NetApp, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended January 28, 2022. Comparisons are to the periods ended January 29, 2021. NetApp is a cloud-led data management company reporting Public Cloud and Hybrid Cloud segments. Fiscal 2021 included an extra week in its first quarter, affecting nine-month comparisons.
Financial performance
| Metric | Q3 FY22 | Q3 FY21 | Nine months FY22 | Nine months FY21 |
|---|---|---|---|---|
| Revenue | $1.614B | $1.470B | $4.638B | $4.189B |
| Gross profit | $1.073B | $975M | $3.131B | $2.780B |
| Operating income | $321M | $258M | $864M | $576M |
| Net income | $252M | $182M | $678M | $396M |
| Diluted EPS | $1.10 | $0.80 | $2.96 | $1.76 |
| Operating cash flow | Not separately stated | Not separately stated | $800M | $774M |
- Q3 revenue grew 10% year over year; nine-month revenue grew 11%. Product revenue rose 9% in Q3 and 11% year to date, while services revenue rose 11% and 10%, respectively.
- Public Cloud revenue was $110M in Q3, up 100%, and $276M for nine months, up 108%. Hybrid Cloud generated $1.504B of Q3 revenue and $4.362B for nine months. All-flash array demand supported product growth.
- Calculated consolidated gross margin was approximately 66.5% in Q3 versus 66.3% a year earlier, and 67.5% year to date versus 66.4%. Operating margin was approximately 19.9% in Q3 versus 17.6%, and 18.6% year to date versus 13.8%.
- Q3 net income increased about 38% and nine-month net income about 71%. The nine-month effective tax rate fell to 17.6% from 24.7%, reflecting discrete tax benefits and stock-compensation benefits, among other factors.
- Operating cash flow was $800M for nine months; capital expenditures were $158M, implying approximately $642M of operating cash flow less capital expenditures. Cash and cash equivalents were $4.170B; cash, equivalents and short-term investments totaled $4.201B, down from $4.596B at April 30, 2021.
- Debt principal was $2.650B, including $250M classified as current. Net cash and investments exceeded debt principal by approximately $1.551B. The $1.0B revolving credit facility was undrawn; no commercial paper was outstanding. The company reported compliance with debt covenants.
- Deferred revenue and financed unearned services revenue totaled $3.969B; approximately 52% was expected to be recognized within 12 months. Net working capital was $2.0B, down $588M from April 30, 2021.
Changes, outlook and risks
- Operating income and margins improved as revenue grew and operating expenses declined as a percentage of revenue. Public Cloud gross margin expanded with scale. Product component and freight costs rose amid supply constraints; management said these pressures were expected to affect margins in Q4 FY22 and into FY23.
- NetApp acquired CloudCheckr for approximately $347M and Data Mechanics for approximately $15M during the period. A further acquisition, Fylamynt, for approximately $30M was completed February 18, 2022, after quarter-end.
- Management expected liquidity sources to meet requirements for at least the next 12 months. Capital expenditures for the remainder of FY22 were expected to be $50M–$100M. The filing does not provide a clear numerical revenue or earnings forecast in the included text.
- COVID-19-related supply constraints, component cost increases, logistics issues and uncertain customer purchasing patterns remained risks. NetApp had increased inventory and longer-term commitments to mitigate shortages. Russia-related sanctions were expected to affect shipments and services to customers operating in Russia and Ukraine; management did not anticipate a significant impact at the time, but noted uncertainty.
- Inventory purchase commitments were $791M, with another $354M of other purchase obligations. The company identified supply-chain disruption, customer and distributor concentration, competition and technology transitions, cybersecurity, foreign exchange, and acquisition integration as material risks.
- Arrow Electronics and Tech Data accounted for 25% and 21% of Q3 revenue, respectively. A securities class-action settlement of approximately $2M remained subject to court approval. Patent litigation and other claims were ongoing; no material accrual was recorded for those other matters. Danish tax litigation and multiple tax audits also remained unresolved.
Investor verification priorities
- Track Public Cloud growth and margins, and whether CloudCheckr, Spot and other acquisitions contribute as expected.
- Verify the duration and financial effect of supply constraints, component and freight inflation, and the outlook for product gross margins.
- Review cash generation against acquisition spending, capital expenditures, dividends and repurchases; note that nine-month dividends and share repurchases were $335M and $350M, respectively.
- Monitor distributor concentration, inventory commitments and working-capital trends.
- Follow the $250M senior-note maturity, tax audits and Danish tax appeal, the proposed securities settlement, and ongoing patent litigation.