29, 2011. Working capital was approximately $3.7 billion.
- Capital expenditures were $191.6 million for the six months. Cash used for investing was $629.2 million, including the Engenio purchase and capital spending; financing used $461.8 million, including $600 million of stock repurchases.
Material changes and balance-sheet items
- Revenue growth reflected the Engenio acquisition, continued demand for storage-efficiency and data-management solutions, and higher hardware maintenance revenue. Engenio’s lower-margin E-Series OEM products reduced gross margin.
- Operating expenses increased: sales and marketing rose 19% for the quarter, R&D 28%, and G&A 1%. Management cited headcount growth, including Engenio employees, and higher stock-based compensation; lower incentive compensation partly offset increases.
- NetApp reported $1.265 billion principal amount of 1.75% convertible notes due June 2013; carrying value was $1.176 billion and classified as long-term at quarter-end. Conversion status is tested quarterly and could change. The notes were classified as current at the prior fiscal year-end.
- Deferred revenue was $2.439 billion, up from $2.315 billion at April 29, 2011. Goodwill rose to $904 million, primarily reflecting $143.7 million recorded for Engenio.
Outlook, risks, and contingencies
- Management said available liquidity and expected operating cash flows should meet working-capital, investment, repurchase, contractual, and other requirements for at least 12 months. It anticipated capital expenditures of $125 million to $175 million over the following six months. The supplied filing text does not provide a specific revenue or EPS forecast.
- Management highlighted uncertainty from global economic conditions and customer spending, competitive pricing and gross-margin variability, and supply-chain exposure. October 2011 flooding in Thailand affected disk-drive suppliers and could constrain supply or increase prices.
- About $2.4 billion of cash, cash equivalents, and short-term investments were held internationally. Management intended to keep foreign funds permanently reinvested; U.S. repatriation could trigger taxes.
- Tax audits were ongoing in the United States and other jurisdictions. Unrecognized tax benefits totaled $135.5 million, including $103.9 million recorded in other long-term liabilities. A Danish withholding-tax assessment was under appeal; the filing does not state a clear potential loss amount.
- The company disclosed a shareholder derivative lawsuit concerning alleged oversight failures related to government contracting; no legal accrual was recorded because the outcome was not determinable. It also reported ongoing discussions with the DOJ and GSA about contract-compliance matters involving channel sales, and media reports alleging possible delivery of products to Syria through a third party. NetApp said it was conducting an internal review and cooperating with the government.
- Other exposures include $390.7 million of future minimum operating lease payments, $176.1 million of non-cancelable contract-manufacturer commitments, and a $127.1 million synthetic-lease residual guarantee. Estimated property value was $51 million below the guarantee; a $27 million reserve was recorded. The company reported compliance with applicable lease covenants.
Investor verification priorities
- Assess how much reported growth is attributable to Engenio and whether the acquired OEM mix continues to weigh on gross margins.
- Track product costs, disk-drive availability and pricing after the Thailand floods, and any resulting effects on shipment execution and margins.
- Monitor conversion conditions and cash repayment exposure for the $1.265 billion notes, including potential share dilution and the quarterly classification change.
- Review progress and potential outcomes in tax audits, the Danish tax appeal, government-contract compliance discussions, and the disclosed Syria-related investigation.
- Reconcile ongoing cash generation with repurchases, capital spending, foreign-held liquidity, and the synthetic-lease and purchase commitments.