NetApp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended October 25, 2013 (13 weeks); year-to-date figures cover the six months ended October 25, 2013. Comparisons are against the corresponding 2012 periods. NetApp supplies enterprise storage and data-management products and services.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $1,549.9 million, up 1% | $3,066.1 million, up 3% |
| Gross profit / margin | $965.2 million / 62.3%, versus 59.3% | $1,874.8 million / 61.2%, versus 59.1% |
| Operating income / margin | $186.9 million / 12.1%, versus $135.3 million / 8.8% | $283.8 million / 9.3%, versus $215.5 million / 7.2% |
| Net income | $166.8 million, versus $109.6 million | $248.4 million, versus $173.4 million |
| Diluted EPS | $0.48, versus $0.30 | $0.70, versus $0.47 |
| Operating cash flow | $362.5 million | $648.3 million, versus $565.6 million |
Quarterly product revenue fell 4% to $955.3 million; software entitlements and maintenance revenue rose 6% to $231.8 million, and service revenue increased 11% to $362.8 million. Management attributed improved gross margin mainly to lower unit material costs and supply-chain efficiencies, with favorable product mix also contributing. Operating expenses were broadly controlled, but year-to-date results included $49.5 million of restructuring charges.
Cash, debt and capital allocation
- Cash, cash equivalents and short-term investments totaled $5.27 billion at period-end, down from $6.95 billion at April 26, 2013. Cash and cash equivalents alone were $2.26 billion.
- Net cash used in financing was $2.24 billion for the six months, including repayment of $1.265 billion principal on convertible notes, $1.0 billion of share repurchases and $102.7 million of dividends paid.
- Remaining debt was $1.0 billion in senior notes: $750 million due 2017 and $250 million due 2022. The $250 million revolving credit facility had no borrowings outstanding; the company reported compliance with debt covenants.
- Working capital was $4.0 billion. Days sales outstanding fell to 35 days from 42 days at fiscal year-end. Total deferred revenue was $2.93 billion, down from $3.01 billion.
- NetApp repurchased 25.3 million shares for $1.0 billion during the six months, with $2.0 billion of authorization remaining. Quarterly dividends were $0.15 per share; a further $0.15 dividend was declared in November 2013.
Changes, outlook and notable matters
- Revenue growth was modest overall, with service and maintenance growth offsetting weaker product sales, particularly OEM products. Product revenue was 62% of revenue for the quarter versus 65% a year earlier.
- In May 2013, NetApp began a restructuring that reduced its global workforce by approximately 7%. It recorded $49.5 million in severance costs in the first six months and said significant additional costs were not anticipated.
- Management expected cash resources and operating cash flow to cover liquidity needs for at least the next 12 months. Planned capital expenditures for the remainder of fiscal 2014 were $75 million to $125 million. The filing does not provide a clear revenue or earnings forecast.
- Management planned to complete the share repurchase program within three years, including planned repurchases of $1.0 billion by the end of May 2014. Future repurchases and dividends remain subject to business, financial, market and regulatory considerations.
- Approximately $3.9 billion of cash, cash equivalents and investments was held internationally. Management said it intended to keep foreign funds permanently reinvested; repatriation could trigger U.S. taxes.
- Key business risks include uncertain demand and quarterly booking patterns, reliance on indirect channels, competition and margin pressure, supply-chain and component availability, and successful adoption of clustered Data ONTAP. Arrow Electronics and Avnet accounted for 23% and 16% of quarterly revenue, respectively.
- The filing discusses an ongoing U.S. export-control inquiry concerning allegations that products reached Syria through a third party; NetApp said it was cooperating with government inquiries. Tax matters include IRS audits and a Danish tax dispute. Unrecognized tax benefits were $199.8 million. No accrual was recorded for legal proceedings because losses were not considered probable and reasonably estimable.
- Investment risks include interest-rate sensitivity: management estimated a 100-basis-point rate increase would reduce fixed-income portfolio fair value by approximately $34 million. Auction-rate securities had a $39.5 million estimated fair value and remained exposed to market and liquidity risk.
Important facts for investors to verify
- Whether service and maintenance growth can continue to offset declines in product and OEM revenue, and how distributor concentration affects sales.
- Progress in customer adoption and migration to clustered Data ONTAP, including product quality and support requirements.
- Execution of the announced repurchase and dividend plans, and the effect of capital returns on liquidity and equity.
- Cash accessibility and potential tax costs associated with foreign-held funds, alongside the status and possible outcomes of tax and export-control matters.
- Whether gross-margin improvement is sustainable amid competition, component costs, supply commitments and changing product mix.