Expanded Gross Margins, Operating Margins and Earnings Per Share Quarter-over-Quarter
- All-flash array annualized net revenue run rate of $2.2 billion increased 29% quarter-over-quarter
- NetApp™ cloud data services annualized recurring revenue of approximately $72 million, an increase of 167% year-over-year
- Consolidated GAAP gross margin of 67.5%, non-GAAP gross margin of 68.6%
- GAAP product gross margin of 55.8%, non-GAAP product gross margin of 57.3%
- $611 million returned to shareholders in share repurchases and cash dividends
NetApp (NASDAQ: NTAP) today reported financial results for the second quarter of fiscal year 2020, which ended on October 25, 2019.
“Our Q2 FY20 results reflect the strength of our business model and value of our innovation. We delivered gross margin, operating margin, and EPS all solidly ahead of our guidance ranges. We are delivering real business value to customers’ hybrid multicloud environments increasing our strategic relevance and enabling us to reach new buyers, address new workloads and expand our presence with existing customers,” said George Kurian, chief executive officer. “We continue to be disciplined in our spending and have a strong financial model with growing gross margins and operating margins that enable us to return cash to shareholders and invest in the long-term health of our business.”
Second Quarter of Fiscal Year 2020 Financial Results
- Net Revenues: $1.37 billion, compared to $1.52 billion* in the second quarter of fiscal 2019
- Net Income: GAAP net income of $243 million, compared to GAAP net income of $241 million in the second quarter of fiscal 2019; non-GAAP net income of $257 million, compared to non-GAAP net income of $280 million in the second quarter of fiscal 2019
- Earnings per Share: GAAP net income per share of $1.03 compared to GAAP net income per share of $0.91 in the second quarter of fiscal 2019; non-GAAP net income per share of $1.09, compared to non-GAAP net income per share of $1.06 in the second quarter of fiscal 2019
- Cash, Cash Equivalents and Investments: $3.0 billion at the end of the second quarter of fiscal 2020
- Cash Provided By (Used In) Operations: $(53) million, compared to $165 million in the second quarter of fiscal 2019
- Share Repurchase and Dividend: Returned $611 million to shareholders through share repurchases and cash dividends
*Net revenues in the second quarter of fiscal year 2019 included $20 million from enterprise software license agreements which did not repeat in the second quarter of fiscal year 2020.
Second Quarter of Fiscal Year 2020 Business Highlights
Driving Innovation in the Industry
- NetApp announced a series of innovative offerings at VMworld 2019 that enable customers to have simplified, scalable, high-performance infrastructure for any cloud at their fingertips: NetApp HCI for VDI with VMware Horizon 7, NetApp Kubernetes Service (NKS) and NetApp HCI Implementation Service for VMware Private Cloud.
- NetApp unveiled the NetApp EF600 all-flash array—an end-to-end NVMe midrange array that accelerates access to data and empowers companies to rapidly develop new insights for performance-sensitive workloads.
- With NetApp ONTAP™ System Manager 9.6, users can now launch the new ONTAP System Manager GUI, called Optimized GUI, allowing IT generalists to perform day-to-day storage management tasks with a streamlined, simple-to-use interface.
- NetApp unveiled the new and improved NetApp SnapCenter™ 4.2 dashboard, offering significant value that IT generalists and backup administrators can use for day-to-day reporting.
- NetApp announced the 9.6 release of the virtual appliance for Virtual Storage Console (VSC), NetApp VASA Provider and VMware Storage Replication Adapter (SRA) to support the HTML5-based framework of VMware vSphere Client, providing a more simplified and seamless user experience.
- NetApp presented the new end-to-end NVMe for FlexPod™, which enables customers to handle the scalability requirements of next-generation, mission-critical applications.
- NetApp introduced a new memory-accelerated FlexPod powered by NetApp MAX Data, a futuristic NetApp server-side storage technology that works with Intel Optane memory to accelerate applications.
Notable Awards and Strengthened Partnerships
- NetApp was named #1 in the 2019 Gartner Magic Quadrant for Primary Storage, further demonstrating that NetApp solutions deliver data-driven business outcomes across core, edge and cloud.
- NetApp announced its collaboration with Equinix and Alibaba Cloud through Indonet, connecting NetApp Private Storage for Cloud (NPS for Cloud), Alibaba Cloud and Platform Equinix. This collaboration allows businesses in Indonesia to get the freedom and flexibility to run their applications or workloads and gain full control of their data across the multicloud platform.
- NetApp announced its sponsorship of NVIDIA’s Artificial Intelligence (AI) Champions program for EMEA NVIDIA Partner Network (NPN) and a Vertical Specialized Award for partners who are able to help customers accelerate their AI projects by using joint ONTAP AI solutions from NetApp and NVIDIA.
- NetApp and Broadcom published a new NetApp Verified Architecture: a best practice reference architecture that illustrates an optimally configured VMware installation on NetApp ONTAP 9.6 and Broadcom technology (Emulex 32GB HBAs and Brocade 32GB FC switches).
- NetApp and Rubrik have partnered to integrate Rubrik’s Cloud Data Management platform with NetApp StorageGRID™ to enable enterprises to simplify data lifecycle management at cloud scale.
“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 of Fiscal Year 2020 Financial Outlook and the Full Fiscal Year 2020 Financial Outlook sections, statements about our free cash flow generation, our ability to navigate the ongoing macroeconomic headwinds, and our ability to capitalize on our Data Fabric strategy. 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 annual report on Form 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.
Non-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 or derecognition of assets, 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 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.
GAAP net income per share and non-GAAP net income per share are calculated using the diluted number of shares.
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 or derecognition of assets These are gains/losses from the sale of our properties and other transactions in which we transfer control of assets to a third party. 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.