01—Abstract
Summary
Summary of the 10-K filed June 29, 2004. Cited figures are marked; the original filing is the authoritative source.
Network Appliance, Inc. reported fiscal 2004 (year ended April 30, 2004) total revenues of $1,170.3 milliona, up from $892.1 million in fiscal 2003, with income from operations of $158.5 million and net income of $152.1 million, or $0.42 per diluted share.
Product revenue was $1,058.2 millionb and service revenue was $112.1 million. Product gross margin was 64.9% and service gross margin fell to 15.9% from 26.5%, as the company invested in its global service organization. Sales and marketing expense rose to $349.5 million, and research and development rose to $131.9 million.
Net income was helped by a non-recurring $16.8 millionc income tax benefit from a favorable Dutch tax ruling. International revenues were $551.0 million, or 47.1% of total revenues. The company completed its all-stock acquisition of Spinnaker Networks, Inc. on February 18, 2004, for approximately $305.5 million, which management expects to accelerate its NetApp Storage Grid architecture.
Goodwill grew to $291.8 milliond at April 30, 2004, from $48.2 million a year earlier. Cash, cash equivalents and short-term investments totaled $808.0 million, and the company repurchased 6.9 million shares for $136.2 million during fiscal 2004. In May 2004 the board expanded the buyback authorization by $200.0 million, for total authorized spending of up to $350.0 million.
Management believes existing liquidity is sufficient for at least the next twelve months. The filing identifies competition from EMC, Hitachi Data Systems, Hewlett-Packard, IBM and Sun Microsystems in storage, and notes risks including reliance on a single disk drive supplier, dependence on indirect sales channels, and the expiration of the Dutch tax ruling at the end of calendar 2005.
02—Key points
Key Highlights
- Total revenues rose to $1,170.3 million in fiscal 2004 from $892.1 million in fiscal 2003, and net income rose to $152.1 million from $76.5 million.
- Diluted net income per share was $0.42, compared with $0.22 in fiscal 2003, which included a non-recurring $16.8 million Dutch tax ruling benefit.
- Service gross margin declined to 15.9% from 26.5% as the company invested in its global service infrastructure; product gross margin was 64.9%.
- Spinnaker Networks was acquired for approximately $305.5 million in stock on February 18, 2004, adding $243.6 million of goodwill and $4.9 million of expensed in-process R&D.
- Cash, cash equivalents and short-term investments were $808.0 million at April 30, 2004, and working capital was $745.0 million.
- The board expanded the stock repurchase program by $200.0 million in May 2004, bringing total authorized spending to up to $350.0 million.
- International revenues were $551.0 million, or 47.1% of total revenues, and indirect channels represented 47.9% of total revenues.
03—Questions
Frequently Asked Questions
What drove the revenue increase in fiscal 2004?
Management attributed product revenue growth of 31.9% to increased software licenses and subscriptions, higher unit shipments, new products such as the FAS960, FAS940, FAS270 and FAS250 filers, NearStore R200, and growth in WORM compliance and backup-to-disk solutions. Service revenue grew 24.9% to $112.1 million.
Why did service gross margin fall?
Service gross margin decreased to 15.9% from 26.5% because of continued investment in the service infrastructure to support a growing enterprise customer base, including additional professional support engineers, support center activity and global service partnership programs. Management expects service margin to improve as service revenue grows and headcount utilization improves.
How did the Spinnaker acquisition affect the company?
Spinnaker was acquired for approximately $305.5 million in an all-stock transaction. The company issued 12.4 million shares and assumed options for 2.9 million shares. The filing states the acquisition did not have a significant impact on fiscal 2004 revenues, and management expects it to accelerate delivery of the NetApp Storage Grid architecture.
How much did the company return to shareholders, and what remains available?
During fiscal 2004 the company repurchased 6.9 million shares at a total cost of $136.2 million. After the May 2004 expansion, the program allows total authorized spending of up to $350.0 million, and the program is open-ended and may be suspended at any time. The company has never paid cash dividends.
What are the main risks highlighted in the filing?
The filing cites intense competition from larger rivals, reliance on a limited number of suppliers (most disk drives come from a single supplier), dependence on contract manufacturers and indirect sales channels, the risk of product defects in new releases, and international operations. It also notes that the Dutch tax ruling, which benefited results, expires at the end of calendar 2005 and that a new ruling is uncertain.
04—Continue