01—Abstract
Summary
Summary of the 10-K filed June 17, 2014. Cited figures are marked; the original filing is the authoritative source.
NetApp, Inc. (NTAP) reported fiscal 2014 (year ended April 25, 2014) net revenues of $6.33 billiona, essentially flat versus fiscal 2013, as product revenues declined while service and software entitlements and maintenance (SEM) revenues grew.
Net revenues were $6,325.1 millionb compared with $6,332.4 million in fiscal 2013, down $7.3 million, or less than 1%. Product revenues fell to $3,943.9 million, while SEM revenues rose to $914.8 million and service revenues rose to $1,466.4 million. Net income increased to $637.5 million, or $1.83 per diluted share, from $505.3 million, or $1.37 per diluted share, the prior year.
Gross profit margin improved to 62.0% from 59.4%, driven mainly by lower unit materials costs, and income from operations rose to $734.3 millionc. Capital allocation was a major theme. The company repaid $1.3 billion of 1.75% Convertible Notes at maturity, repurchased 47.3 million shares for $1.88 billion, and paid $202.3 million in dividends ($0.60 per share) after initiating a quarterly dividend in May 2013.
Cash, cash equivalents and short-term investments fell to $5.00 billiond from $6.95 billion. Operating cash flow was $1.35 billion. Restructuring charges of $88.3 million were recorded across May 2013 and March 2014 plans, which reduced the global workforce by approximately 11% in aggregate.
Shortly after year-end, on June 5, 2014, NetApp issued $500.0 million of 3.375% Senior Notes due 2021. Investors should note the concentration of revenue through distributors, with Arrow Electronics and Avnet accounting for 22% and 16% of net revenues, and indirect channels representing 82% of sales.
The filing also discloses a Netherlands tax ruling expiring April 30, 2015, ongoing IRS audits, and $4.3 billion of cash held by foreign subsidiaries, which may trigger significant tax costs if repatriated. Management's stated focus is on the cDOT transition from Data ONTAP 7-Mode, the flash product line, and the planned FlashRay launch in fiscal 2015.
02—Key points
Key Highlights
- Net revenues of $6,325.1 million were down $7.3 million, or less than 1%, from $6,332.4 million in fiscal 2013, as product revenues declined $148.4 million.
- Net income rose to $637.5 million from $505.3 million, and diluted EPS increased to $1.83 from $1.37.
- Gross profit margin rose to 62.0% from 59.4%, mainly from lower unit materials costs and supply chain efficiencies.
- SEM revenues grew to $914.8 million and service revenues grew to $1,466.4 million, partly offset by lower product revenues.
- Capital returns totaled $1.88 billion in buybacks and $202.3 million in dividends, while $1.3 billion of Convertible Notes were repaid at maturity.
- Cash, cash equivalents and short-term investments declined to $5,003.3 million from $6,952.6 million.
- Restructuring charges of $88.3 million were recorded, with a workforce reduction of approximately 11% in aggregate across the May 2013 and March 2014 plans.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, NetApp kept $0.10.
- Revenue$6.33B100.0%
- Cost of revenue−$2.41B38.0%
- Gross profit$3.92B62.0%
- Operating costs−$3.19B50.4%
- Operating income$734.0M11.6%
- Interest, other & tax−$96.0M1.5%
- Net income$638.0M10.1%
Where FY2014 revenue went
$6.33B- Cost of revenue: $2.41B, 38% of revenue
- Other operating costs: $2.27B, 36% of revenue
- R&D: $918.0M, 15% of revenue
- Net income: $638.0M, 10% of revenue
- Interest, other & tax: $96.0M, 1.5% of revenue
Kept 10% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed June 17, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $6.33B$6.33B | −0.1% |
| Cost of Revenue | $2.41B$2.57B | −6.4% |
| Gross Profit | $3.92B$3.76B | +4.2% |
| R&D Expenses | $918.00M$904.20M | +1.5% |
| Operating Expenses | $3.19B$3.15B | +1.0% |
| Operating Income | $734.00M$607.80M | +20.8% |
| Interest Expense | $36.00M$91.70M | −60.7% |
| Net Income | $638.00M$505.30M | +26.3% |
| EPS (Basic) | $1.87$1.40 | +33.6% |
| EPS (Diluted) | $1.83$1.37 | +33.6% |
| Shares Outstanding (Basic) | 340.00M361.50M | −5.9% |
| Shares Outstanding (Diluted) | 348.00M368.00M | −5.4% |
05—Questions
Frequently Asked Questions
How did NetApp's revenue and profitability trend in fiscal 2014?
Net revenues were $6,325.1 million, essentially flat (down $7.3 million, or less than 1%) from $6,332.4 million. Net income increased 26% to $637.5 million, and diluted EPS rose 34% to $1.83, reflecting higher gross margin (62.0% versus 59.4%) and cost containment.
What drove the change in revenue mix?
Product revenues decreased $148.4 million to $3,943.9 million, mainly because OEM product revenues declined 26%. Software entitlements and maintenance revenues rose to $914.8 million, and service revenues rose to $1,466.4 million, mainly from a larger installed base under hardware maintenance contracts.
How much cash did NetApp return to shareholders, and how was its debt position affected?
NetApp repurchased 47.3 million shares for $1,881.5 million and paid $202.3 million in dividends. It repaid $1.3 billion of 1.75% Convertible Notes at maturity. After year-end, it issued $500.0 million of 3.375% Senior Notes due 2021, with net proceeds of about $494.7 million. Remaining buyback authorization was $1.1 billion.
What are the main risks highlighted in the filing?
Key risks include a 82% reliance on indirect channels, with Arrow Electronics and Avnet representing 22% and 16% of net revenues; a Netherlands tax ruling expiring April 30, 2015; ongoing IRS audits; and the transition from Data ONTAP 7-Mode to clustered Data ONTAP, along with a competitive market in flash and converged infrastructure.
What is the outlook for capital expenditures and future cash uses?
NetApp anticipates fiscal 2015 capital expenditures of $200.0 million to $250.0 million. It expects to complete the March 2014 restructuring activities in the first six months of fiscal 2015, declared a $0.165 quarterly dividend on May 21, 2014, and plans to use the proceeds of its June 2014 notes for general corporate purposes, including possible repurchases and acquisitions.
06—Continue