NetApp, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 27, 2017; comparative periods ended January 29, 2016. NetApp provides software, systems and services for data management and storage. Fiscal 2017 is a 52-week year.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $1.404B | $1.386B | $4.038B | $4.166B |
| Gross profit | $851M | $855M | $2.477B | $2.555B |
| Gross margin | 61% | 62% | 61% | 61% |
| Operating income | $183M | $165M | $418M | $284M |
| Net income | $146M | $153M | $319M | $237M |
| Diluted EPS | $0.52 | $0.52 | $1.13 | $0.79 |
| Operating cash flow | $235M | $355M | $621M | $629M |
- Q3 revenue rose 1%; nine-month revenue fell 3%. Q3 product revenue increased 5% to $784M, while hardware maintenance and other services revenue declined 5% to $380M. Software maintenance revenue rose 3% to $240M.
- The product mix continued shifting toward Strategic solutions: these represented 65% of Q3 product revenue versus 56% a year earlier. Strategic product revenue grew 22% to $512M; Mature product revenue fell 18% to $272M. Clustered ONTAP unit volume rose 24%, while 7-mode system unit volume fell 64%.
- Q3 operating income improved despite slightly lower gross profit, as sales and marketing, R&D, and G&A costs declined. The quarter included $52M of restructuring charges and a $10M property-sale gain. Higher income tax expense ($37M versus $10M) contributed to lower Q3 net income. Nine-month effective tax rates were 23.5% versus 16.8%.
- Nine-month operating cash flow was $621M. Cash and cash equivalents were $2.213B, short-term investments $2.426B, and combined cash, equivalents and short-term investments $4.639B at January 27, 2017, down from $5.303B at fiscal year-end. Working capital was $1.8B; DSO was 39 days.
- Principal debt was $1.892B: $1.5B of senior notes and $392M of commercial paper. The $750M notes due December 2017 were classified as current. A $600M revolving credit facility backed the commercial paper program; no facility borrowings were outstanding. The company reported covenant compliance.
- During the first nine months, NetApp repurchased $576M of stock, paid $157M in dividends and repaid an $850M acquisition-related short-term loan. It declared a further $0.19-per-share dividend payable April 26, 2017.
Outlook, commentary and risks
- Management gave no specific revenue or earnings guidance in the provided filing text. It expects available liquidity, operating cash generation and access to capital markets and committed credit lines to meet requirements for at least 12 months. Planned capital expenditures for the remainder of FY2017 were $25M–$75M.
- The November 2016 restructuring reduced worldwide headcount by approximately 6%; management expected completion in Q4 FY2017 with no significant additional charges. It cited ongoing cost-reduction efforts and the transition from older products to newer Strategic solutions.
- Key risks include uncertain storage-market demand and technology transitions; execution and customer acceptance of newer products; pricing, product mix and component costs; reliance on distributors and suppliers; and competition, including cloud, flash and software-defined storage. Arrow Electronics and Avnet together represented 42% of Q3 revenue.
- Cash and investments held by foreign subsidiaries totaled $4.108B. NetApp intended to keep these funds indefinitely reinvested abroad; repatriation could incur U.S. and state taxes. The filing also describes ongoing tax audits and $215M of gross unrecognized tax benefits. A Danish withholding-tax dispute had been referred to the European Court of Justice.
- Other items to monitor include $313M of non-cancelable inventory purchase commitments, $227M of operating lease payments, and $130M of remaining sale-leaseback financing obligations. The filing reported no accrued legal loss for proceedings because losses were not considered probable and/or reasonably estimable.
Important facts for investors to verify
- Whether Strategic-product growth can offset continuing declines in Mature products and maintenance-related revenue.
- Whether product pricing, discounting and materials costs allow gross margins to stabilize or improve.
- Cash generation and working-capital trends, including deferred-revenue and maintenance-renewal activity.
- Plans for the $750M senior-note maturity, commercial-paper refinancing and use of foreign-held liquidity.
- Potential cash or earnings effects from tax audits, the Danish tax dispute, restructuring and remaining sale-leaseback arrangements.