NetApp, Inc. — Form 10-Q Summary
Business and period: NetApp supplies enterprise storage and data-management hardware, software and services. This filing covers the 13 weeks ended July 29, 2011 (fiscal 2012 first quarter); comparisons are with the 13 weeks ended July 30, 2010. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net revenue | $1,458.2 | $1,153.7 | +26% |
| Gross profit / margin | $896.9 / 61.5% | $737.8 / 64.0% | Margin down 2.5 points |
| Operating income / margin | $176.2 / 12.1% | $177.6 / 15.4% | Income down 1% |
| Net income / margin | $139.5 / 9.6% | $150.7 / 13.1% | Income down 7% |
| Diluted EPS | $0.34 | $0.40 | Down 15% |
| Operating cash flow | $240.6 | $177.3 | +$63.3 |
| Capital expenditures | $98.3 | $40.2 | +$58.1 |
- Revenue by category: product $965.7 (+31%); software entitlements and maintenance $198.2 (+14%); service $294.3 (+22%). Product revenue included $155.9 of Engenio OEM sales; Engenio contributed $157.1 of consolidated revenue after its May 6 acquisition.
- Cash and cash equivalents were $2,543.2 and short-term investments $2,170.9, totaling $4,714.1, versus $5,174.7 at April 29, 2011. Working capital was $2.7 billion, down from $3.0 billion.
- Total liabilities were $4,519.0. Convertible notes had $1,265.0 principal outstanding, bearing 1.75% interest and due June 2013; their $1,163.1 net carrying amount was classified as current because conversion conditions were met. Other long-term financing arrangements totaled $11.8.
- Net cash from operations was offset by investing outflows, including $480.0 for Engenio and $98.3 in capital expenditures, and financing outflows that included a $200.0 share repurchase. Accounts-receivable days sales outstanding improved to 37 from 47.
Material changes and management commentary
- Revenue growth reflected the Engenio acquisition, higher service revenue and demand for storage-efficiency and data-management solutions. APAC revenue rose 55%, Americas 27% and EMEA 16% year over year.
- Gross margin fell to 61.5%, chiefly because Engenio OEM products carry lower margins. Product costs rose 41%, faster than product revenue growth of 31%.
- Sales, marketing, research and development, and general and administrative expenses together rose 28%, with higher headcount and stock-based compensation among the drivers. Average headcount increased 25%, about half of the increase associated with Engenio.
- Indirect channels generated 76% of revenue, versus 69% a year earlier. Arrow Electronics and Avnet represented 15% and 11% of revenue, respectively.
- The July accelerated share repurchase used $200.0 to repurchase 4.1 million shares at a volume-adjusted average price of $48.30; 0.5 million shares were delivered after quarter-end. On August 19, NetApp entered another ASR with a $400.0 prepayment, expected to conclude by December 30, 2011.
Outlook, risks and unusual items
- Management expected available liquidity and operating cash generation to meet requirements for at least the next 12 months. It anticipated $200–$250 million of capital expenditures over the next nine months. No specific revenue or earnings guidance is provided in the filing text.
- Key risks include uncertain IT and storage demand, pricing and gross-margin pressure, reliance on indirect channels and distributors, component supply and forecasting, competition, and successful integration of acquisitions. Management noted the usual uncertainty of quarterly results and seasonality.
- NetApp reported $191.8 million in non-cancelable contract-manufacturer purchase commitments, $249.2 million in other purchase commitments, and $312.3 million in future minimum operating lease payments. The estimated fair value of properties under synthetic leases was $51.0 million below the residual guarantee; a $21.6 million deficiency reserve was recorded. The company said it was in compliance with lease financial covenants.
- Income tax audits were ongoing in the United States and other jurisdictions. A Danish withholding-tax assessment relating to 2005–2006 distributions was appealed; the company said it believed the assessment lacked merit. Unrecognized tax benefits were $136.6 million, including $107.0 million recorded in other long-term liabilities.
- A shareholder derivative complaint was dismissed, with leave to amend by September 16, 2011; a related Delaware books-and-records complaint was filed in August. No legal contingency accrual was recorded because outcomes were not determinable.
- Auction-rate securities were carried at $56.3 million and classified as long-term because near-term liquidity was uncertain. The filing describes possible additional impairment if market conditions worsen. A 10% increase in market interest rates was estimated to reduce available-for-sale investment fair value by approximately $1.1 million.
Important facts for investors to verify
- Whether revenue growth persists excluding Engenio and whether the acquisition integrates successfully without further margin pressure.
- Whether operating margins and diluted EPS stabilize as expenses and share-based compensation rise.
- The cash and share impact of the $400.0 million August ASR, and the effect of further repurchases on liquidity.
- Convertible-note conversion status, potential dilution, and cash requirements through the 2013 maturity.
- Developments in tax audits and the Danish assessment, the shareholder litigation, and synthetic-lease residual obligations.
- Liquidity, valuation and impairment exposure in auction-rate securities and other investments.