NetApp, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2021, ended January 29, 2021. Comparisons are to the periods ended January 24, 2020, except balance-sheet comparisons, which are to April 24, 2020. Fiscal 2021 is a 53-week year; its first quarter included an extra week. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $1,470 | $1,404 | $4,189 | $4,011 |
| Gross profit / margin | $975 / 66% | $941 / 67% | $2,780 / 66% | $2,682 / 67% |
| Operating income / margin | $258 / 18% | $268 / 19% | $576 / 14% | $668 / 17% |
| Net income | $182 | $277 | $396 | $623 |
| Diluted EPS | $0.80 | $1.21 | $1.76 | $2.64 |
| Operating cash flow | $373 | $420 | $774 | $677 |
- Q3 revenue increased 5%; nine-month revenue increased 4%. Product revenue declined 2% in both periods, while software maintenance revenue grew 27% in Q3 and 22% year to date. Hardware maintenance and other services rose 2% and 6%, respectively.
- Lower product margins, attributed mainly to lower average selling prices and, year to date, higher materials costs, contributed to gross margin declining by about one percentage point.
- Net income fell despite revenue growth: higher operating expenses, higher interest expense and a higher tax provision weighed on results. The nine-month comparison also includes $42 of restructuring charges in FY2021 versus $21 in FY2020; FY2020 included a $38 gain on asset sale/derecognition.
- For the nine months, operating cash flow was $774; purchases of property and equipment were $124. Cash flow less those purchases was $650, a simple derived measure.
Financial position and capital
- Cash, cash equivalents and short-term investments totaled $3,894 at January 29, 2021, versus $2,882 at April 24, 2020. Working capital was $2.1 billion, up $1.4 billion.
- Principal debt was $2,650, compared with $1,673 at fiscal year-end; balance-sheet long-term debt was $2,632. No commercial paper was outstanding and the $1.0 billion revolving credit facility was undrawn. The company reported compliance with debt and credit-facility covenants.
- In June 2020, NetApp issued $2.0 billion principal of notes due 2025, 2027 and 2030, and used $513 to redeem notes due 2021, recording a $14 loss on extinguishment.
- Nine-month cash flows included $350 for acquisitions, $321 of dividends, $50 of share repurchases and $124 of capital expenditures. The company reinitiated repurchases in Q3 after suspending them in the first half.
- Deferred revenue and financed unearned services revenue was $3,828, up from $3,698 at fiscal year-end. NetApp expected to recognize approximately 51% within 12 months and 25% in months 13–24.
Outlook, commentary and risks
- Management said available liquidity, operating cash generation, capital-market access and committed credit lines should meet requirements for at least 12 months. Capital expenditures for the remainder of fiscal 2021 were expected to be $25–$50. The filing does not provide a clear full-year revenue or earnings guidance figure.
- COVID-19 caused some customers to delay purchases while others accelerated orders for remote work and digital business; management said the net impact on product revenue was unfavorable. It also cited delivery challenges and minor supply-chain constraints. The filing warns that the pandemic’s duration and financial impact remain uncertain.
- Management identified semiconductor shortages, component costs and availability, competitive and technology shifts, channel and customer concentration, and product-transition execution as risks. Two distributors accounted for 43% of Q3 revenue combined: Arrow Electronics (24%) and Tech Data (19%).
- NetApp acquired Spot, Inc. for $340 in cash in July 2020, and acquired Cloud Jumper for approximately $34 in April 2020. The company expects these acquisitions to support cloud-related capabilities; acquisition-related costs were $14 for the nine-month period.
- Restructuring plans reduced global headcount by approximately 5% under the August 2020 plan and by less than 1% under the May 2020 plan; substantially all activities were completed by Q3.
- A securities class action concerning fiscal 2020 guidance was dismissed on February 1, 2021, with leave to amend. The plaintiff later stated an intent not to amend but reserved the right to appeal. NetApp also disclosed ongoing patent litigation and other legal proceedings; no material accrual was recorded for these matters.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during Q3.
Most important facts for investors to verify
- Whether recurring software and maintenance growth can offset continued weakness in product revenue and pressure on product margins.
- How much of reported nine-month growth reflects the extra fiscal week and favorable Q3 foreign-exchange effects.
- Cash generation and liquidity after the debt issuance, acquisitions, dividends and resumed share repurchases; also monitor future debt service.
- Whether COVID-19, semiconductor availability, input costs and customer purchasing delays materially affect future shipments and margins.
- Integration progress and returns from Spot and Cloud Jumper, alongside the concentration of revenue through major distributors.
- Developments in tax audits and legal proceedings, including any appeal in the dismissed securities class action.