01—Abstract
Summary
Summary of the 10-K filed June 23, 2011. Cited figures are marked; the original filing is the authoritative source.
NetApp, Inc. reported fiscal 2011 (year ended April 29, 2011) net revenues of $5.12 billiona, up $1.2 billion, or 30%, from $3.93 billion in fiscal 2010.
Product revenues rose 41% to $3.37 billionb, software entitlements and maintenance rose 6% to $720.6 million, and service revenues rose 19% to $1.03 billion. Net income was $673.1 million, or $1.71 per diluted share, versus $400.4 million in fiscal 2010. The filing notes that adoption of new revenue recognition standards added $129.2 million to net revenues and $53.0 million to net income in fiscal 2011.
Indirect channels generated 73% of net revenues. The balance sheet strengthened, with cash, cash equivalents and short-term investments of $5.17 billionc at April 29, 2011, up from $3.72 billion a year earlier, and stockholders' equity rising to $3.73 billion. However, the $1.265 billion 1.75% Convertible Senior Notes due 2013 became convertible at holders' option through June 30, 2011 because the stock price threshold of $41.41 was exceeded, so the carrying value was reclassified to a current liability of $1.15 billion.
The company also disclosed that it completed the acquisition of certain assets of LSI Corporation's Engenio external storage systems business (ESG) on May 6, 2011 for $480 milliond in cash, which management expects to materially affect fiscal 2012 results and to reduce product gross margin percentage. Risk factors highlighted by the filing include dependence on indirect channels and distributors Arrow Electronics (18% of net revenues) and Avnet (12%), a U.S. government revenue exposure, IRS and Danish tax matters, dilution from the convertible notes, and a derivative lawsuit concerning GSA contracting activities with a hearing scheduled for July 15, 2011.
02—Key points
Key Highlights
- Net revenues of $5.12 billion, up 30% from $3.93 billion in fiscal 2010, with product revenues up 41%
- Net income of $673.1 million, or $1.71 per diluted share, compared with $400.4 million, or $1.13 per diluted share, in fiscal 2010
- Adoption of new revenue recognition standards increased fiscal 2011 net revenues by $129.2 million and net income by $53.0 million
- Cash, cash equivalents and short-term investments of $5.17 billion at April 29, 2011, against $1.15 billion of convertible notes now classified as current
- Acquisition of ESG from LSI Corporation closed May 6, 2011 for $480 million in cash, expected to materially affect fiscal 2012 results and lower product gross margin percentage
- Indirect channels represented 73% of net revenues, with Arrow Electronics and Avnet accounting for 18% and 12% of net revenues respectively
- Stock repurchase authorization of $1.1 billion remained available, and no shares were repurchased in fiscal 2011
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, NetApp kept $0.13.
- Revenue$5.12B100.0%
- Cost of revenue−$1.79B35.0%
- Gross profit$3.33B65.0%
- Operating costs−$2.50B48.9%
- Operating income$824.3M16.1%
- Interest, other & tax−$151.2M3.0%
- Net income$673.1M13.1%
Where FY2011 revenue went
$5.12B- Other operating costs: $1.86B, 36% of revenue
- Cost of revenue: $1.79B, 35% of revenue
- Net income: $673.1M, 13% of revenue
- R&D: $648.6M, 13% of revenue
- Interest, other & tax: $151.2M, 3.0% of revenue
Kept 13% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed June 23, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $5.12B$3.93B | +30.3% |
| Cost of Revenue | $1.79B$1.41B | +27.0% |
| Gross Profit | $3.33B$2.52B | +32.1% |
| R&D Expenses | $648.60M$535.70M | +21.1% |
| Operating Expenses | $2.50B$2.03B | +23.3% |
| Operating Income | $824.30M$488.40M | +68.8% |
| Interest Expense | $75.90M$74.10M | +2.4% |
| Net Income | $673.10M$400.40M | +68.1% |
| EPS (Basic) | $1.87$1.18 | +58.5% |
| EPS (Diluted) | $1.71$1.13 | +51.3% |
| Shares Outstanding (Basic) | 360.90M339.60M | +6.3% |
| Shares Outstanding (Diluted) | 393.70M353.20M | +11.5% |
05—Questions
Frequently Asked Questions
Why are the convertible notes classified as a current liability?
The company's closing stock price exceeded the $41.41 contingent conversion threshold for at least 20 of the 30 trading days ended March 31, 2011. As a result, the $1.265 billion 1.75% Convertible Senior Notes are convertible at holders' option through June 30, 2011, and their carrying value of $1.15 billion was classified as a current liability. The notes may be reclassified to long-term debt in future quarters if the threshold is not met.
How much did the ESG acquisition cost and what does management expect from it?
NetApp paid LSI $480 million in cash on May 6, 2011 for certain assets of the Engenio external storage systems business and assumed certain related assets and liabilities. Management expects the transaction to materially affect fiscal 2012 results, with ESG product revenues initially coming from existing OEMs, and expects the fiscal 2012 consolidated product gross margin percentage to decrease compared with fiscal 2011.
How concentrated is NetApp's revenue among distributors and channel partners?
Indirect channels generated 73% of net revenues in fiscal 2011. Distributors Arrow Electronics and Avnet accounted for approximately 18% and 12% of net revenues, respectively, and the company's OEM relationship with IBM and its agreement with Fujitsu are also significant. Reseller agreements generally do not require minimum purchases.
What drove the increase in operating expenses and gross profit?
Gross profit rose to $3.33 billion, or 65.0% of net revenues, from $2.52 billion, or 64.1%. Operating expenses excluding restructuring and acquisition items rose 21% to $2.5 billion, primarily due to a 17% increase in average headcount and higher incentive compensation and commissions. Income from operations increased to $824.3 million from $488.4 million.
What legal and tax matters could affect investors?
A derivative lawsuit filed October 13, 2010 by Amalgamated Bank on behalf of NetApp names 15 current and former directors and alleges breaches related to GSA contracting activities; a hearing on motions to dismiss is scheduled for July 15, 2011, and no accrual has been recorded. The company closed an IRS examination of its 2003-2004 returns, resulting in additional liability of $10.8 million offset by net operating loss carryforwards. A Danish tax authority decision on 2005-2006 dividend withholding tax is under appeal, and the company states it believes the assessment is without merit.
06—Continue