NetApp, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 29, 2010. NetApp supplies enterprise storage and data-management hardware, software and services. Fiscal 2011’s first six months comprised 26 weeks, versus 27 weeks in the comparable fiscal 2010 period; the company cautions that results are not necessarily indicative of future periods.
Financial performance
| Metric | Three months ended Oct. 29, 2010 | Prior-year quarter | Six months ended Oct. 29, 2010 | Prior-year period |
|---|---|---|---|---|
| Revenue | $1,207.4 million | $910.0 million | $2,345.2 million | $1,748.0 million |
| Gross profit / margin | $801.1 million / 66.3% | $606.7 million / 66.7% | $1,525.5 million / 65.0% | $1,129.2 million / 64.6% |
| Operating income / margin | $197.4 million / 16.3% | $115.4 million / 12.7% | $361.6 million / 15.4% | $186.2 million / 10.6% |
| Net income / diluted EPS | $164.6 million / $0.42 | $95.7 million / $0.27 | $306.4 million / $0.80 | $147.3 million / $0.43 |
| Operating cash flow | Not separately reported | Not separately reported | $542.0 million | $305.5 million |
- Quarterly revenue rose 33%; six-month revenue rose 34%. Product revenue grew 49% and 50%, respectively, while software entitlements and maintenance increased 5% in both periods and service revenue grew 16% and 20%.
- Management attributed growth to strong demand for storage-efficiency and data-management solutions across geographies. Configured-system unit volume increased 77% in both comparisons; lower average selling prices, particularly for smaller systems, were a partial offset.
- Operating expenses increased 23% for the quarter and 19% for the six months, largely reflecting higher headcount, incentive compensation and commissions. Sales and marketing was the largest expense category.
- Six-month investing cash flow was negative $753.2 million, including net investment purchases and $74.9 million paid for Bycast, net of acquired cash. Financing cash flow was positive $266.8 million, principally from employee equity-plan proceeds and related tax benefits. Cash and cash equivalents increased $66.1 million to $1.77 billion.
Balance sheet, debt and liquidity
- At October 29, 2010, cash, cash equivalents and investments totaled $4.45 billion, including $2.61 billion of short-term investments; working capital was $3.30 billion. Current assets were $5.13 billion and current liabilities $1.83 billion.
- Total liabilities were $4.03 billion. The company reported $1.265 billion principal amount of 1.75% convertible senior notes due June 2013, carried at $1.125 billion net of unamortized discount. The notes were convertible at holders’ option through December 31, 2010 following the stock-price threshold being met. NetApp disclosed potential dilution, including an unhedged 20% portion of the notes’ conversion exposure.
- Days sales outstanding declined to 34 days from 37 days at April 30, 2010. Management said available liquidity and expected operating cash flows should cover requirements for at least the next 12 months. It expected approximately $155 million of capital-project spending in the remainder of fiscal 2011.
- Cash and investments held outside the U.S. totaled $2.0 billion. The company noted that repatriating foreign funds could create tax costs. It had $1.1 billion remaining under its stock-repurchase authorization, but made no repurchases during the six-month period.
Changes, outlook and notable matters
- NetApp completed its acquisition of Bycast on May 13, 2010 for an initial purchase price of $83.8 million, including assumed vested options. The acquisition added object-based storage software; $56.0 million of the purchase price was allocated to goodwill.
- The prior-year six-month comparison included a net $41.1 million acquisition-related gain from the terminated Data Domain merger; the current period had $0.3 million of acquisition-related expense. This makes that prior-period comparison unusual.
- No specific revenue or earnings guidance is stated in the supplied filing text. Management cited strong demand and expected liquidity sufficiency, while emphasizing uncertainty in forecasts and cash flows. The company reported no material changes to critical accounting estimates.
- Risks include economic and IT-spending uncertainty; competition and product pricing/mix; reliance on distributors and contract manufacturers; and quarterly revenue variability. Arrow and Avnet accounted for 18% and 15% of quarterly revenue, respectively.
- NetApp disclosed $126.2 million of noncancelable contract-manufacturer commitments, $337.1 million of other purchase commitments and $254.3 million of future minimum operating-lease payments. Financing arrangements carried maximum guaranteed payment contingencies of approximately $75.8 million.
- Tax matters include $126.0 million of recorded liabilities for uncertain tax positions, ongoing U.S. and foreign audits, and a disputed Danish withholding-tax assessment. The company said a final settlement of the IRS 2003–2004 audit was reasonably possible within six months.
- Other notable exposures include $66.2 million fair value of illiquid auction-rate securities, with $2.1 million of previously recorded other-than-temporary impairment; synthetic-lease residual guarantees, with estimated property values $36.9 million below aggregate guarantees; and a derivative lawsuit alleging fiduciary-duty and oversight failures related to GSA contracting. Sun patent lawsuits were dismissed without prejudice in September 2010.
Most important facts for investors to verify
- Whether growth in product demand and configured-system volumes persists without significant erosion from pricing and product mix.
- How convertible-note conversion, warrants and equity compensation affect diluted shares and per-share results.
- Progress and outcomes of IRS, state and Danish tax matters, and potential cash-tax exposure.
- Liquidity and valuation developments for auction-rate securities and exposure under synthetic leases and financing guarantees.
- Revenue concentration and dependence on major distributors, indirect channels and contract manufacturers.