NetApp, Inc. — Form 10-Q Summary
Business context and reporting period
NetApp provides hybrid-cloud infrastructure, storage, software and services, and public-cloud offerings. This unaudited report covers the first quarter of fiscal 2023, the three months ended July 29, 2022; the comparable period ended July 30, 2021. Amounts are in millions except per-share data.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Revenue | $1,592 | $1,458 |
| Gross profit / margin | $1,046 / 65.7% | $999 / 68.5% |
| Operating income / margin | $255 / 16% | $249 / 17% |
| Net income | $214 | $202 |
| Diluted EPS | $0.96 | $0.88 |
| Cash from operating activities | $281 | $242 |
- Revenue increased 9% year over year. Product revenue rose 8% to $786; services revenue rose 11% to $806. Public Cloud revenue increased 67% to $132.
- Hybrid Cloud revenue was $1,460, with segment gross margin of 66.4%, down from 69.2%. Public Cloud revenue was $132, with segment gross margin of 69.7%, down from 70.9%.
- Consolidated gross margin declined 2.8 percentage points. Management cited higher component and freight costs, supply-chain constraints and foreign-exchange effects.
- Cash, cash equivalents and short-term investments totaled $3,439 at quarter end, down from $4,134 at April 29, 2022. Net working capital was $1.3 billion. Principal debt was $2,650; reported debt carrying value was $2,637. No commercial paper or revolving-credit borrowings were outstanding.
- Quarter-end total assets were $9,544 and total liabilities were $8,887. Deferred revenue and financed unearned services revenue totaled $4,170.
Material changes versus the prior comparable period
- Revenue growth was partly offset by currency movements, which reduced reported revenue growth by approximately four percentage points.
- Product costs rose 21%, faster than product revenue, reflecting higher materials, component and freight costs. Hybrid Cloud product gross margin fell approximately six percentage points.
- Operating cash flow increased to $281 from $242. Investing cash outflow rose to $628, principally reflecting $491 paid, net of acquired cash, for Instaclustr. Financing cash outflow was $459, including $350 of share repurchases and $110 of dividends.
- Net income increased 6%, while the effective tax rate rose to 20.7% from 14.8%, primarily due to capitalization of research and development expenses under tax law, partly offset by discrete stock-compensation benefits.
- Net income included a $32 gain from selling a minority equity interest for approximately $59 in proceeds. Other income, net, was $15 versus expense of $12 in the prior-year quarter.
Outlook, management commentary, risks and unusual items
- Management said cash, operating cash generation, capital-market access and committed credit lines should meet cash requirements for at least the next 12 months. It cautioned that cash flows may fluctuate and that further cost reductions or financing could be needed if liquidity proves insufficient.
- Capital expenditures for the remainder of fiscal 2023 are expected to be $200–$300. The filing provides no specific revenue or earnings guidance.
- Management reported continuing inflationary pressure and supply-chain constraints, which raised costs and delayed fulfillment of some customer orders. Prolonged or worsening constraints could affect demand, component availability, fulfillment and revenue growth. Russia and Belarus operations were suspended; the reported first-quarter impact was not significant.
- On May 20, 2022, NetApp acquired Instaclustr for approximately $498. The preliminary allocation included $421 of goodwill, not deductible for tax purposes. The quarter also included $10 of acquisition-related expenses and $11 of restructuring charges; additional restructuring charges were expected during the rest of fiscal 2023.
- NetApp had approximately $0.9 billion of non-cancelable inventory purchase commitments and $0.3 billion of other purchase obligations. It reported $224 of gross unrecognized tax benefits, of which $137 would affect the tax provision if recognized; the possible 12-month impact could not be estimated.
- In August 2022, after quarter end, the company called for redemption of $250 principal of notes due December 2022, at an aggregate $252 including accrued interest, with redemption scheduled for September 15, 2022. It also declared a $0.50-per-share dividend payable October 26, 2022.
- Legal matters include a securities class-action settlement of approximately $2 million awaiting final court approval and other patent litigation. No material accrual was recorded for the other matters; adverse outcomes could entail damages, injunctions or product restrictions.
Important facts for investors to verify
- Whether supply constraints and higher component and freight costs persist, and how they affect margins and order fulfillment.
- Whether Public Cloud growth continues and how acquired businesses, including Instaclustr, contribute to growth and profitability.
- Cash conversion and working-capital trends, including the effects of inventory commitments, collections and supplier payments.
- Debt redemption, future capital allocation, and the pace of remaining share-repurchase authorization, which was $902 at quarter end.
- Developments in tax audits and the Danish tax dispute, legal proceedings, and final approval of the securities settlement.