01—Abstract
Summary
Summary of the 10-K filed June 19, 2012. Cited figures are marked; the original filing is the authoritative source.
NetApp, Inc. reported fiscal 2012 (year ended April 27, 2012) net revenues of $6,233.2 milliona, up $1,110.6 million, or 22%, from $5,122.6 million in fiscal 2011.
Growth was driven mainly by $656.6 millionb of E-Series OEM revenue from the Engenio acquisition, completed May 6, 2011 for $480.0 million in cash, along with continued demand for storage efficiency and data management solutions. Product revenues rose 25% to $4,209.7 million, while gross profit margin fell to 59.6% from 65.0%, mainly due to lower-margin E-Series OEM products and higher discounting. Profitability declined despite higher sales.
Income from operations was $746.5 millionc versus $824.3 million in fiscal 2011, and net income was $605.4 million, or $1.58 per diluted share, compared with $673.1 million, or $1.71 per diluted share. Operating expenses rose as average headcount grew, reaching 12,149 employees as of April 27, 2012. Operating cash flow increased to $1,462.6 million from $1,346.3 million, and deferred revenue grew to $2,815.9 million.
The balance sheet carries $5.4 billiond in cash, cash equivalents and short-term investments, against $1.265 billion of 1.75% Convertible Senior Notes due June 2013, which were convertible at holders' option as of the fiscal year-end because the stock price exceeded the conversion threshold. The company repurchased $600.0 million of stock during the year and has $0.5 billion remaining under its $4.0 billion authorization. Key risks disclosed include dependence on distributors Arrow Electronics and Avnet (17% and 12% of revenue), IRS and Danish tax audits, a U.S. government contracting inquiry involving the DOJ and GSA, and Thailand flooding affecting disk drive supply.
02—Key points
Key Highlights
- Net revenues rose 22% to $6,233.2 million, with $656.6 million from E-Series OEM sales tied to the Engenio acquisition.
- Gross profit margin declined to 59.6% from 65.0% due to lower-margin E-Series OEM products and higher discounting.
- Net income fell to $605.4 million ($1.58 diluted EPS) from $673.1 million ($1.71 diluted EPS) as operating expenses grew.
- Operating cash flow increased to $1,462.6 million, and deferred revenue rose to $2,815.9 million.
- Cash, cash equivalents and short-term investments totaled $5.4 billion, against $1.265 billion of convertible notes due June 2013.
- Indirect channels generated 78% of net revenues, with Arrow Electronics and Avnet accounting for 17% and 12%.
- The company repurchased $600.0 million of common stock during fiscal 2012, leaving $0.5 billion under its authorization.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, NetApp kept $0.10.
- Revenue$6.23B100.0%
- Cost of revenue−$2.52B40.4%
- Gross profit$3.71B59.6%
- Operating costs−$2.97B47.6%
- Operating income$746.5M12.0%
- Interest, other & tax−$141.1M2.3%
- Net income$605.4M9.7%
Where FY2012 revenue went
$6.23B- Cost of revenue: $2.52B, 40% of revenue
- Other operating costs: $2.14B, 34% of revenue
- R&D: $828.2M, 13% of revenue
- Net income: $605.4M, 9.7% of revenue
- Interest, other & tax: $141.1M, 2.3% of revenue
Kept 9.7% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed June 19, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $6.23B$5.12B | +21.7% |
| Cost of Revenue | $2.52B$1.79B | +40.5% |
| Gross Profit | $3.71B$3.33B | +11.6% |
| R&D Expenses | $828.20M$648.60M | +27.7% |
| Operating Expenses | $2.97B$2.50B | +18.5% |
| Operating Income | $746.50M$824.30M | −9.4% |
| Interest Expense | $74.70M$75.90M | −1.6% |
| Net Income | $605.40M$673.10M | −10.1% |
| EPS (Basic) | $1.66$1.87 | −11.2% |
| EPS (Diluted) | $1.58$1.71 | −7.6% |
| Shares Outstanding (Basic) | 363.90M360.90M | +0.8% |
| Shares Outstanding (Diluted) | 384.30M393.70M | −2.4% |
05—Questions
Frequently Asked Questions
Why did revenue grow while profitability declined in fiscal 2012?
Revenue grew 22% to $6,233.2 million, but gross margin fell to 59.6% from 65.0%, mainly because lower-margin E-Series OEM products from the Engenio acquisition entered the revenue mix, and higher discounting reduced margins. Operating expenses also rose with average headcount, so income from operations declined to $746.5 million from $824.3 million.
What is the Engenio acquisition and what did it contribute?
On May 6, 2011, NetApp acquired certain assets of the Engenio external storage systems business of LSI Corporation for $480.0 million in cash. The filing states that fiscal 2012 net revenues included $665.9 million attributable to Engenio, and it enables offerings for high-bandwidth and analytics workloads.
What are the main risks related to the convertible notes?
The 1.75% notes due June 2013 totaled $1.265 billion in principal and were convertible at the holders' option as of April 27, 2012. Conversion could dilute shareholders, and the company is subject to potential dilution on the 20% of notes not covered by note hedges, if the stock price exceeds the $31.85 conversion price.
How concentrated is NetApp's customer base?
Sales through indirect channels represented 78% of net revenues in fiscal 2012. Distributors Arrow Electronics and Avnet accounted for approximately 17% and 12% of net revenues, respectively, and the company notes that its reseller agreements generally do not require minimum purchases.
What regulatory and legal matters does the filing disclose?
The filing discloses that the DOJ and GSA are reviewing contract compliance for sales made through a channel partner, which could lead to fines or debarment. It also describes an IRS audit for fiscal 2005 through 2007 with a transfer pricing protest, a Danish withholding tax dispute, and a derivative lawsuit that was dismissed with prejudice in March 2012.
06—Continue