NetApp, Inc. — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended April 30, 2021. Although the request metadata says “2020 Q4,” this filing is an annual report for FY2021, not a standalone quarterly filing. FY2021 included 53 weeks; FY2020 included 52 weeks. Amounts below are in U.S. dollars.
Business context and results
NetApp is a data-management and storage company focused on hybrid and public cloud services, storage systems, and related software and support. Its strategy centers on helping customers manage data across on-premises and cloud environments. Indirect channels generated 77% of FY2021 revenue.
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $5.744 billion | $5.412 billion |
| Gross profit / margin | $3.815 billion / 66% | $3.623 billion / 67% |
| Operating income / margin | $1.031 billion / 18% | $945 million / 17% |
| Net income | $730 million | $819 million |
| Diluted EPS | $3.23 | $3.52 |
| Operating cash flow | $1.333 billion | $1.060 billion |
| Cash, cash equivalents and short-term investments | $4.596 billion | $2.882 billion |
| Principal debt | $2.650 billion | $1.673 billion |
| Deferred revenue and financed unearned services revenue | $4.003 billion | $3.698 billion |
Material changes versus the prior year
- Revenue rose 6%, led by software support revenue, which increased 24% to $1.281 billion. Hardware support and other services revenue rose 6% to $1.472 billion. Product revenue was essentially flat at $2.991 billion.
- Software support benefited from growth in Public Cloud Services and the installed base, as well as the additional fiscal week. The extra week contributed approximately $20 million to software support and approximately $20 million to hardware support revenue.
- Net income declined 11% and diluted EPS declined 8%. The effective tax rate increased to 24.1% from 13.2%, including acquired-company integration impacts and a smaller benefit from tax matters than in FY2020. FY2020 included a $61 million tax benefit from the lapse of statutes of limitations, versus $6 million in FY2021.
- Gross margin declined approximately one percentage point, primarily due to lower product margins; a higher share of software support revenue partly offset the decline. Operating margin increased approximately one point, helped by the property-sale gain, partly offset by higher sales and marketing costs.
- Operating cash flow increased 26%, primarily reflecting lower cash payments for incentive compensation. Cash and investments rose by $1.714 billion, supported by debt issuance, operating cash flow and property-sale proceeds.
Cash, debt and capital allocation
- Working capital was approximately $2.5 billion. The company reported $4.596 billion in cash, cash equivalents and short-term investments and $2.650 billion in senior-note principal; no commercial paper was outstanding at year-end.
- Senior notes mature in 2022, 2024, 2025, 2027 and 2030. NetApp issued $2.0 billion of notes in June 2020 and redeemed $513 million principal amount of 2021 notes for $513 million plus accrued interest and fees; it recorded a $14 million extinguishment loss.
- NetApp paid $427 million in dividends and repurchased approximately 2 million shares for $125 million in FY2021. Repurchases had been suspended during the first half of the year and resumed in the third quarter. The board authorized an additional $500 million of repurchases in May 2021.
- NetApp acquired Spot for $340 million and Cloud Jumper for $34 million. It recorded $16 million of acquisition-related expenses, primarily related to Spot.
Outlook, risks and unusual items
- Management expects FY2022 capital expenditures of $225 million to $250 million and believes available liquidity and access to financing will cover operating and other cash requirements for at least 12 months. The filing provides no specific FY2022 revenue or earnings guidance.
- COVID-19 continued to cause demand uncertainty, delayed or accelerated customer orders, logistical challenges and minor supply constraints. NetApp said it was investing in inventory and longer-term commitments to mitigate supply risk; it also cited broader technology supply-chain issues, including semiconductor shortages.
- Key risks include the decline of traditional networked-storage markets, competition from public-cloud providers and other vendors, execution of cloud and consumption-based business models, product acceptance and margins, reliance on suppliers and channel partners, cybersecurity, and international, foreign-exchange and tax exposures.
- Two distributors, Arrow Electronics and Tech Data, accounted for 24% and 20% of revenue, respectively, or 44% combined. The company also disclosed active patent litigation; management said no material accrual had been recorded and that outcomes remain uncertain.
- A $156 million gain on the sale of Sunnyvale headquarters property boosted operating results. The property generated $365 million in cash proceeds against a $210 million net book value. NetApp leased back the properties short-term and entered into an 11-year lease for new San Jose headquarters, with approximately $180 million of minimum undiscounted payments.
- The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified revenue performance-obligation assessments in certain large enterprise and distributor contracts as a critical audit matter.
Important facts for investors to verify
- Confirm whether revenue growth and recurring software-support growth persist after accounting for FY2021’s extra week and the shift in revenue mix.
- Assess the durability of earnings excluding the $156 million property-sale gain, and the effects of tax-rate changes and acquisition costs.
- Review distributor concentration, supplier and semiconductor availability, and the company’s inventory and purchase commitments, including $800 million of purchase commitments at year-end.
- Track debt maturities, interest expense, dividends and repurchases against cash generation and the stated capital-expenditure outlook.
- Monitor the appeal in the securities class action, patent litigation and tax audits or appeals, including the Danish withholding-tax matter; the filing does not quantify a clear range of potential losses for these matters.