NetApp(NTAP) - 2025 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This part presents NetApp's unaudited condensed consolidated financial statements and management's discussion for the quarter ended July 26, 2024 Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents NetApp, Inc.'s unaudited condensed consolidated financial statements for the quarter ended July 26, 2024, including balance sheets, income statements, comprehensive income statements, cash flow statements, and stockholders' equity statements, along with detailed notes explaining the company's business, accounting policies, financial instruments, debt, leases, equity, and other significant financial activities Condensed Consolidated Balance Sheets This section provides a snapshot of NetApp's financial position, detailing assets, liabilities, and stockholders' equity as of July 26, 2024, and April 26, 2024 Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | July 26, 2024 | April 26, 2024 | | :----------------------------------- | :------------ | :------------- | | Total current assets | $4,321 | $4,897 | | Total assets | $9,311 | $9,887 | | Total current liabilities | $4,512 | $4,106 | | Total liabilities | $8,382 | $8,741 | | Total stockholders' equity | $929 | $1,146 | - Total assets decreased by $576 million from April 26, 2024, to July 26, 2024, primarily driven by a decrease in cash and cash equivalents and accounts receivable[17] - Total current liabilities increased by $406 million, mainly due to a significant increase in the current portion of long-term debt from $400 million to $1,149 million[17] Condensed Consolidated Statements of Income This section presents NetApp's financial performance, including revenues, gross profit, operating income, and net income for the three months ended July 26, 2024, and July 28, 2023 Condensed Consolidated Statements of Income Highlights (Three Months Ended, in millions, except per share amounts) | Metric | July 26, 2024 | July 28, 2023 | Change (YoY) | | :--------------------------- | :------------ | :------------ | :----------- | | Net revenues | $1,541 | $1,432 | +$109 | | Product revenues | $669 | $590 | +$79 | | Services revenues | $872 | $842 | +$30 | | Gross profit | $1,098 | $996 | +$102 | | Income from operations | $282 | $178 | +$104 | | Net income | $248 | $149 | +$99 | | Diluted Net income per share | $1.17 | $0.69 | +$0.48 | - Net revenues increased by 8% year-over-year, driven by growth in both product and services revenues[19] - Net income significantly increased by 66% year-over-year, and diluted EPS rose by 69.6% from $0.69 to $1.17[19] Condensed Consolidated Statements of Comprehensive Income This section outlines NetApp's comprehensive income, including net income and other comprehensive income components, for the three months ended July 26, 2024, and July 28, 2023 Condensed Consolidated Statements of Comprehensive Income (Three Months Ended, in millions) | Metric | July 26, 2024 | July 28, 2023 | | :------------------------------------------ | :------------ | :------------ | | Net income | $248 | $149 | | Other comprehensive income | $0 | $3 | | Comprehensive income | $248 | $152 | - Comprehensive income for the three months ended July 26, 2024, was $248 million, a substantial increase from $152 million in the prior year period, primarily reflecting the higher net income[21] Condensed Consolidated Statements of Cash Flows This section details NetApp's cash inflows and outflows from operating, investing, and financing activities for the three months ended July 26, 2024, and July 28, 2023 Condensed Consolidated Statements of Cash Flows Highlights (Three Months Ended, in millions) | Activity | July 26, 2024 | July 28, 2023 | | :----------------------------------- | :------------ | :------------ | | Net cash provided by operating activities | $341 | $453 | | Net cash used in investing activities | $(51) | $(228) | | Net cash used in financing activities | $(548) | $(521) | | Net change in cash, cash equivalents and restricted cash | $(250) | $(296) | - Net cash provided by operating activities decreased to $341 million from $453 million year-over-year, despite higher net income, due to changes in working capital[24] - Net cash used in investing activities significantly decreased from $(228) million to $(51) million, primarily due to lower net purchases of investments[24] - Net cash used in financing activities increased to $(548) million from $(521) million, mainly driven by higher payments for taxes related to stock awards and increased common stock repurchases[24] Condensed Consolidated Statements of Stockholders' Equity This section presents changes in NetApp's stockholders' equity, including share repurchases, dividends, and net income, for the three months ended July 26, 2024 Condensed Consolidated Statements of Stockholders' Equity Highlights (Three Months Ended, in millions, except shares) | Metric | April 26, 2024 | July 26, 2024 | Change | | :----------------------------------- | :------------- | :------------ | :----- | | Shares outstanding | 206 | 205 | (1) | | Total stockholders' equity | $1,146 | $929 | $(217) | - Total stockholders' equity decreased by $217 million, primarily due to $400 million in common stock repurchases and $107 million in cash dividends, partially offset by $248 million in net income and $85 million in stock-based compensation[25] - The company repurchased 3 million shares of common stock during the quarter, reducing total outstanding shares[25] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering accounting policies, financial instruments, and other significant financial activities 1. Description of Business and Significant Accounting Policies This note describes NetApp's business operations and outlines the significant accounting policies used in preparing the financial statements - NetApp, Inc. provides intelligent data infrastructure solutions, combining unified data storage, integrated data services, and CloudOps solutions to enable seamless data management and support AI workloads[28][116] - The company's fiscal year ends on the last Friday in April, with fiscal years 2025 and 2024 each being 52-week years with 13 weeks per quarter[29] - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information, reflecting normal recurring adjustments and management estimates[30][31] 2. Recent Accounting Pronouncements This note discusses recently issued accounting pronouncements and their potential impact on NetApp's financial reporting - The company is evaluating ASU 2023-09 (Income Taxes) effective for fiscal years after December 15, 2024, which expands income tax disclosures[32] - NetApp will adopt ASU 2023-07 (Segment Reporting) for annual periods starting in fiscal 2025, expecting enhanced financial statement disclosures only[33] 3. Goodwill and Purchased Intangible Assets, Net This note provides details on NetApp's goodwill allocation by segment and the net carrying value of purchased intangible assets Goodwill by Reportable Segment (in millions) | Segment | Amount | | :------------- | :----- | | Hybrid Cloud | $1,714 | | Public Cloud | $1,045 | | Total goodwill | $2,759 | Purchased Intangible Assets, Net (in millions) | Asset Type | July 26, 2024 (Net) | April 26, 2024 (Net) | | :-------------------------- | :------------------ | :------------------- | | Developed technology | $62 | $71 | | Customer contracts/relationships | $47 | $52 | | Other purchased intangibles | $1 | $1 | | Total | $110 | $124 | - Amortization expense for purchased intangible assets totaled $14 million for the three months ended July 26, 2024, with $41 million remaining for fiscal year 2025[36] 4. Supplemental Financial Information This note offers additional financial details, including cash and cash equivalents, deferred revenue, and other income components Cash and Cash Equivalents (in millions) | Metric | July 26, 2024 | April 26, 2024 | | :----------------------------------- | :------------ | :------------- | | Cash and cash equivalents | $1,652 | $1,903 | | Restricted cash | $7 | $6 | | Cash, cash equivalents and restricted cash | $1,659 | $1,909 | Deferred Revenue and Financed Unearned Services Revenue (in millions) | Component | July 26, 2024 | April 26, 2024 | | :---------------------------------------- | :------------ | :------------- | | Deferred product revenue | $57 | $59 | | Deferred services revenue | $4,065 | $4,123 | | Financed unearned services revenue | $47 | $52 | | Total | $4,169 | $4,234 | | Short-term | $2,133 | $2,176 | | Long-term | $2,036 | $2,058 | - Remaining performance obligations totaled $4.5 billion as of July 26, 2024, with approximately 50% expected to be recognized as revenue in the next 12 months[46] Other Income, Net (Three Months Ended, in millions) | Component | July 26, 2024 | July 28, 2023 | | :--------------- | :------------ | :------------ | | Interest income | $36 | $28 | | Interest expense | $(16) | $(16) | | Other, net | $(3) | $(4) | | Total | $17 | $8 | 5. Financial Instruments and Fair Value Measurements This note describes NetApp's financial instruments and the methodologies used for fair value measurements - The company uses a three-level hierarchy for fair value measurements, with Level 1 for observable inputs in active markets and Level 2 for less active markets or derived observable data[51][52][53] Investments at Cost or Amortized Cost (in millions) | Investment Type | July 26, 2024 | April 26, 2024 | | :---------------------------------- | :------------ | :------------- | | U.S. Treasury and government debt securities | $1,501 | $1,349 | | Money market funds | $692 | $1,161 | | Certificates of deposit | $34 | $12 | | Mutual funds | $43 | $38 | | Total debt and equity securities | $2,270 | $2,560 | - All debt investments as of July 26, 2024, are due to mature in one year or less[57] - The fair value of long-term debt was approximately $2,254 million as of July 26, 2024, based on observable market prices in a less active market[60] 6. Financing Arrangements This note details NetApp's long-term debt, credit facilities, and future principal debt maturities Long-Term Debt (Senior Notes) (in millions) | Senior Notes (Due) | Effective Interest Rate | July 26, 2024 (Principal) | April 26, 2024 (Principal) | | :----------------- | :---------------------- | :------------------------ | :------------------------- | | September 2024 | 3.42% | $400 | $400 | | June 2025 | 2.03% | $750 | $750 | | June 2027 | 2.51% | $550 | $550 | | June 2030 | 2.81% | $700 | $700 | | Total principal amount | | $2,400 | $2,400 | | Current portion of long-term debt | | $(1,149) | $(400) | | Total long-term debt | | $1,244 | $1,992 | - The company has a $1.0 billion commercial paper program and a $1.0 billion revolving unsecured credit facility, with no amounts outstanding or drawn as of July 26, 2024[66][67] - Future principal debt maturities include $400 million in fiscal 2025 (remainder), $750 million in fiscal 2026, $550 million in fiscal 2028, and $700 million thereafter[65] 7. Leases This note outlines NetApp's lease arrangements, including operating lease costs and balance sheet information - NetApp leases real estate, equipment, and automobiles, with real estate leases forming the majority of ROU assets and liabilities, having terms up to 18 years[68] Operating Lease Costs (Three Months Ended, in millions) | Lease Cost Type | July 26, 2024 | July 28, 2023 | | :---------------- | :------------ | :------------ | | Operating lease cost | $13 | $14 | | Variable lease cost | $4 | $4 | | Total lease cost | $17 | $18 | Operating Lease Balance Sheet Information (in millions, except lease term and discount rate) | Metric | July 26, 2024 | April 26, 2024 | | :------------------------------ | :------------ | :------------- | | Total operating lease ROU assets | $241 | $247 | | Total operating lease liabilities | $255 | $260 | | Weighted Average Remaining Lease Term | 9.0 years | 9.2 years | | Weighted Average Discount Rate | 3.2 % | 3.1 % | 8. Stockholders' Equity This note provides information on NetApp's stock-based compensation, share repurchase program, and dividend declarations - NetApp granted approximately 3 million restricted stock units (RSUs), including performance-based RSUs (PBRSUs), with a weighted average grant date fair value of $128.21 per share during the three months ended July 26, 2024[72] - PBRSUs granted to executives have performance-based vesting criteria tied to Total Stockholder Return (TSR) relative to peers and the Company's billings result average over a three-year period[73][75] Stock-Based Compensation Expense (Three Months Ended, in millions) | Classification | July 26, 2024 | July 28, 2023 | | :----------------------------- | :------------ | :------------ | | Cost of product revenues | $1 | $1 | | Cost of services revenues | $6 | $6 | | Sales and marketing | $35 | $36 | | Research and development | $31 | $32 | | General and administrative | $12 | $12 | | Total stock-based compensation expense | $85 | $87 | - The Board of Directors has authorized repurchases of up to $17.1 billion of common stock, with $1.1 billion remaining authorization as of July 26, 2024. The company repurchased 3 million shares for $400 million in the quarter[77][78] - A cash dividend of $0.52 per share was declared for the quarter ended July 26, 2024, up from $0.50 per share in the prior year period[79] 9. Derivatives and Hedging Activities This note describes NetApp's use of derivative instruments to manage foreign currency risk and their impact on financial results - NetApp uses derivative instruments, primarily foreign currency exchange forward contracts, to manage foreign currency risk and reduce earnings volatility, not for trading or speculative purposes[82] Notional Amount of Outstanding Foreign Currency Exchange Forward Contracts (in millions) | Contract Type | July 26, 2024 | April 26, 2024 | | :------------------------ | :------------ | :------------- | | Cash Flow Hedges (purchased) | $108 | $71 | | Balance Sheet Contracts (sold) | $1,088 | $881 | | Balance Sheet Contracts (purchased) | $12 | $11 | - Derivative instruments not designated as hedging instruments resulted in a $4 million loss recognized in other income, net, for the three months ended July 26, 2024, compared to a $13 million gain in the prior year[84] 10. Restructuring Charges This note details NetApp's restructuring plans, including workforce reductions and associated charges incurred - In the first quarter of fiscal 2025, management approved a restructuring plan to reduce the global workforce by approximately 2% and redirect resources, incurring $17 million in charges primarily for employee severance[85][153] - A similar restructuring plan in fiscal 2024 involved a 1% workforce reduction and real estate lease terminations, with activities substantially completed by the end of fiscal 2024[86][87][154] Restructuring Activities (Three Months Ended, in millions) | Metric | July 26, 2024 | July 28, 2023 | | :------------------------- | :------------ | :------------ | | Balance at beginning of period | $10 | $36 | | Net charges | $17 | $26 | | Cash payments | $(9) | $(31) | | Balance at end of period | $18 | $31 | 11. Income Taxes This note provides information on NetApp's effective tax rates, the impact of Pillar Two rules, and unrecognized tax benefits Effective Tax Rates (Three Months Ended) | Period | Effective Tax Rate | | :------------ | :----------------- | | July 26, 2024 | 17.1 % | | July 28, 2023 | 19.9 % | - The effective tax rate for Q1 fiscal 2025 decreased to 17.1% from 19.9% in the prior year, reflecting increased discrete tax benefits related to stock compensation[89] - The company is subject to Pillar Two rules starting in fiscal year 2025, but currently, these taxes do not have a significant impact due to safe harbor relief[90] - As of July 26, 2024, gross unrecognized tax benefits totaled $221 million, with $158 million affecting the provision for income taxes if recognized[93] 12. Net Income per Share This note details the calculation of NetApp's basic and diluted net income per share for the reported periods Net Income per Share Calculation (Three Months Ended, in millions, except per share amounts) | Metric | July 26, 2024 | July 28, 2023 | | :-------------------------------------- | :------------ | :------------ | | Net income | $248 | $149 | | Shares used in basic computation | 206 | 212 | | Shares used in diluted computation | 212 | 216 | | Basic Net Income per Share | $1.20 | $0.70 | | Diluted Net Income per Share | $1.17 | $0.69 | - Diluted net income per share increased significantly to $1.17 from $0.69 year-over-year[94] 13. Segment, Geographic, and Significant Customer Information This note provides a breakdown of NetApp's revenues and gross profit by operating segment, geographic region, and significant customers - NetApp operates in two segments: Hybrid Cloud (unified data storage, infrastructure solutions, software, hardware, support) and Public Cloud (as-a-service cloud storage and CloudOps services on major public clouds)[95][96][97] Segment Revenues and Gross Profit (Three Months Ended July 26, 2024, in millions) | Segment | Net Revenues | Segment Gross Profit | Segment Gross Margin | | :------------- | :----------- | :------------------- | :------------------- | | Hybrid Cloud | $1,382 | $1,000 | 72.4 % | | Public Cloud | $159 | $113 | 71.1 % | | Consolidated | $1,541 | $1,098 | 71.3 % | Geographical Revenues (Three Months Ended, in millions) | Region | July 26, 2024 | July 28, 2023 | | :----------------------------------- | :------------ | :------------ | | United States, Canada and Latin America (Americas) | $763 | $754 | | Europe, Middle East and Africa (EMEA) | $513 | $446 | | Asia Pacific (APAC) | $265 | $232 | | Net revenues | $1,541 | $1,432 | - Two distributors, Arrow Electronics, Inc. and TD Synnex Corporation, accounted for 23% and 22% of net revenues, respectively, for the three months ended July 26, 2024[102] 14. Commitments and Contingencies This note outlines NetApp's various commitments and potential liabilities, including purchase obligations and legal proceedings - As of July 26, 2024, NetApp had approximately $0.6 billion in non-cancelable purchase commitments for inventory and $0.5 billion in other purchase obligations[103][104] - The company provides long-term financing to creditworthy customers and enters into recourse leasing arrangements, but has not experienced significant losses to date[105][107][182] - NetApp is involved in patent litigation and other legal proceedings, but management believes the ultimate outcome will not materially harm its financial position, results of operations, or cash flows[111][112] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on NetApp's financial condition and results of operations for the quarter ended July 26, 2024, discussing revenue drivers, cost management, operating expenses, and liquidity. It highlights the company's strategic focus on intelligent data infrastructure, AI workloads, and cloud offerings, alongside details on stock repurchases, dividends, and restructuring events Overview This overview highlights NetApp's strategic focus on intelligent data infrastructure, AI workloads, and cloud solutions, along with key financial activities like share repurchases and restructuring - NetApp aims to make data infrastructure intelligent by combining unified data storage, integrated data services, and CloudOps solutions, focusing on modernizing infrastructure, improving ransomware resiliency, and building data pipelines for AI workloads[116][117] - The company's operations are organized into two segments: Hybrid Cloud (data center modernization, unified storage) and Public Cloud (as-a-service cloud storage and CloudOps on major public clouds)[118][119][120] - During the first three months of fiscal 2025, NetApp repurchased approximately 3 million shares for $400 million and declared cash dividends of $0.52 per share, totaling $107 million[121] - A restructuring plan approved in Q1 fiscal 2025 resulted in $17 million in charges, primarily for employee severance, as part of an effort to redirect resources and reduce costs[122] Results of Operations This section analyzes NetApp's net revenues, gross margins, operating expenses, and tax provisions for the reported periods, detailing key drivers of financial performance Net Revenues (in millions, except percentages) | Metric | July 26, 2024 | July 28, 2023 | % Change | | :---------- | :------------ | :------------ | :------- | | Net revenues | $1,541 | $1,432 | 8 % | - The 8% increase in net revenues was driven by a 13% increase in product revenues and a 4% increase in services revenues[126][127][132] - Product revenues increased due to higher sales of C-Series all-flash array systems, while Public Cloud revenues grew due to higher customer demand and overall cloud market growth[131][135] - Hybrid Cloud product gross margins increased by approximately five percentage points due to lower component and freight costs[139] - Public Cloud gross margins increased by four percentage points due to cost optimization, including a decrease in fixed assets depreciation[144] - Total operating expenses as a percentage of net revenues decreased by three percentage points to 52%, reflecting increased net revenues and relatively flat compensation costs[146][148] - Interest income increased by 29% due to higher yields on cash and investments, while interest expense remained flat[156] - The provision for income taxes increased by 38%, but the effective tax rate decreased to 17.1% due to increased discrete tax benefits related to stock compensation[157] Liquidity, Capital Resources and Cash Requirements This section discusses NetApp's cash position, working capital, cash flow activities, and future capital commitments and obligations Cash, Cash Equivalents and Short-Term Investments (in millions) | Metric | July 26, 2024 | April 26, 2024 | | :-------------------------------------- | :------------ | :------------- | | Cash, cash equivalents and short-term investments | $3,017 | $3,252 | - Cash, cash equivalents, and short-term investments decreased by $235 million, primarily due to stock repurchases ($400 million) and dividend payments ($107 million), partially offset by operating cash flows ($341 million)[160] - Net working capital deficit was $191 million as of July 26, 2024, a reduction of $982 million, mainly due to decreased cash and the reclassification of $750 million of senior notes to current liabilities[160] - Cash provided by operating activities was $341 million, reflecting net income of $248 million, adjusted for non-cash items and changes in assets and liabilities, including a $335 million decrease in accounts receivable[161][165] - The company anticipates capital expenditures for the remainder of fiscal 2025 to be between $100 million and $150 million[175] - Outstanding payments related to the 2017 transition tax are estimated at $215 million, with $115 million expected in fiscal 2025 and $100 million in fiscal 2026[176] - As of July 26, 2024, the remaining authorized amount for stock repurchases under the program was $1.1 billion[178] - Off-balance sheet purchase commitments totaled approximately $1.1 billion at July 26, 2024[179] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in NetApp's market risk exposures for the three months ended July 26, 2024, compared to those discussed in its Annual Report on Form 10-K for the year ended April 26, 2024 - No material changes in market risk exposures were reported for the three months ended July 26, 2024[187] Item 4. Controls and Procedures NetApp's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of July 26, 2024. No material changes in internal control over financial reporting were identified during the first quarter of fiscal 2025 - The CEO and CFO concluded that NetApp's disclosure controls and procedures were effective as of July 26, 2024[189] - No material changes in internal control over financial reporting were identified during the first quarter of fiscal 2025[190] PART II — OTHER INFORMATION This part covers various other information, including legal proceedings, risk factors, equity sales, and exhibits for the reporting period Item 1. Legal Proceedings This section refers to Note 14 – Commitments and Contingencies for a discussion of NetApp's legal proceedings - Legal proceedings are discussed in Note 14 – Commitments and Contingencies[193] Item 1A. Risk Factors This section states that there have been no material changes to the company's risk factors since its Annual Report on Form 10-K for the year ended April 26, 2024 - No material changes to the company's risk factors have occurred since the Annual Report on Form 10-K for the year ended April 26, 2024[194] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchase activity for the three months ended July 26, 2024, under its ongoing stock repurchase program Common Stock Repurchase Activity (Three Months Ended July 26, 2024) | Period | Total Number of Shares Purchased (thousands) | Average Price Paid per Share | | :--------------------------- | :------------------------------------------- | :--------------------------- | | April 27, 2024 - May 24, 2024 | 1,015 | $107.51 | | May 25, 2024 - June 21, 2024 | 935 | $121.93 | | June 22, 2024 - July 26, 2024 | 1,371 | $129.04 | | Total | 3,321 | $120.46 | - As of July 26, 2024, the Board of Directors has authorized the repurchase of up to $17.1 billion of common stock, with $1.1 billion remaining under the program[195] Item 3. Defaults upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[196] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[197] Item 5. Other Information This section discloses that Daniel De Lorenzo, VP and Chief Accounting Officer, entered into a Rule 10b5-1 trading arrangement on June 25, 2024, for the sale of up to 3,853 shares, expiring on June 25, 2025 - Daniel De Lorenzo, VP, Chief Accounting Officer, entered into a 10b5-1 trading arrangement on June 25, 2024, to sell up to 3,853 shares, expiring on June 25, 2025[198] - No other directors or executive officers adopted, modified, or terminated any 10b5-1 trading arrangements during the quarter[199] Item 6. Exhibits This section lists all documents filed as exhibits to the report, including various forms of Restricted Stock Unit Agreements, certifications from the CEO and CFO, and Inline XBRL documents - Exhibits include forms of Restricted Stock Unit Agreements (Senior Executive, VP and Below, Performance-Based - Billings, Performance-Based - Total Shareholder Return) effective May 15, 2024[201] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302(a) and 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits[201] SIGNATURE This section contains the signature of Michael J. Berry, Executive Vice President and Chief Financial Officer, confirming the due authorization and filing of the report on behalf of NetApp, Inc. on August 28, 2024 - The report is signed by Michael J. Berry, Executive Vice President and Chief Financial Officer, on August 28, 2024[203]