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Aug 15, 2018

NetApp Reports First Quarter Fiscal Year 2019 Results

Net Revenues of $1.47 Billion Grew 12% Year-over-Year

  • Product revenue grew 20% year-over-year
  • All-flash array annualized net revenue run rate of $2.2 billion increased 50% year-over-year
  • Free cash flow was 18% of revenue and increased 22% year-over-year
  • $605 million returned to shareholders in share repurchases and cash dividends

SUNNYVALE, Calif.--(BUSINESS WIRE)--Aug. 15, 2018-- NetApp (NASDAQ: NTAP) today reported financial results for the first quarter of fiscal year 2019, which ended July 27, 2018.

“We delivered a very strong first quarter with revenue, gross margin, operating margin, and earnings per share all above our guidance. In Q1, we introduced substantial innovation across our portfolio, expanding our industry-leading cloud data services and introducing new partnerships, products and solutions to help data-driven organizations thrive,” said George Kurian, chief executive officer. “Enterprises are signaling strong confidence in NetApp by making long-term investments to enable the NetAppTM Data Fabric across their entire enterprise.”

First Quarter Fiscal Year 2019 Financial Results

  • Net Revenues:$1.47 billion, increased 12% year-over-year from $1.32 billion* in the first quarter of fiscal 2018
  • Net Income: GAAP net income of $283 million, compared to GAAP net income of $131 million* in the first quarter of fiscal 2018; non-GAAP net income1 of $281 million, compared to non-GAAP net income of $166 million* in the first quarter of fiscal 2018
  • Earnings per Share: GAAP earnings per share2 of $1.05 compared to GAAP earnings per share of $0.47* in the first quarter of fiscal 2018; non-GAAP earnings per share of $1.04, compared to non-GAAP earnings per share of $0.60* in the first quarter of fiscal 2018
  • Cash, Cash Equivalents and Investments:$4.8 billion at the end of the first quarter of fiscal 2019
  • Cash from Operations: $326 million, compared to $250 million in the first quarter of fiscal 2018
  • Share Repurchase and Dividend: Returned $605 million to shareholders through share repurchases and cash dividends

* In the first quarter of fiscal 2019, NetApp adopted Revenue from Contracts with Customers (ASC 606), a new accounting standard which establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The full retrospective method of adoption was employed. Accordingly, NetApp’s condensed consolidated balance sheet as of April 27, 2018, condensed consolidated statements of operations and cash flows for all prior periods presented, and all related financial statement metrics included herein, have been restated to conform to the new rules. The adoption of the standard had no impact to cash provided by or used in operating, investing or financing activities as presented on the condensed consolidated statement of cash flows.

Second Quarter Fiscal Year 2019 Financial Outlook

The Company provided the following financial guidance for the second quarter of fiscal year 2019:

  • Net revenues are expected to be in the range of $1.450 billion to $1.550 billion
 
   

GAAP

       

Non-GAAP

  • Earnings per share is expected to be in the range of:
$0.79-$0.85 $0.94-$1.00

Dividend

Next cash dividend of $0.40 per share to be paid on October 24, 2018, to shareholders of record as of the close of business on October 5, 2018.

First Quarter Fiscal Year 2019 Business Highlights

NetApp Expands the Industry's Most Complete Cloud Data Services

  • Azure NetApp Files is now available in public preview. Jointly developed by Microsoft and NetApp, Azure NetApp Files is a native Azure service powered by NetApp’s leading ONTAP technology and storage expertise.
  • NetApp announced NetAppCloud Volumes Services for Google Cloud Platform offering customers a fully-managed, cloud-native file storage service that is integrated with Google Cloud Platform.

New Products and Solutions that will Help Data-Driven Organizations Thrive

  • NetApp introduced the AFF A800 array, a high performance, cloud-connected flash system to power artificial intelligence and compute-intensive applications. The NetApp AFF A800 is the first available end-to-end NVMe enterprise grade all flash array and boasts the industry’s first support of 30TB solid state drives.
  • The latest update to our flagshipNetApp ONTAPTM 9 software includes enhancements to FabricPool and improves hybrid cloud data tiering and adds support for Microsoft Azure. ONTAP will automatically move inactive data to a lower-cost storage tier to save money and bring data back when needed.
  • NetApp Active IQTM technology provides new cloud-based analytics for all NetApp systems that predicts future performance needs and identifies unprotected data to optimize operations.
  • NetApp StorageGRID object-based storage solution now provides superior next-generation, cloud-architected infrastructure for financial and personal data retention compliance as one integrated resource across public and private clouds.

Cisco and NetApp Simplify the Delivery of Cloud Infrastructure and Industry-Specific Applications

  • The new Managed Private Cloud solution built on FlexPodTM enables customers to realize a cloud-like, As-a-Service model for their on-premises IT with remote management, securing critical customer data and advancing cloud-capabilities for both partners and their customers.
  • New FlexPod industry solutions provide a proven platform to quickly deploy key applications across industries that are challenged by the increasingly diverse, dynamic and distributed nature of data. The initial industry solution, FlexPod Datacenter for Epic HER, simplifies IT infrastructure for healthcare customers, helping them move faster and improve patient care.

Recognition for Industry Leading Products

  • NetApp all-flash array technology was recognized as a Leader in Gartner’s 2018 Magic Quadrant for Solid-State Arrays.3NetApp has improved its position in the Leaders Quadrant with a higher rating for its ability to execute.
  • NetApp StorageGRID named a Leader in IDC’s MarketScape for Object-Based Storage.4 IDC recognizes the strength of applying StorageGRID capabilities across our broader NetApp portfolio, and specifically praises a few capabilities in the report, including integration with NetApp FabricPool technology.
  • According to a new Storage Performance Council SPC-1 Result,5 tests of the AFF A800 system places it as number 1 overall in terms of SPC-1 Response Time and makes it the top-performing enterprise all-flash array among the industry’s leading storage providers. The AFF A800 is also in the top 4 on the SPC-1 Performance list. The SPC-1 tests of the AFF A800 were conducted with compression and deduplication enabled, just as they would be under real-world conditions.

Webcast and Conference Call Information

NetApp will host a conference call to discuss these results today at 2:00 p.m. Pacific Time. To access the live webcast of this event, visit the NetApp Investor Relations website at investors.netapp.com. In addition, this press release, historical supplemental data tables, and other information related to the call will be posted on the Investor Relations website. An audio replay will also be available on the website after 4:00 p.m. Pacific Time today.

About NetApp

NetApp is the data authority for hybrid cloud. We provide a full range of hybrid cloud data services that simplify management of applications and data across cloud and on-premises environments to accelerate digital transformation. Together with our partners, we empower global organizations to unleash the full potential of their data to expand customer touchpoints, foster greater innovation, and optimize their operations. For more information, visit www.netapp.com. #DataDriven

“Safe Harbor” Statement Under U.S. Private Securities Litigation Reform Act of 1995

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, all of the statements made under the Second Quarter Fiscal Year 2019 Financial Outlook section and statements about enterprise customers making long term investments in the NetApp Data Fabric. All of these forward-looking statements involve risk and uncertainty. Actual results may differ materially from these statements for a variety of reasons, including, without limitation, general global political, macroeconomic and market conditions, changes in U.S. government spending, revenue seasonality and matters specific to our business, such as our ability to expand our total available market and grow our portfolio of products, customer demand for and acceptance of our products and services, our ability to successfully execute new business models, our ability to successfully execute on our Data Fabric strategy to generate profitable growth and stockholder return and our ability to manage our gross profit margins. These and other equally important factors are described in reports and documents we file from time to time with the Securities and Exchange Commission, including the factors described under the section titled “Risk Factors” in our most recently submitted report on 10-K. We disclaim any obligation to update information contained in this press release whether as a result of new information, future events, or otherwise.

NetApp and the NetApp logo and the marks listed at http://www.netapp.com/TM are trademarks of NetApp, Inc. Other company and product names may be trademarks of their respective owners.

Footnotes

1Non-GAAP net income excludes, when applicable, (a) amortization of intangible assets, (b) stock-based compensation expenses, (c) litigation settlements, (d) acquisition-related expenses, (e) restructuring charges, (f) asset impairments, (g) gains/losses on the sale of properties, and (h) our GAAP tax provision, but includes a non-GAAP tax provision based upon our projected annual non-GAAP effective tax rate for the first three quarters of the fiscal year and an actual non-GAAP tax provision for the fourth quarter of the fiscal year. NetApp makes additional adjustments to the non-GAAP tax provision for certain tax matters as described below. A detailed reconciliation of our non-GAAP to GAAP results can be found at http://investors.netapp.com. NetApp’s management uses these non-GAAP measures in making operating decisions because it believes the measurements provide meaningful supplemental information regarding NetApp’s ongoing operational performance.

2GAAP earnings per share and non-GAAP earnings per share are calculated using the diluted number of shares.

3Leader in Gartner’s 2018 Magic Quadrant for Solid-State Arrays, Gartner Magic Quadrant for Solid-State Arrays, by Valdis Filks, John Monroe, Joseph Unsworth, Santhosh Rao, July 23, 2018

4Leader in IDC’s MarketScape for Object-Based Storage, “IDC MarketScape: Worldwide Object-Based Storage 2016 Vendor Assessment,” by Amita Potnis, June 2018. IDC #US42665518

5Storage Performance Council SPC-1 Result, http://spcresults.org/benchmarks/results/spc1-spc1e#A32007

NetApp Usage of Non-GAAP Financial Information

To supplement NetApp’s condensed consolidated financial statement information presented in accordance with generally accepted accounting principles in the United States (GAAP), NetApp provides investors with certain non-GAAP measures, including, but not limited to, historical non-GAAP operating results, non-GAAP net income, non-GAAP effective tax rate and free cash flow, and historical and projected non-GAAP earnings per diluted share.

NetApp believes that the presentation of non-GAAP net income, non-GAAP effective tax rates, and non-GAAP earnings per share data when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and results of operations. NetApp believes that the presentation of free cash flow, which it defines as the net cash provided by operating activities less cash used to acquire property and equipment, to be a liquidity measure that provides useful information to management and investors because it reflects cash that can be used to, among other things, invest in its business, make strategic acquisitions, repurchase common stock, and pay dividends on its common stock. As free cash flow is not a measure of liquidity calculated in accordance with GAAP, free cash flow should be considered in addition to, but not as a substitute for, the analysis provided in the statement of cash flows.

NetApp’s management uses these non-GAAP measures in making operating decisions because it believes the measurements provide meaningful supplemental information regarding NetApp’s ongoing operational performance. These non-GAAP financial measures are used to: (1) measure company performance against historical results, (2) facilitate comparisons to our competitors’ operating results and (3) allow greater transparency with respect to information used by management in financial and operational decision making.

NetApp excludes the following items from its non-GAAP measures when applicable:

A. Amortization of intangible assets.NetApp records amortization of intangible assets that were acquired in connection with its business combinations. The amortization of intangible assets varies depending on the level of acquisition activity. Management finds it useful to exclude these charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods and in measuring operational performance.

B. Stock-based compensation expenses.NetApp excludes stock-based compensation expenses from its non-GAAP measures primarily because they are non-cash expenses. While management views stock-based compensation as a key element of our employee retention and long-term incentives, we do not view it as an expense to be used in evaluating operational performance in any given period.

C. Litigation settlements. NetApp may periodically incur charges or benefits related to litigation settlements. NetApp excludes these charges and benefits, when significant, because it does not believe they are reflective of ongoing business and operating results.

D. Acquisition-related expenses.NetApp excludes acquisition-related expenses, including (a) due diligence, legal and other one-time integration charges and (b) write down of assets acquired that NetApp does not intend to use in its ongoing business, from its non-GAAP measures, primarily because they are not related to our ongoing business or cost base and, therefore, cannot be relied upon for future planning and forecasting.

E. Restructuring charges. These charges consist of restructuring charges that are incurred based on the particular facts and circumstances of restructuring decisions, including employment and contractual settlement terms, and other related charges, and can vary in size and frequency. We therefore exclude them in our assessment of operational performance.

F. Asset impairments. These are non-cash charges to write down assets when there is an indication that the asset has become impaired. Management finds it useful to exclude these non-cash charges due to the unpredictability of these events in its assessment of operational performance.

G. Gains/losses on the sale of properties. These are gains/losses from the sale of our properties. Management believes that these transactions do not reflect the results of our underlying, on-going business and, therefore, cannot be relied upon for future planning or forecasting.

H. Income tax adjustments. NetApp’s non-GAAP tax provision is based upon a projected annual non-GAAP effective tax rate for the first three quarters of the fiscal year and an actual non-GAAP tax provision for the fourth quarter of the fiscal year. The non-GAAP tax provision also excludes, when applicable, (a) tax charges or benefits in the current period that relate to one or more prior fiscal periods that are a result of events such as changes in tax legislation, authoritative guidance, income tax audit settlements and/or court decisions, (b) tax charges or benefits that are attributable to unusual or non-recurring book and/or tax accounting method changes, (c) tax charges that are a result of a non-routine foreign cash repatriation, (d) tax charges or benefits that are a result of infrequent restructuring of the Company’s tax structure, (e) tax charges or benefits that are a result of a change in valuation allowance, and (f) tax charges resulting from the integration of intellectual properties from acquisitions. Management believes that the use of non-GAAP tax provisions provides a more meaningful measure of the Company’s operational performance.

These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with GAAP, and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. NetApp believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company’s results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate the Company’s results of operations in conjunction with the corresponding GAAP measures. NetApp management compensates for these limitations by analyzing current and projected results on a GAAP basis as well as a non-GAAP basis. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with generally accepted accounting principles in the United States. The non-GAAP financial measures are meant to supplement, and be viewed in conjunction with, GAAP financial measures.

     

NETAPP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)

(Unaudited)

 

July 27,
2018

April 27,
2018

 
ASSETS
 
Current assets:
Cash, cash equivalents and investments $ 4,811 $ 5,391
Accounts receivable 616 1,047
Inventories 97 122
Other current assets   329   392
Total current assets 5,853 6,952
 
Property and equipment, net 768 756
Goodwill and purchased intangible assets, net 1,820 1,833
Other non-current assets   464   450
Total assets $ 8,905 $ 9,991
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
Accounts payable $ 425 $ 609
Accrued expenses 592 825
Commercial paper notes 200 385
Short-term deferred revenue and financed unearned services revenue   1,623   1,712
Total current liabilities 2,840 3,531
Long-term debt 1,542 1,541
Other long-term liabilities 964 992
Long-term deferred revenue and financed unearned services revenue   1,637   1,651
Total liabilities   6,983   7,715
 
Stockholders' equity   1,922   2,276
Total liabilities and stockholders' equity $ 8,905 $ 9,991
 
 

NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)

 
Three Months Ended

July 27,
2018

 

July 28,
2017

 
Revenues:
Product $ 875 $ 727
Software maintenance 229 223
Hardware maintenance and other services   370   371
Net revenues   1,474   1,321
 
Cost of revenues:
Cost of product 398 376
Cost of software maintenance 7 7
Cost of hardware maintenance and other services   106   114
Total cost of revenues   511   497
Gross profit   963   824
 
Operating expenses:
Sales and marketing 409 423
Research and development 208 193
General and administrative 73 68
Restructuring charges   19  
Total operating expenses   709   684
 
Income from operations 254 140
 
Other income, net   18   5
 
Income before income taxes 272 145
 
Provision (benefit) for income taxes   (11 )   14
 
Net income $ 283 $ 131
 
Net income per share:
Basic $ 1.08 $ 0.49
 
Diluted $ 1.05 $ 0.47
 
Shares used in net income per share calculations:
Basic   262   270
 
Diluted   269   278
 
Cash dividends declared per share $ 0.40 $ 0.20
 
 

NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 
Three Months Ended

July 27,
2018

 

July 28,
2017

Cash flows from operating activities:
Net income $ 283 $ 131

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 49 51
Stock-based compensation 40 48
Deferred income taxes (26 )
Other items, net 8 5
Changes in assets and liabilities, net of acquisitions of businesses:
Accounts receivable 423 226
Inventories 25 24
Accounts payable (177 ) (58 )
Accrued expenses (221 ) (135 )

Deferred revenue and financed unearned services revenue

(87 ) (102 )
Long-term taxes payable 5
Changes in other operating assets and liabilities, net   4   60
Net cash provided by operating activities   326   250
Cash flows from investing activities:
Redemptions of investments, net 248 112
Purchases of property and equipment (64 ) (36 )
Acquisitions of businesses, net of cash acquired (24 )
Other investing activities, net   2   1
Net cash provided by investing activities   186   53
Cash flows from financing activities:

Proceeds from issuance of common stock under employee stock award plans

63 48

Payments for taxes related to net share settlement of stock awards

(84 ) (57 )

Repurchase of common stock

(500 ) (150 )

Proceeds from (repayments of) commercial paper notes, net

(185 ) 394

Dividends paid

(105 ) (54 )

Other financing activities, net

  (1 )  
Net cash provided by (used in) financing activities   (812 )   181
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash (14 ) 19
 
Net increase (decrease) in cash, cash equivalents and restricted cash (314 ) 503
Cash, cash equivalents and restricted cash:
Beginning of period   2,947   2,450
End of period $ 2,633 $ 2,953
 
 

SELECTED CONDENSED CONSOLIDATED BALANCE SHEET LINE ITEMS

(In millions)

(Unaudited)

 
As of April 27, 2018
     

As Previously
Reported

 

Impact of ASC
606 Adoption

  As Adjusted
ASSETS
Accounts receivable $ 1,009 $ 38 $ 1,047
Inventories 126 (4 ) 122
Other current assets 330 62 392
Other non-current assets 420 30 450
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term deferred revenue and financed unearned services revenue $ 1,804 $ (92 ) $ 1,712
Other long-term liabilities 961 31 992
Long-term deferred revenue and financed unearned services revenue 1,673 (22 ) 1,651
Total stockholders' equity 2,067 209 2,276
 
 
NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
       
Three Months Ended July 28, 2017

As Previously Reported

Impact of ASC 606
Adoption

As Adjusted
 
Revenues:
Product $ 723 $ 4 $ 727
Software maintenance 234 (11 ) 223
Hardware maintenance and other services   368   3   371
Net revenues   1,325   (4 )   1,321
 
Cost of revenues:
Cost of product 371 5 376
Cost of software maintenance 7 7
Cost of hardware maintenance and other services   113   1   114
Total cost of revenues   491   6   497
Gross profit   834   (10 )   824
 
Operating expenses:
Sales and marketing 425 (2 ) 423
Research and development 193 193
General and administrative   68     68
Total operating expenses   686   (2 )   684
 
Income from operations 148 (8 ) 140
 
Other income, net   5     5
 
Income before income taxes 153 (8 ) 145
 
Provision for income taxes   17   (3 )   14
 
Net income $ 136 $ (5 ) $ 131
 
Net income per share:
Basic $ 0.50 $ (0.01 ) $ 0.49
 
Diluted $ 0.49 $ (0.02 ) $ 0.47
 
Shares used in net income per share calculations:
Basic   270   270   270
 
Diluted   278   278   278
 
 
NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
  Three Months Ended October 27, 2017

As Previously Reported

   

Impact of ASC 606
Adoption

  As Adjusted
 
Revenues:
Product $ 807 $ 12 $ 819
Software maintenance 240 (16 ) 224
Hardware maintenance and other services   375   (3 )   372
Net revenues   1,422   (7 )   1,415
 
Cost of revenues:
Cost of product 399 (2 ) 397
Cost of software maintenance 6 6
Cost of hardware maintenance and other services   115   (3 )   112
Total cost of revenues   520   (5 )   515
Gross profit   902   (2 )   900
 
Operating expenses:
Sales and marketing 420 1 421
Research and development 194 194
General and administrative   69     69
Total operating expenses   683   1   684
 
Income from operations 219 (3 ) 216
 
Other income, net   6     6
 
Income before income taxes 225 (3 ) 222
 
Provision for income taxes   50   (2 )   48
 
Net income $ 175 $ (1 ) $ 174
 
Net income per share:
Basic $ 0.65 $ $ 0.65
 
Diluted $ 0.64 $ (0.01 ) $ 0.63
 
Shares used in net income per share calculations:
Basic   269   269   269
 
Diluted   275   275   275
 
 
NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
  Three Months Ended January 26, 2018

As Previously Reported

 

Impact of ASC 606
Adoption

  As Adjusted
 
Revenues:
Product $ 920 $ 32 $ 952
Software maintenance 237 (16 ) 221
Hardware maintenance and other services   366     366
Net revenues   1,523   16   1,539
 
Cost of revenues:
Cost of product 468 1 469
Cost of software maintenance 6 6
Cost of hardware maintenance and other services   108     108
Total cost of revenues   582   1   583
Gross profit   941   15   956
 
Operating expenses:
Sales and marketing 423 (4 ) 419
Research and development 193 193
General and administrative 72 72
Gain on sale of properties   (218 )     (218 )
Total operating expenses   470   (4 )   466
 
Income from operations 471 19 490
 
Other income, net   14     14
 
Income before income taxes 485 19 504
 
Provision for income taxes   991   (8 )   983
 
Net loss $ (506 ) $ 27 $ (479 )
 
Net loss per share:
Basic $ (1.89 ) $ 0.10 $ (1.79 )
 
Diluted $ (1.89 ) $ 0.10 $ (1.79 )
 
Shares used in net loss per share calculations:
Basic   268   268   268
 
Diluted   268   268   268
 
 
NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
  Three Months Ended April 27, 2018

As Previously Reported

   

Impact of ASC 606
Adoption

  As Adjusted
 
Revenues:
Product $ 1,011 $ 16 $ 1,027
Software maintenance 247 (13 ) 234
Hardware maintenance and other services   383     383
Net revenues   1,641   3   1,644
 
Cost of revenues:
Cost of product 500 (4 ) 496
Cost of software maintenance 6 6
Cost of hardware maintenance and other services   113     113
Total cost of revenues   619   (4 )   615
Gross profit   1,022   7   1,029
 
Operating expenses:
Sales and marketing 461 (18 ) 443
Research and development 203 203
General and administrative   71     71
Total operating expenses   735   (18 )   717
 
Income from operations 287 25 312
 
Other income, net   16     16
 
Income before income taxes 303 25 328
 
Provision for income taxes   32   6   38
 
Net income $ 271 $ 19 $ 290
 
Net income per share:
Basic $ 1.02 $ 0.07 $ 1.09
 
Diluted $ 0.99 $ 0.07 $ 1.06
 
Shares used in net income per share calculations:
Basic   265   265   265
 
Diluted   273   273   273
 
 
NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
  Year Ended April 27, 2018
As Previously Reported  

Impact of ASC 606
Adoption

  As Adjusted
 
Revenues:
Product $ 3,461 $ 64 $ 3,525
Software maintenance 958 (56 ) 902
Hardware maintenance and other services   1,492     1,492
Net revenues   5,911   8   5,919
 
Cost of revenues:
Cost of product 1,738 1,738
Cost of software maintenance 25 25
Cost of hardware maintenance and other services   449   (2 )   447
Total cost of revenues   2,212   (2 )   2,210
Gross profit   3,699   10   3,709
 
Operating expenses:
Sales and marketing 1,729 (23 ) 1,706
Research and development 783 783
General and administrative 280 280
Gain on sale of properties   (218 )     (218 )
Total operating expenses   2,574   (23 )   2,551
 
Income from operations 1,125 33 1,158
 
Other income (expense), net   41     41
 
Income before income taxes 1,166 33 1,199
 
Provision for income taxes   1,090   (7 )   1,083
 
Net income $ 76 $ 40 $ 116
 
Net income per share:
Basic $ 0.28 $ 0.15 $ 0.43
 
Diluted $ 0.28 $ 0.14 $ 0.42
 
Shares used in net income per share calculations:
Basic   268   268   268
 
Diluted   276   276   276
 
 
NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)
 
  Year Ended April 28, 2017
As Previously Reported  

Impact of ASC 606
Adoption

  As Adjusted
 
Revenues:
Product $ 3,006 $ 54 $ 3,060
Software maintenance 965 (60 ) 905
Hardware maintenance and other services   1,548   (22 )   1,526
Net revenues   5,519   (28 )   5,491
 
Cost of revenues:
Cost of product 1,614 (2 ) 1,612
Cost of software maintenance 28 28
Cost of hardware maintenance and other services   487     487
Total cost of revenues   2,129   (2 )   2,127
Gross profit   3,390   (26 )   3,364
 
Operating expenses:
Sales and marketing 1,633 18 1,651
Research and development 779 779
General and administrative 271 271
Restructuring charges 52 52
Gain on sale of properties   (10 )     (10 )
Total operating expenses   2,725   18   2,743
 
Income from operations 665 (44 ) 621
 
Other income (expense), net      
 
Income before income taxes 665 (44 ) 621
 
Provision for income taxes   156   (16 )   140
 
Net income $ 509 $ (28 ) $ 481
 
Net income per share:
Basic $ 1.85 $ (0.10 ) $ 1.75
 
Diluted $ 1.81 $ (0.10 ) $ 1.71
 
Shares used in net income per share calculations:
Basic   275   275   275
 
Diluted   281   281   281
 
 
NETAPP, INC.
SUPPLEMENTAL DATA
(In millions except net income per share, percentages, DSO, DIO, DPO, CCC and Inventory Turns)
(Unaudited)
             
 
Q1 FY'19 Q4 FY'18 Q3 FY'18 Q2 FY'18 Q1 FY'18 FY 2018 FY 2017
 
Revenues
Product $ 875 $ 1,027 $ 952 $ 819 $ 727 $ 3,525 $ 3,060
Strategic $ 612 $ 747 $ 657 $ 566 $ 498 $ 2,468 $ 2,000
Mature $ 263 $ 280 $ 295 $ 253 $ 229 $ 1,057 $ 1,060
Software Maintenance $ 229 $ 234 $ 221 $ 224 $ 223 $ 902 $ 905
Hardware Maintenance and Other Services $ 370 $ 383 $ 366 $ 372 $ 371 $ 1,492 $ 1,526
Hardware Maintenance Support Contracts $ 303 $ 310 $ 300 $ 306 $ 298 $ 1,214 $ 1,258
Professional and Other Services $ 67 $ 73 $ 66 $ 66 $ 73 $ 278 $ 268
Net Revenues $ 1,474 $ 1,644 $ 1,539 $ 1,415 $ 1,321 $ 5,919 $ 5,491
 
 
Geographic Mix
% of Q1 FY'19 Revenue % of Q4 FY'18 Revenue % of Q3 FY'18 Revenue % of Q2 FY'18 Revenue % of Q1 FY'18

Revenue

% of FY 2018

Revenue

% of FY 2017

Revenue

Americas 57 % 54 % 53 % 56 % 55 % 54 % 55 %
Americas Commercial 46 % 42 % 43 % 40 % 42 % 41 % 42 %
U.S. Public Sector 11 % 12 % 10 % 16 % 13 % 13 % 13 %
EMEA 29 % 33 % 33 % 30 % 30 % 32 % 32 %
Asia Pacific 14 % 13 % 14 % 14 % 15 % 14 % 13 %
 
 
Pathways Mix
% of Q1 FY'19 Revenue % of Q4 FY'18 Revenue % of Q3 FY'18 Revenue % of Q2 FY'18 Revenue % of Q1 FY'18

Revenue

% of FY 2018

Revenue

% of FY 2017

Revenue

Direct 29 % 21 % 22 % 22 % 20 % 21 % 22 %
Indirect 71 % 79 % 78 % 78 % 80 % 79 % 78 %
 
 
Non-GAAP Gross Margins
Q1 FY'19 Q4 FY'18 Q3 FY'18 Q2 FY'18 Q1 FY'18 FY 2018 FY 2017
Non-GAAP Gross Margin 66.2 % 63.3 % 63.0 % 64.5 % 63.3 % 63.5 % 62.1 %
Product 55.7 % 52.7 % 51.8 % 52.7 % 49.5 % 51.8 % 48.4 %
Software Maintenance 96.9 % 97.4 % 97.3 % 97.3 % 96.9 % 97.2 % 96.9 %
Hardware Maintenance and Other Services 72.2 % 71.0 % 71.3 % 70.4 % 70.1 % 70.7 % 68.9 %
 
 
Non-GAAP Income from Operations, Income before Income Taxes & Effective Tax Rate
Q1 FY'19 Q4 FY'18 Q3 FY'18 Q2 FY'18 Q1 FY'18 FY 2018 FY 2017
Non-GAAP Income from Operations $ 326 $ 360 $ 329 $ 269 $ 201 $ 1,159 $ 906
% of Net Revenues 22.1 % 21.9 % 21.4 % 19.0 % 15.2 % 19.6 % 16.5 %
Non-GAAP Income before Income Taxes $ 344 $ 376 $ 343 $ 275 $ 206 $ 1,200 $ 906
Non-GAAP Effective Tax Rate 18.3 % 18.4 % 15.7 % 19.6 % 19.4 % 18.1 % 18.4 %
 
 
 
Non-GAAP Net Income
Q1 FY'19 Q4 FY'18 Q3 FY'18 Q2 FY'18 Q1 FY'18 FY 2018 FY 2017
Non-GAAP Net Income $ 281 $ 307 $ 289 $ 221 $ 166 $ 983 $ 739
Non-GAAP Weighted Average Common Shares Outstanding, Diluted 269 273 276 275 278 276 281
Non-GAAP Income per Share, Diluted $ 1.04 $ 1.12 $ 1.05 $ 0.80 $ 0.60 $ 3.56 $ 2.63
 
 
Select Balance Sheet Items
Q1 FY'19 Q4 FY'18 Q3 FY'18 Q2 FY'18 Q1 FY'18
Deferred Revenue and Financed Unearned Services Revenue $ 3,260 $ 3,363 $ 3,143 $ 3,059 $ 3,127
DSO (days) 38 58 46 39 37
DIO (days) 17 18 14 18 25
DPO (days) 76 90 71 67 53
CCC (days) (20 ) (14 ) (12 ) (10 ) 8
Inventory Turns 21 20 26 21 15
 
Days sales outstanding (DSO) is defined as accounts receivable divided by net revenues, multiplied by the number of days in the quarter.
Days inventory outstanding (DIO) is defined as net inventories divided by cost of revenues, multiplied by the number of days in the quarter.
Days payables outstanding (DPO) is defined as accounts payable divided by cost of revenues, multiplied by the number of days in the quarter.
Cash conversion cycle (CCC) is defined as DSO plus DIO minus DPO.
Inventory turns is defined as annualized cost of revenues divided by net inventories.
 
 
Select Cash Flow Statement Items
Q1 FY'19 Q4 FY'18 Q3 FY'18 Q2 FY'18 Q1 FY'18 FY 2018 FY 2017
Net Cash Provided by Operating Activities $ 326 $ 494 $ 420 $ 314 $ 250 $ 1,478 $ 986
Purchases of Property and Equipment $ 64 $ 48 $ 32 $ 29 $ 36 $ 145 $ 175
Free Cash Flow $ 262 $ 446 $ 388 $ 285 $ 214 $ 1,333 $ 811
Free Cash Flow as a % of Net Revenues 17.8 % 27.1 % 25.2 % 20.1 % 16.2 % 22.5 % 14.8 %
 
Free cash flow is a non-GAAP measure and is defined as net cash provided by operating activities less purchases of property and equipment.
 
Some items may not add or recalculate due to rounding.
 
 
NETAPP, INC.
RECONCILIATION OF NON-GAAP TO GAAP
INCOME STATEMENT INFORMATION
(In millions, except net income (loss) per share amounts)
             
Q1'FY19 Q4'FY18 Q3'FY18 Q2'FY18 Q1'FY18 FY2018 FY2017
 
NET INCOME (LOSS) $ 283 $ 290 $ (479 ) $ 174 131 $ 116 $ 481
Adjustments:
Amortization of intangible assets 13 12 14 14 13 53 48
Stock-based compensation 40 36 38 39 48 161 195
Litigation settlements 5 5
Restructuring charges 19 52
Gain on sale of properties (218 ) (218 ) (10 )
Income tax effects (40 ) (31 ) 73 (6 ) (26 ) 10 (27 )
Income tax benefit of ASC 606 adoption (34 )
Tax reform       856       856  
NON-GAAP NET INCOME $ 281 $ 307 $ 289 $ 221 $ 166 $ 983 $ 739
 
COST OF REVENUES $ 511 $ 615 $ 583 $ 515 $ 497 $ 2,210 $ 2,127
Adjustments:
Amortization of intangible assets (9 ) (9 ) (10 ) (9 ) (8 ) (36 ) (29 )
Stock-based compensation   (4 )   (3 )   (3 )   (3 )   (4 )   (13 )   (17 )
NON-GAAP COST OF REVENUES $ 498 $ 603 $ 570 $ 503 $ 485 $ 2,161 $ 2,081
 
COST OF PRODUCT REVENUES $ 398 $ 496 $ 469 $ 397 $ 376 $ 1,738 $ 1,612
Adjustments:
Amortization of intangible assets (9 ) (9 ) (10 ) (9 ) (8 ) (36 ) (29 )
Stock-based compensation   (1 )   (1 )     (1 )   (1 )   (3 )   (4 )
NON-GAAP COST OF PRODUCT REVENUES $ 388 $ 486 $ 459 $ 387 $ 367 $ 1,699 $ 1,579
 
COST OF HARDWARE MAINTENANCE AND OTHER SERVICES REVENUES $ 106 $ 113 $ 108 $ 112 $ 114 $ 447 $ 487
Adjustment:
Stock-based compensation   (3 )   (2 )   (3 )   (2 )   (3 )   (10 )   (13 )
NON-GAAP COST OF HARDWARE MAINTENANCE AND OTHER SERVICES REVENUES $ 103 $ 111 $ 105 $ 110 $ 111 $ 437 $ 474
 
GROSS PROFIT $ 963 $ 1,029 $ 956 $ 900 $ 824 $ 3,709 $ 3,364
Adjustments:
Amortization of intangible assets 9 9 10 9 8 36 29
Stock-based compensation   4   3   3   3   4   13   17
NON-GAAP GROSS PROFIT $ 976 $ 1,041 $ 969 $ 912 $ 836 $ 3,758 $ 3,410
 
 
NETAPP, INC.
RECONCILIATION OF NON-GAAP TO GAAP
INCOME STATEMENT INFORMATION
(In millions, except net income (loss) per share amounts)
             
Q1'FY19 Q4'FY18 Q3'FY18 Q2'FY18 Q1'FY18 FY2018 FY2017
 
SALES AND MARKETING EXPENSES $ 409 $ 443 $ 419 $ 421 $ 423 $ 1,706 $ 1,651
Adjustments:
Amortization of intangible assets (4 ) (3 ) (4 ) (5 ) (5 ) (17 ) (19 )
Stock-based compensation   (17 )   (15 )   (16 )   (16 )   (21 )   (68 )   (84 )
NON-GAAP SALES AND MARKETING EXPENSES $ 388 $ 425 $ 399 $ 400 $ 397 $ 1,621 $ 1,548
 
RESEARCH AND DEVELOPMENT EXPENSES $ 208 $ 203 $ 193 $ 194 $ 193 $ 783 $ 779
Adjustment:
Stock-based compensation   (12 )   (11 )   (11 )   (12 )   (15 )   (49 )   (59 )
NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES $ 196 $ 192 $ 182 $ 182 $ 178 $ 734 $ 720
 
GENERAL AND ADMINISTRATIVE EXPENSES $ 73 $ 71 $ 72 $ 69 $ 68 $ 280 $ 271
Adjustment:
Stock-based compensation (7 ) (7 ) (8 ) (8 ) (8 ) (31 ) (35 )
Litigation settlements       (5 )       (5 )  
NON-GAAP GENERAL AND ADMINISTRATIVE EXPENSES $ 66 $ 64 $ 59 $ 61 $ 60 $ 244 $ 236
 
RESTRUCTURING CHARGES $ 19 $ $ $ $ $ $ 52
Adjustment:
Restructuring charges   (19 )             (52 )
NON-GAAP RESTRUCTURING CHARGES $ $ $ $ $ $ $
 
GAIN ON SALE OF PROPERTIES $ $ $ (218 ) $ $ $ (218 ) $ (10 )
Adjustment:
Gain on sale of properties       218       218   10
NON-GAAP GAIN ON SALE OF PROPERTIES $ $ $ $ $ $ $
 
OPERATING EXPENSES $ 709 $ 717 $ 466 $ 684 $ 684 $ 2,551 $ 2,743
Adjustments:
Amortization of intangible assets (4 ) (3 ) (4 ) (5 ) (5 ) (17 ) (19 )
Stock-based compensation (36 ) (33 ) (35 ) (36 ) (44 ) (148 ) (178 )
Litigation settlements (5 ) (5 )
Restructuring charges (19 ) (52 )
Gain on sale of properties       218       218   10
NON-GAAP OPERATING EXPENSES $ 650 $ 681 $ 640 $ 643 $ 635 $ 2,599 $ 2,504
 
 
NETAPP, INC.
RECONCILIATION OF NON-GAAP TO GAAP
INCOME STATEMENT INFORMATION
(In millions, except net income (loss) per share amounts)
             
Q1'FY19 Q4'FY18 Q3'FY18 Q2'FY18 Q1'FY18 FY2018 FY2017
 
INCOME FROM OPERATIONS $ 254 $ 312 $ 490 $ 216 $ 140 $ 1,158 $ 621
Adjustments:
Amortization of intangible assets 13 12 14 14 13 53 48
Stock-based compensation 40 36 38 39 48 161 195
Litigation settlements 5 5
Restructuring charges 19 52
Gain on sale of properties       (218 )       (218 )   (10 )
NON-GAAP INCOME FROM OPERATIONS $ 326 $ 360 $ 329 $ 269 $ 201 $ 1,159 $ 906
 
INCOME BEFORE INCOME TAXES $ 272 $ 328 $ 504 $ 222 $ 145 $ 1,199 $ 621
Adjustments:
Amortization of intangible assets 13 12 14 14 13 53 48
Stock-based compensation 40 36 38 39 48 161 195
Litigation settlements 5 5
Restructuring charges 19 52
Gain on sale of properties       (218 )       (218 )   (10 )
NON-GAAP INCOME BEFORE INCOME TAXES $ 344 $ 376 $ 343 $ 275 $ 206 $ 1,200 $ 906
 
PROVISION FOR INCOME TAXES $ (11 ) $ 38 $ 983 $ 48 $ 14 $ 1,083 $ 140
Adjustments:
Income tax effects 40 31 (73 ) 6 26 (10 ) 27
Income tax benefit of ASC 606 adoption 34
Tax reform       (856 )       (856 )  
NON-GAAP PROVISION FOR INCOME TAXES $ 63 $ 69 $ 54 $ 54 $ 40 $ 217 $ 167
 
NET INCOME (LOSS) PER SHARE $ 1.05 $ 1.06 $ (1.79 ) $ 0.63 $ 0.47 $ 0.42 $ 1.71
Adjustments:
Amortization of intangible assets 0.05 0.04 0.05 0.05 0.05 0.19 0.17
Stock-based compensation 0.15 0.13 0.14 0.14 0.17 0.58 0.69
Litigation settlements 0.02 0.02
Restructuring charges 0.07 0.19
Gain on sale of properties (0.81 ) (0.79 ) (0.04 )
Income tax effects (0.15 ) (0.11 ) 0.27 (0.02 ) (0.09 ) 0.04 (0.10 )
Income tax benefit of ASC 606 adoption (0.13 )
Tax reform       3.19       3.10  
NON-GAAP NET INCOME PER SHARE $ 1.04 $ 1.12 $ 1.05 $ 0.80 $ 0.60 $ 3.56 $ 2.63
 
In Q3'FY18, our GAAP net loss per share was calculated using basic shares of 268 million, as the impact of common stock equivalents would have been anti-dilutive. Additionally, each adjustment presented in the reconciliation was computed using basic shares. However, because we reported net income on a non-GAAP basis, non-GAAP net income per share was computed using diluted shares of 276 million. As a result of the difference in the number of shares, the summation of GAAP net loss per share and the adjustments does not equal non-GAAP net income per share.
 
 
RECONCILIATION OF NON-GAAP TO GAAP
GROSS MARGIN
($ in millions)
     
Q1'FY19   Q4'FY18   Q3'FY18   Q2'FY18   Q1'FY18 FY2018 FY2017
 
Gross margin-GAAP 65.3 % 62.6 % 62.1 % 63.6 % 62.4 % 62.7 % 61.3 %
Cost of revenues adjustments   0.9 %   0.7 %   0.8 %   0.8 %   0.9 %   0.8 %   0.8 %
Gross margin-Non-GAAP 66.2 % 63.3 % 63.0 % 64.5 % 63.3 % 63.5 % 62.1 %
 
GAAP cost of revenues $ 511 $ 615 $ 583 $ 515 $ 497 $ 2,210 $ 2,127
Cost of revenues adjustments:
Amortization of intangible assets (9 ) (9 ) (10 ) (9 ) (8 ) (36 ) (29 )
Stock-based compensation   (4 )   (3 )   (3 )   (3 )   (4 )   (13 )   (17 )
Non-GAAP cost of revenues $ 498 $ 603 $ 570 $ 503 $ 485 $ 2,161 $ 2,081
 
Net revenues $ 1,474 $ 1,644 $ 1,539 $ 1,415 $ 1,321 $ 5,919 $ 5,491
 
 
RECONCILIATION OF NON-GAAP TO GAAP
PRODUCT GROSS MARGIN
($ in millions)
     
Q1'FY19   Q4'FY18   Q3'FY18   Q2'FY18   Q1'FY18 FY2018 FY2017
 
Product gross margin-GAAP 54.5 % 51.7 % 50.7 % 51.5 % 48.3 % 50.7 % 47.3 %
Cost of product revenues adjustments   1.1 %   1.0 %   1.1 %   1.2 %   1.2 %   1.1 %   1.1 %
Product gross margin-Non-GAAP 55.7 % 52.7 % 51.8 % 52.7 % 49.5 % 51.8 % 48.4 %
 
GAAP cost of product revenues $ 398 $ 496 $ 469 $ 397 $ 376 $ 1,738 $ 1,612
Cost of product revenues adjustments:
Amortization of intangible assets (9 ) (9 ) (10 ) (9 ) (8 ) (36 ) (29 )
Stock-based compensation   (1 )   (1 )     (1 )   (1 )   (3 )   (4 )
Non-GAAP cost of product revenues $ 388 $ 486 $ 459 $ 387 $ 367 $ 1,699 $ 1,579
 
Product revenues $ 875 $ 1,027 $ 952 $ 819 $ 727 $ 3,525 $ 3,060
 
 
RECONCILIATION OF NON-GAAP TO GAAP
HARDWARE MAINTENANCE AND OTHER SERVICES GROSS MARGIN
($ in millions)
     
Q1'FY19   Q4'FY18   Q3'FY18   Q2'FY18   Q1'FY18 FY2018 FY2017
 
Hardware maintenance and other services gross margin-GAAP 71.4 % 70.5 % 70.5 % 69.9 % 69.3 % 70.0 % 68.1 %
Cost of hardware maintenance and other services revenues adjustment   0.8 %   0.5 %   0.8 %   0.5 %   0.8 %   0.7 %   0.9 %
Hardware maintenance and other services gross margin-Non-GAAP 72.2 % 71.0 % 71.3 % 70.4 % 70.1 % 70.7 % 68.9 %
 
GAAP cost of hardware maintenance and other services revenues $ 106 $ 113 $ 108 $ 112 $ 114 $ 447 $ 487
Cost of hardware maintenance and other services revenues adjustment:
Stock-based compensation   (3 )   (2 )   (3 )   (2 )   (3 )   (10 )   (13 )
Non-GAAP cost of hardware maintenance and other services revenues $ 103 $ 111 $ 105 $ 110 $ 111 $ 437 $ 474
 
Hardware maintenance and other services revenues $ 370 $ 383 $ 366 $ 372 $ 371 $ 1,492 $ 1,526
 
 
RECONCILIATION OF NON-GAAP TO GAAP
EFFECTIVE TAX RATE
         
Q1'FY19   Q4'FY18   Q3'FY18   Q2'FY18   Q1'FY18 FY2018 FY2017
         
GAAP effective tax rate (4.0 )% 11.6 % 195.0 % 21.6 % 9.7 % 90.3 % 22.5 %
Adjustment:
Income tax effects 9.8 % 6.8 % (9.5 )% (2.0 )% 9.8 % (0.8 )% (4.1 )%
Income tax benefit of ASC 606 adoption 12.5 % % % % % % %
Tax reform   %   %   (169.8 )%   %   %   (71.4 )%   %
Non-GAAP effective tax rate 18.3 % 18.4 % 15.7 % 19.6 % 19.4 % 18.1 % 18.4 %
 
 
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES
TO FREE CASH FLOW (NON-GAAP)
(In millions)
     
Q1'FY19   Q4'FY18   Q3'FY18   Q2'FY18   Q1'FY18 FY2018 FY2017
Net cash provided by operating activities $ 326 $ 494 $ 420 $ 314 $ 250 $ 1,478 $ 986
Purchases of property and equipment   (64 )   (48 )   (32 )   (29 )   (36 )   (145 )   (175 )
Free cash flow $ 262 $ 446 $ 388 $ 285 $ 214 $ 1,333 $ 811
 

Some items may not add or recalculate due to rounding.

 
 
NETAPP, INC.
RECONCILIATION OF NON-GAAP GUIDANCE TO GAAP
EXPRESSED AS EARNINGS PER SHARE
SECOND QUARTER FISCAL 2019
   
Second Quarter
Fiscal 2019  
 
Non-GAAP Guidance - Net Income Per Share $0.94 - $1.00
 
Adjustments of Specific Items to Net Income
Per Share for the Second Quarter Fiscal 2019:
Amortization of intangible assets (0.05 )
Stock-based compensation expense (0.14 )
Income tax effects   0.04  
Total Adjustments (0.15 )
 
GAAP Guidance - Net Income Per Share $0.79 - $0.85
 

Source: NetApp

NetApp
Press Contact:
Madge Miller, 1 408-419-5263
madge.miller@netapp.com
or
Investor Contact:
Kris Newton, 1 408-822-3312
kris.newton@netapp.com