NetApp, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2022, ended October 29, 2021. NetApp is a cloud-led data-management company reporting Public Cloud and Hybrid Cloud segments following a reporting realignment effective in fiscal Q1.
Financial performance and position
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $1.566B | $1.416B | $3.024B | $2.719B |
| Gross profit / margin | $1.059B / 67.6% | $933M / 65.9% | $2.058B / 68.1% | $1.805B / 66.4% |
| Operating income / margin | $294M / 18.8% | $182M / 12.9% | $543M / 18.0% | $318M / 11.7% |
| Net income | $224M | $137M | $426M | $214M |
| Diluted EPS | $0.98 | $0.61 | $1.86 | $0.96 |
- Q2 revenue grew 11% year over year: product revenue rose 9% to $814M and services rose 13% to $752M. For the six-month period, revenue increased 11%.
- Q2 Public Cloud revenue was $87M, up 85%; Hybrid Cloud revenue was $1.479B. Public Cloud gross margin was 71.3%, versus 66.0% a year earlier. Segment comparisons reflect the new reporting presentation.
- Six-month operating cash flow was $540M, versus $401M; capital expenditures were $97M. Investing activities used $85M and financing activities used $461M. Cash, cash equivalents and short-term investments totaled $4.548B at October 29, 2021, versus $4.596B at April 30, 2021.
- Long-term debt was $2.634B carrying value ($2.650B principal); no commercial paper was outstanding and the $1.0B revolving facility was undrawn. Working capital was $2.5B. Current and long-term deferred revenue and financed unearned services revenue totaled $3.866B.
- NetApp repurchased approximately 2.7M shares for $225M and paid $224M in dividends during the six months. Remaining repurchase authorization was $627M. A $0.50-per-share dividend was declared November 22, payable January 26, 2022.
Changes versus comparable periods
- Revenue growth came from both product and services sales. Product growth was primarily driven by all-flash array systems; software’s share of product revenue increased as the product mix shifted toward those systems.
- Gross margin expanded year over year. Management attributed Hybrid Cloud product margin gains to product mix and Public Cloud margin gains to scaling efficiencies.
- Operating income and net income increased substantially; lower restructuring charges and reduced unallocated intangible amortization supported the improvement. The six-month effective tax rate fell to 17.6% from 23.3%, including discrete tax benefits and fewer acquisition-integration tax charges.
- Six-month operating cash flow increased, while prior-year investing and financing cash flows were affected by larger acquisitions and debt issuance/repayments. Fiscal 2021’s first quarter included an additional week, which management noted affected comparisons.
Outlook, commentary, risks and unusual items
- No revenue or earnings guidance is provided in the supplied filing text. NetApp expects fiscal 2022 remaining capital expenditures of $100M–$150M and believes available liquidity and funding sources should meet requirements for at least the next 12 months.
- Management reported COVID-related customer purchase delays as well as accelerated demand in some areas, logistical challenges and minor supply constraints. It increased inventory and made longer-term commitments to mitigate shortages, while warning continued constraints could raise costs. Inventory purchase commitments were $735M; other purchase obligations were $318M.
- Key risks include component shortages and supplier concentration, uncertain demand and competition from cloud providers, customer and distributor concentration, cybersecurity and privacy exposure, foreign exchange, and the effects of COVID-19. Arrow Electronics and Tech Data each accounted for at least 10% of revenue; together they represented 44% in Q2.
- Fiscal 2022 restructuring charges were $29M for the six months, mainly office-space changes, relocation and severance; the plan included an approximately 1% workforce reduction and was substantially completed. A $2M securities-litigation settlement was accrued, subject to court approval. Patent matters remain outstanding, with no material accrual recorded; management cautions adverse outcomes could be material.
- Tax authorities are auditing NetApp in the U.S. and abroad. The Danish tax dispute remains under appeal; the company prevailed on the principal distribution, while a smaller distribution was ruled for the authorities. Gross unrecognized tax benefits were $214M; management could not estimate the possible 12-month change.
- After quarter-end, NetApp acquired CloudCheckr on November 5, 2021, for approximately $348M; purchase-price allocation was still in progress. During the period, it acquired Data Mechanics for approximately $15M.
Important facts for investors to verify
- Whether Public Cloud growth and improving segment margins continue, and how the new segment reporting affects trend comparability.
- Whether supply constraints, inventory commitments and component costs affect product availability, revenue mix and gross margins.
- Whether operating cash generation remains sufficient alongside debt service, dividends, buybacks, capital spending and acquisitions.
- How CloudCheckr integration and the acquisition’s final purchase-price allocation affect results and goodwill.
- Developments in the Danish tax appeal, tax audits, securities-settlement approval and patent litigation exposure.