01—Abstract
Summary
Summary of the 10-K filed June 22, 2016. Cited figures are marked; the original filing is the authoritative source.
NetApp, Inc. (NASDAQ: NTAP) reported fiscal 2016 (ended April 29, 2016, a 53-week year) with net revenues of $5.55 billiona, down 9% from $6.12 billion in fiscal 2015.
Product revenues fell 18% to $2.99 billionb, while software maintenance ($949 million, up 6%) and hardware maintenance and other services ($1.61 billion, up 3%) partly offset the decline. Gross profit margin declined to 61% from 63%, driven by lower average selling prices from higher discounting and promotions. Income from operations fell to $348 million (6% of revenues) from $716 million, and net income dropped to $229 million, or $0.77 per diluted share, from $560 million.
The company is pursuing its Data Fabric hybrid cloud strategy and completed the $850 millionc cash acquisition of all-flash storage maker SolidFire, Inc. in February 2016, funded by an $870 million short-term loan of which $850 million remained outstanding at year end. A March 2016 restructuring reduced headcount by approximately 11%, with $80 million of employee severance charges recorded in the fourth quarter. Cash, cash equivalents and short-term investments were $5.30 billion, roughly flat year over year, while total debt rose to $2.34 billion and working capital fell to $2.79 billion.
The company also sold Sunnyvale properties for $250 milliond in April 2016 and repurchased $960 million of stock. Investors should note the sharp earnings decline, the increase in leverage (debt equal to 82% of stockholders' equity), and management's stated expectation that the short-term loan will be repaid from global earnings by the start of the third quarter of fiscal 2017. The company also reports that $4.8 billion of its cash and short-term investments is held by foreign subsidiaries, and that repatriation could trigger significant U.S. tax costs.
02—Key points
Key Highlights
- Net revenues of $5,546 million in fiscal 2016, down 9% from $6,123 million; product revenues fell 18% to $2,986 million.
- Gross profit margin fell to 61% from 63%, mainly from lower average selling prices due to higher discounting and product promotions.
- Net income declined to $229 million ($0.77 diluted EPS) from $560 million ($1.75 diluted EPS), with the effective tax rate rising to 33.6% from 21.5%.
- Acquired SolidFire, Inc. in February 2016 for $850 million in cash, financed by an $870 million short-term loan; $850 million remained outstanding at April 29, 2016.
- Restructuring in March 2016 reduced worldwide headcount by approximately 11%, with $80 million of employee severance charges in the fourth quarter.
- Total debt rose to $2,339 million from $1,487 million; debt was 82% of stockholders' equity, and stockholders' equity fell to $2,881 million.
- Returned capital through $960 million of share repurchases (33 million shares) and $210 million of dividends; $1.5 billion of repurchase authorization remained.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, NetApp kept $0.04.
- Revenue$5.55B100.0%
- Cost of revenue−$2.17B39.2%
- Gross profit$3.37B60.8%
- Operating costs−$3.02B54.5%
- Operating income$348.0M6.3%
- Interest, other & tax−$119.0M2.1%
- Net income$229.0M4.1%
Where FY2016 revenue went
$5.55B- Cost of revenue: $2.17B, 39% of revenue
- Other operating costs: $2.16B, 39% of revenue
- R&D: $861.0M, 16% of revenue
- Net income: $229.0M, 4.1% of revenue
- Interest, other & tax: $119.0M, 2.1% of revenue
Kept 4.1% as net incomeNet income $229.0M · 4.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed June 22, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $5.55B$6.12B | −9.4% |
| Cost of Revenue | $2.17B$2.29B | −5.1% |
| Gross Profit | $3.37B$3.83B | −12.0% |
| R&D Expenses | $861.00M$920.00M | −6.4% |
| Operating Expenses | $3.02B$3.12B | −3.0% |
| Operating Income | $348.00M$716.00M | −51.4% |
| Interest Expense | $49.00M$42.00M | +16.7% |
| Net Income | $229.00M$560.00M | −59.1% |
| EPS (Basic) | $0.78$1.77 | −55.9% |
| EPS (Diluted) | $0.77$1.75 | −56.0% |
| Shares Outstanding (Basic) | 294.00M316.00M | −7.0% |
| Shares Outstanding (Diluted) | 297.00M321.00M | −7.5% |
05—Questions
Frequently Asked Questions
Why did NetApp's revenue and profit decline in fiscal 2016?
Net revenues fell 9% to $5,546 million, mainly because product revenues dropped $669 million (18%). Configured system revenues fell 15% and non-configured product revenues fell 24%. Average selling prices declined due to higher discounting and promotions, and foreign exchange was unfavorable. Maintenance revenues rose partly offsetting the decline. Income from operations fell to $348 million from $716 million, including $108 million of restructuring and other charges.
What was the purpose of the SolidFire acquisition?
NetApp acquired all-flash startup SolidFire, Inc. on February 2, 2016 for $850 million in cash. The filing says it extends NetApp's position in the all-flash array market and adds flash offerings with a webscale architecture intended to simplify data center operations and enable rapid deployment of new applications. The company recorded $649 million of goodwill and $168 million of intangible assets from the deal.
How is NetApp funding its debt and cash needs?
At April 29, 2016, the company had $1.5 billion of Senior Notes, $850 million outstanding under the short-term loan, and no borrowings under its $300 million revolving credit facility. Cash, cash equivalents and short-term investments totaled $5.30 billion, of which $4.8 billion was held by foreign subsidiaries. Management expects to repay the short-term loan using funds generated by global operations, and states that it believes liquidity will satisfy requirements for at least the next 12 months.
What is NetApp's dividend and buyback activity?
In fiscal 2016 NetApp paid $0.18 per share quarterly, totaling $0.72 per share and $210 million. It repurchased 33 million shares for $960 million at an average price of $28.80. The board had authorized up to $9.6 billion in total repurchases, with $1.5 billion remaining at year end. On May 25, 2016, the board declared a $0.19 per share dividend payable July 27, 2016.
What are the main risks highlighted in the filing?
The filing emphasizes declining revenues and storage market stagnation, the transition from Data ONTAP 7-Mode to clustered Data ONTAP, competition from full-stack vendors and the pending Dell and EMC merger, heavy reliance on distributors (Arrow and Avnet accounted for 22% and 19% of revenue), dependence on limited suppliers and contract manufacturers, and the tax consequences of repatriating $4.8 billion of foreign-held cash.
06—Continue