NetApp, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended April 29, 2011 (52 weeks), with comparisons to FY2010 (53 weeks). The filing metadata refers to “2010 Q4,” but this filing reports FY2011; selected Q4 FY2011 results are noted below.
Business context and financial performance
NetApp provides enterprise storage and data-management hardware, software, and services. The company attributed FY2011 growth mainly to strong demand for storage-efficiency and data-management solutions, including products launched in November 2010.
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net revenue | $5,122.6 million | $3,931.4 million | +30% |
| Gross profit / gross margin | $3,328.7 million / 65.0% | $2,519.2 million / 64.1% | Margin +0.9 percentage points |
| Operating income / margin | $824.3 million / 16.1% | $488.4 million / 12.4% | Margin +3.7 percentage points |
| Net income / margin | $673.1 million / 13.1% | $400.4 million / 10.2% | +68% |
| Diluted EPS | $1.71 | $1.13 | +51% |
| Operating cash flow | $1,346.3 million | $975.0 million | +$371.3 million |
| Capital expenditures | $222.7 million | $135.6 million | +$87.1 million |
FY2011 revenue mix was 65.7% product, 14.1% software entitlements and maintenance, and 20.2% services. Product revenue rose 41%, services 19%, and software entitlements and maintenance 6%. Configured-system unit volume increased 46%; average selling prices declined. International revenue represented 49% of total revenue.
Q4 FY2011: Revenue was $1,428.3 million, gross profit $928.2 million, pretax income $208.1 million, net income $160.6 million, and diluted EPS $0.40. Adoption of new revenue-recognition standards increased Q4 revenue by $48.2 million and net income by $19.4 million.
Liquidity, debt, and financial position
- Cash, cash equivalents, and short-term investments totaled $5,174.7 million at year-end, up from $3,724.0 million. Working capital was $2,992.4 million, versus $2,626.1 million.
- Total assets were $8,498.8 million; stockholders’ equity was $3,730.2 million.
- The company had $1.265 billion principal amount of 1.75% convertible senior notes due June 2013. Because the conversion threshold was met, the notes were classified as current at year-end; their net carrying amount was $1,150.4 million, with $114.6 million presented as mezzanine equity.
- Cash and short-term investments were split between approximately $3.0 billion in the U.S. and $2.2 billion overseas. Repatriation of certain foreign earnings could trigger U.S. taxes.
- Deferred revenue totaled $2,314.9 million. Accounts-receivable days sales outstanding increased to 47 days from 37, partly due to supply constraints and shipments weighted toward the end of the year.
Material changes and unusual items
- Early adoption of updated revenue-recognition standards increased FY2011 revenue by $129.2 million and net income by $53.0 million. Management said the future impact could vary with transaction mix and volume.
- Gross margin improved with higher product and service revenues at improved margins. Operating expenses rose 23% in total, reflecting headcount growth, incentive compensation, and commissions, but declined as a share of revenue.
- FY2010 included $41.1 million net proceeds from termination of the proposed Data Domain merger. FY2009 included a $128.7 million revenue reduction for a GSA settlement.
- An IRS settlement concerning FY2003–2004 resulted in an additional $10.8 million liability, largely offset by tax attributes, and a $21.1 million net tax benefit in FY2011. The effective tax rate was 15.2%, versus 10.4% in FY2010.
- After year-end, on May 6, 2011, NetApp acquired certain Engenio external storage systems business assets and liabilities from LSI for $480 million cash. A preliminary purchase-price allocation was pending; the company expected $250–$350 million to be allocated to identifiable intangible assets.
Outlook, risks, and contingencies
- For FY2012, management expected capital expenditures of $250–$300 million and said existing liquidity and expected operating cash flow should meet requirements for at least 12 months.
- Management expected FY2012 Engenio revenue primarily from existing OEM customers, with new business developing gradually. Consolidated product gross margin was expected to decline versus FY2011 because of Engenio’s lower-margin OEM mix.
- Key risks include volatile quarterly demand and back-end-loaded bookings; reliance on indirect channels (73% of FY2011 revenue); distributor concentration (Arrow 18%, Avnet 12%); pricing pressure and competition; constrained component supply; and execution and integration risks from acquisitions.
- The company reported $65.1 million fair value of auction-rate securities, classified as long-term because liquidity was uncertain. It recorded cumulative temporary impairment charges and could incur further impairment.
- Sunnyvale synthetic leases carried a $127.1 million minimum residual guarantee; estimated property value was $35.8 million below aggregate guarantees, with a $16.1 million deficiency reserve. Lease covenants and guarantees may constrain liquidity.
- A shareholder derivative lawsuit relating to GSA contracting practices sought unspecified damages and disgorgement. No legal-contingency accrual was recorded because the outcome was not determinable; motions to dismiss were pending.
- Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded internal controls were effective. The filing disclosed immaterial interim balance-sheet classification errors for the convertible notes, to be corrected prospectively.
Important facts for investors to verify
- Separate reported growth from the $129.2 million revenue-recognition benefit and assess its effect on future comparability.
- Track Engenio integration, actual revenue contribution, purchase accounting, and the expected pressure on product gross margin.
- Review note conversion and dilution exposure, including the unhedged 20% portion of the note hedge and outstanding warrants.
- Assess distributor dependence, supply availability, and whether DSO and collections normalize after the late-year shipment concentration.
- Monitor the tax audits and Danish withholding-tax appeal, auction-rate securities liquidity and valuation, synthetic-lease obligations, and the derivative litigation.