NetApp, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended July 30, 2021. NetApp is a cloud-led data-management software, systems and services company. The comparable prior-year quarter ended July 31, 2020 included 14 weeks, versus 13 weeks in the current quarter, which affects year-over-year comparisons.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $1.458 billion | $1.303 billion | +12% |
| Product revenue | $730 million | $627 million | +16% |
| Services revenue | $728 million | $676 million | +8% |
| Gross profit / margin | $999 million / 68.5% | $872 million / 66.9% | Margin +1.6 percentage points |
| Operating income / margin | $249 million / 17.1% | $136 million / 10.4% | |
| Net income | $202 million | $77 million | |
| Diluted EPS | $0.88 | $0.35 | |
| Operating cash flow | $242 million | $240 million |
- Revenue mix: Product revenue growth was driven mainly by all-flash array systems. NetApp’s non-GAAP allocation of product revenue showed software at $414 million, up 33%, and hardware at $316 million, flat. Support revenue was $578 million, essentially flat despite the prior-year extra week.
- Segments: Newly reported Public Cloud revenue was $79 million, up from $31 million; segment gross margin was 70.9%, versus 58.1%. Hybrid Cloud revenue was $1.379 billion, up from $1.272 billion; segment gross margin was 69.2%, versus 68.2%. Prior-period segment data were recast to the new structure.
- Cash and liquidity: Cash, cash equivalents and short-term investments totaled $4.547 billion at quarter-end, down $49 million from April 30, 2021. Working capital was approximately $2.5 billion. Operating cash flow was $242 million; capital expenditures were $51 million.
- Debt: Senior Notes had $2.650 billion principal outstanding ($2.633 billion carrying value). No commercial paper was outstanding, and the $1.0 billion revolving credit facility was undrawn. Cash and short-term investments exceeded debt principal by approximately $1.9 billion.
- Capital returns: NetApp repurchased 1.2 million shares for $100 million and paid $112 million in dividends during the quarter. It declared a further $0.50-per-share dividend on August 23, 2021. Remaining repurchase authorization was $752 million.
- Deferred revenue: Deferred revenue and financed unearned services revenue was $3.904 billion. The company expected to recognize about 51% within 12 months. NetApp cautioned that cancellable orders and as-needed purchasing make backlog an unreliable indicator of future revenue.
Material changes, outlook and risks
- NetApp reorganized reporting into Public Cloud and Hybrid Cloud segments, reflecting how management evaluates performance and allocates resources. An interim goodwill impairment test following the realignment found no impairment.
- Operating expenses included $22 million of restructuring charges, mainly office relocation, lease termination and severance costs. The plan reduced the global workforce by approximately 1%; further restructuring charges could occur as the company assesses its real-estate footprint and staffing needs.
- NetApp acquired Data Mechanics, a cloud analytics company, for approximately $15 million in cash. Acquisition-related expense was $1 million.
- Management expected existing liquidity, operating cash generation and access to credit to meet requirements for at least the next 12 months. Anticipated capital expenditures for the remainder of FY2022 were $150–$200 million. The filing provides no revenue or earnings guidance.
- Management reported customer purchase delays as well as accelerated orders, logistical challenges and minor supply constraints amid COVID-19. It increased inventory and longer-term commitments to mitigate shortages; continued supply-chain challenges could raise cost of revenue. The filing identifies semiconductor availability as a risk.
- Other risks include demand and quarterly order timing volatility, competition and changing cloud-consumption models, reliance on channel partners and distributors, and customer concentration: Arrow Electronics represented 24% and Tech Data 20% of quarterly revenue. COVID-19, geopolitical and foreign-exchange risks, cybersecurity, and intellectual-property litigation are also discussed.
- The effective tax rate fell to 14.8% from 26.0%, reflecting discrete tax benefits, including statute-of-limitations lapses and stock-based compensation benefits; the prior-year quarter included acquisition-integration tax charges. NetApp had $214 million of gross unrecognized tax benefits. A Danish tax dispute remained under appeal.
- A securities class action settlement memorandum provided for an approximately $2 million payment, accrued in the quarter, subject to court approval. NetApp also disclosed ongoing patent litigation; it stated that no material accrual had been recorded for those other matters.
Investor verification points
- Assess the impact of the prior-year quarter’s extra week when interpreting reported growth, particularly services and expense trends.
- Verify whether Public Cloud revenue growth and margin improvement continue, and how much reflects underlying demand versus the Spot acquisition.
- Monitor supply availability, inventory and purchase commitments, and any effect on costs, deliveries and margins.
- Track cash conversion, deferred-revenue trends, capital spending, debt maturities and the pace of dividends and repurchases.
- Check the court approval and final terms of the securities settlement, developments in tax audits and the Danish dispute, and outcomes of other legal proceedings.