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Room 4561
April 28, 2006
Steven J. Gomo
Chief Financial Officer
Network Appliance, Inc.
495 East Java Drive
Sunnyvale, CA 94089
Re: Network Appliance, Inc.
Form 10-K for the fiscal year ended April 30, 2005
Filed on July 8, 2005
Form 8-Ks
Filed on August 17, 2005 and November 16, 2005
File No. 000-27130
Dear Mr. Gomo:
We have reviewed the above referenced filings and have the
following comments. Please note that we have limited our review
to
the matters addressed in the comments below. We may ask you to
provide us with supplemental information so we may better
understand
your disclosures. Please be as detailed as necessary in your
explanations. After reviewing this information, we may raise
additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form 10-K for the Fiscal Year Ended April 30, 2005
Item 7. Management`s Discussion and Analysis of Finance
Condition
and Results of Operations
Overview, page 33
1. Tell us what consideration you gave to disclosing key
indicators
of financial condition and operating performance pursuant to
Section
III.B.1 of SEC Release 33-8350, Commission Guidance Regarding
Management`s Discussion and Analysis of Financial Condition and
Results of Operations. As part of your response, clarify the key
variables and other qualitative and quantitative factors you have
identified that are necessary to understand and evaluate your
company.
Critical Accounting Estimates and Polices, page 36
2. Your critical accounting policies should describe more fully
your
estimates and assumptions that are highly uncertain or susceptible
to
change and the related material impact on financial condition or
operating performance. Disclosure should be considered as to why
they bear risk of change, how you arrived at the estimate,
accuracy
of the estimate/assumption in the past, how they have changed, and
reasonably likely future changes. For further disclosure guidance
see Financial Reporting Release No. 60, Cautionary Advice
Regarding
Disclosure About Critical Accounting Policies and Release No. 34-
45907, Proposed Rule: Disclosure in Management`s Discussion and
Analysis about the Application of Critical Accounting Policies.
New Accounting Standards, page 40
3. Your disclosure states that the adoption of SFAS 123R will have
a
"significant impact on our consolidated financial statements."
Tell
us what consideration you gave to disclosing the impact that is
expected to have on your financial statements pursuant to SAB
Topic
11M with respect to the following:
* A discussion of the quantitative impact that adoption of the
standard is expected to have on the financial statements, unless
not
known or reasonably estimable and in that case include a statement
to
that effect.
* Disclosure of the potential impact of other significant matters
that you believe might result from the adoption of the standard
(such
as technical violations of debt covenant agreements, planned or
intended changes in business practices, etc.).
Fiscal 2005 Compared to Fiscal 2004
Product Revenues, page 42
4. You disclose that "increase in product revenues was
specifically
attributable to increased software licenses and software
subscriptions and an increase in units shipped." You also
disclose
on page 42 that product revenues were negatively affected by
lower-
cost-per-megabyte disks and declines both in average selling
prices
and older product unit sales. Tell us your consideration of
Regulation S-K, Item 303(a) (3) (ii) and (iii), which require you
to
disclose any known trends or uncertainties that have had or that
you
reasonably expect will have a material favorable or unfavorable
impact on net sales or revenues or income from continuing
operations.
Address in your response the extent to which increases in revenues
are attributable to increases in prices, the volume of goods or
services being sold, or to the introduction of new products or
services. In this respect, we believe you should quantify the
impact
of the favorable and negative factors that affect product
revenues.
See Item 303 of Regulation S-K and the "Commission Guidance
Regarding
Management`s Discussion and Analysis of Financial Condition and
Results of Operations," Release 33-8350 for further disclosure
guidance.
5. You also disclose 2005 to 2004 material changes in Service
Revenues, International total revenues and Product Gross Margin.
In
addition, you state that product gross margin was favorably
affected
by "favorable product and add-on software mix" and negatively
affected by "increased sales through certain indirect channels,
which
typically carry a lower gross margin than our direct sales." When
discussing material changes and the impact of positive and
negative
factors, your analysis should provide the underlying reasons or
implications of changes and factors and the financial implications
of
any trends, events or uncertainties. See Item 303 of Regulation
S-K
and the "Commission Guidance Regarding Management`s Discussion and
Analysis of Financial Condition and Results of Operations,"
Release
33-8350 for further disclosure guidance.
Note 2. Significant Accounting Policies
Revenue Recognition and Allowance, page 65
6. We note you derive a significant portion of your sales from the
resale of disk drives as components of your storage system from
your
disclosure on page 25. This and other disclosure noted in your
filing indicates that your product revenue includes a hardware and
software element. For example we note the "add-on software"
related
to sales of your current product portfolio as disclosed on page
42.
Tell us how you considered EITF Issue No. 03-5 when determining
whether the non-software deliverables included in your arrangement
(hardware, hardware installation and hardware maintenance) are
software related and included in the scope of SOP 97-2.
7. We note your arrangements include multiple elements and that
you
allocate revenue to each element using the residual method based
on
vendor specific objective evidence ("VSOE") of fair value of the
undelivered items. Please address the following with respect to
your
policy for establishing VSOE of fair value of your elements.
* Clarify which elements of your arrangements that you have and
have
not established VSOE of fair value.
* Your disclosure indicates that VSOE of fair value is based on
the
price charged when the element is sold separately. Please provide
your analysis that demonstrates how you have established VSOE of
fair
value for each element in accordance with paragraphs 10 and 57 of
SOP
97-2, as amended.
* We note that your software subscriptions and hardware
maintenance
can have terms of up to three years. If you have established VSOE
of
fair value of these elements based on renewal rates, explain how
you
have determine that such rates are substantive in accordance with
TPA
5100.52.
* We note that you offer pricing discounts based on your
disclosure
on page 43. This implies that you sell your products and services
at
varying prices. Explain the types of discounts that you offer for
each element in your arrangements. Clarify whether these
discounts
impact your ability to establish VSOE of fair value of the
elements
in your arrangements as there is no specific amount that
represents
VSOE of fair value.
8. We note your disclosure, "(i)f undelivered products or services
exist that are essential to the functionality of the delivered
product in the arrangement, delivery is not considered to have
occurred." Clarify all post-delivery obligations that you include
in
your arrangements that cause you to determine that delivery has
not
occurred and whether such terms are typical provisions in your
arrangements. Further, explain how you determine that the post-
delivery obligations have been satisfied and that delivery has
occurred. For your multiple element arrangements that include
post-
delivery obligations, explain how the post-delivery obligations
impact the revenue recognition of the other elements in the
arrangement.
9. Where you have two or more undelivered elements in multiple
element arrangements, such as PCS and maintenance services
(comprised
of technical support and hardware maintenance), tell us how your
accounting and disclosure complies with paragraphs 12 and 58 of
SOP
97-2.
10. We note your disclosure that the software subscription element
of
your arrangements includes unspecified product upgrades and
enhancements on a when-and-if-available basis, bug fixes, and
patch
releases. Please clarify the following with respect to this
disclosure.
* Please describe the various deliverables that comprise your
software subscription arrangements.
* Clarify whether software subscriptions are post contract
customer
support (PCS) as defined by paragraph 56 of SOP 97-2. If so,
clarify
why you characterize amounts generated from PCS sales as product,
not
service revenues.
* Explain whether this element includes unspecified additional
software products and if so, explain your consideration of
paragraphs
48 and 49 of SOP 97-2. Clarify how you differentiate between
unspecified product upgrades and additional software products.
11. We note you offer both recourse and non recourse lease
financing
arrangements to your customers based on your disclosure on page
91.
Your disclosure further indicates that the financing is provided
by
third-party leasing companies. Clarify whether your involvement
in
this financing activity is limited to transferring financial
assets
(i.e. accounts receivable) to the third-party leasing companies.
If
so, tell us how you consider paragraph 9 of SFAS 140 when
determining
whether or not you have surrendered control of the transferred
receivables. In addition, clarify whether you enter into
arrangements whereby you engage in leasing or financing activity
directly to your customers.
12. Tell us the components of deferred revenue and your
consideration
for disclosing such components.
Note 8. Segment, Geographic, and Customer Information, page 83
13. We note that you aggregate your geographic operating segments
into one reportable segment. Tell us the operating segments you
have
identified and demonstrate how you have met all of the criteria of
paragraph 17 of SFAS 131 to aggregate the identified operating
segments. As part of your response, tell us your consideration of
paragraphs 73 and 74 of SFAS 131, which indicates that aggregation
is
appropriate only if "operating segments have characteristics so
similar that they can be expected to essentially have the same
future
prospects."
14. We note that you market your products and services, in part,
as
`IT Solutions` and `Business Solutions`. Clarify how you have
evaluated paragraphs 10 through 15 of SFAS 131 when determining
that
these solutions do not represent separate operating segments. In
this respect, we note that you use combination of products,
technologies, and partners to deliver each solution. Clarify what
information is reviewed by your chief operating decision maker to
allocate such resources to these solutions.
Note 11. Business Combination, page 85
15. We note your disclosure of the Spinnaker acquisition here and
the
Decru acquisition on page 17 of the Form 10-Q for the quarterly
period ended October 28, 2005. Explain why a significant amount
of
the purchase price for each acquisition was allocated to Goodwill
and
how you determined the fair value of the acquired technology. In
this respect, we note your disclosure that the "The combination of
NetApp unified storage and data management solutions with advanced
distributed storage technologies acquired from Spinnaker will
further
our strategy to deliver Storage Grid solutions as the foundation
for
data infrastructures of the future" and "Decru`s technology will
augment our data protection and security solutions and provide for
a
wide variety of deployments with vendors` storage systems in NAS,
DAS, SAN, iSCSI, and even tape backup environments, which will
allow
us to pursue extended market opportunities." Clarify why more
value
was not allocated to acquired technology as your disclosure
indicates
that you will generate significant cash flows from such
technology.
In addition, your disclosure should include a description of the
factors that contributed to a purchase price that resulted in
recognition of goodwill. See paragraph 51(b) of SFAS 141.
16. Please provide your significance analysis of the Decru
acquisition in accordance with Rule 3-05 and Rule 1-02(w) of
Regulation S-X.
Form 8-Ks filed on August 17, 2005 and November 16, 2005
17. We note your use of non-GAAP financial measures excludes a
number
of recurring items. Demonstrate the usefulness of each non-GAAP
measure in assessing performance when these recurring items are a
result of your operations and have contributed to your
performance.
Refer to Question 8, Frequently Asked Questions Regarding the Use
of
Non-GAAP Financial Measures. As part of your response, ensure to
demonstrate the way that management uses the non-GAAP measure to
conduct or evaluate your business. If you are able to overcome
the
burden of demonstrating the usefulness of each measure, ensure
future
uses of non-GAAP measures include all of the disclosures
identified
in Item 10 of Regulation S-X and the guidance set forth in the
Frequently Asked Questions Regarding the Use of Non-GAAP Financial
Measures.
* * * * *
As appropriate, please amend your filings and respond to
these
comments within ten business days or tell us when you will provide
us
with a response. Please submit all correspondence and
supplemental
materials on EDGAR as required by Rule 101 of Regulation S-T. You
may wish to provide us with marked copies of any amendment to
expedite our review. Please furnish a cover letter with any
amendment that keys your responses to our comments and provides
any
requested information. Detailed cover letters greatly facilitate
our
review. Please understand that we may have additional comments
after
reviewing any amendment and your responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
If you have any questions, please call Chris White at (202)
551-
3461 or myself at (202) 551-3226.
Sincerely,
Craig Wilson
Senior Assistant Chief
Accountant
Steven J. Gomo
Network Appliance, Inc.
April 28, 2006
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