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| NTAP > SEC Filings for NTAP > Form 10-Q on 4-Sep-2009 | All Recent SEC Filings |
4-Sep-2009
Quarterly Report
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act), and is subject to the safe harbor provisions set forth in the Exchange
Act. Forward-looking statements usually contain the words "estimate," "intend,"
"plan," "predict," "seek," "may," "will," "should," "would," "could,"
"anticipate," "expect," "believe," or similar expressions and variations or
negatives of these words. In addition, any statements that refer to
expectations, projections, or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. All forward-looking statements, including but not limited to,
statements about:
• our future financial and operating results;
• our business strategies;
• management's plans, beliefs and objectives for future operations, research and development;
• acquisitions and joint ventures, growth opportunities, investments and legal proceedings;
• our restructuring plans and estimates;
• competitive positions;
• product introductions, development, enhancements and acceptance;
• economic and industry trends or trend analyses;
• future cash flows and cash deployment strategies;
• short-term and long-term cash requirements;
• the impact of completed acquisitions;
• our anticipated tax rate;
• the continuation of our stock repurchase program;
• compliance with laws, regulations and loan covenants; and
• the conversion, maturation or repurchase of the Notes,
are inherently uncertain as they are based on management's current expectations and assumptions concerning future events, and they are subject to numerous known and unknown risks and uncertainties. Therefore, our actual results may differ materially from the forward-looking statements contained herein. Factors that could cause actual results to differ materially from those described herein include, but are not limited to:
• the amount of orders received in future periods;
• our ability to ship our products in a timely manner;
• our ability to achieve anticipated pricing, cost, and gross margins levels;
• our ability to maintain or increase backlog and increase revenue;
• our ability to successfully execute on our strategy;
• our ability to increase our customer base, market share and revenue;
• our ability to successfully introduce new products;
• our ability to adapt to changes in market demand;
• the general economic environment and the growth of the storage markets;
• acceptance of, and demand for, our products;
• demand for our global service and support and professional services;
• our ability to identify and respond to significant market trends and emerging standards;
• our ability to realize our financial objectives through management of our investment in people, process, and systems;
• our ability to maintain our supplier and contract manufacturer relationships;
• the ability of our suppliers and contract manufacturers to meet our requirements;
• the ability of our competitors to introduce new products that compete successfully with our products;
• our ability to grow direct and indirect sales and to efficiently utilize global service and support;
• the general economic environment and the growth of the storage markets;
• variability in our gross margins;
• our ability to sustain and/or improve our cash and overall financial position;
• our cash requirements and terms and availability of financing;
• valuation and liquidity of our investment portfolio;
• our ability to finance business acquisitions, construction projects and capital expenditures through cash from operations and/or financing;
• the impact of industry consolidation;
• the results of our ongoing litigation, tax audits, government audits and inquiries; and
• those factors discussed under "Risk Factors" elsewhere in this Quarterly Report on Form 10-Q.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based upon information available to us at this time. These statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement. Actual results could vary from our forward looking statements due to foregoing factors as well as other important factors, including those described in the Risk Factors included on page 45.
Overview
Revenue for the three month period ended July 31, 2009 was $838.0 million, down 4% from the comparable period in the prior year. Though the macroeconomic environment showed signs of moderate stabilization, capital spending by customers remained under pressure.
Gross margins strengthened during the current period due largely to improvements in product materials cost and an increase in software entitlements and maintenance services in the revenue mix.
During the three month period ended July 31, 2009, we entered into a merger agreement with Data Domain, Inc., which was subsequently terminated on July 8, 2009. In accordance with the agreement, we received a $57.0 million termination fee, which, when netted against $15.9 million of incremental third-party costs we incurred relating to the terminated merger agreement, resulted in net proceeds of $41.1 million.
During the three month period ended July 31, 2009, operating expenses, excluding restructuring charges and the net merger termination proceeds, were $491.3 million, up 3% from the comparable period of the prior year, and reflected the impact of having 14 weeks in the current three month period compared to 13 weeks in the prior year. We continue to focus on maintaining spending discipline in light of the current business conditions.
Critical Accounting Estimates and Policies
Our discussion and analysis of financial conditions and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets
and liabilities as of the date of the financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary from our estimates.
We believe the accounting policies and estimates discussed under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended April 24, 2009, affect our more significant judgments and estimates used in the preparation of the condensed consolidated financial statements. There have been no material changes to the critical accounting policies and estimates as filed in such report, except for the retrospective adoption of FASB Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP APB No. 14-1).
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in Note 2 of the notes to condensed consolidated financial statements.
Results of Operations
The following table sets forth certain consolidated statements of operations
data as a percentage of net revenues for the periods indicated:
Three Months Ended
July 31, 2009 July 25, 2008
Revenues:
Product 57.1 % 63.1 %
Software entitlements and maintenance 19.7 16.6
Service 23.2 20.3
100.0 100.0
Cost of Revenues:
Cost of product 25.3 28.7
Cost of software entitlements and maintenance 0.4 0.3
Cost of service 11.9 11.5
Gross Margin 62.4 59.5
Operating Expenses:
Sales and marketing 35.9 34.9
Research and development 15.6 14.4
General and administrative 7.1 5.7
Restructuring and other charges 0.2 -
Merger termination proceeds, net (4.9 ) -
Total Operating Expenses 53.9 55.0
Income from Operations 8.5 4.5
Other Income (Expenses), Net:
Interest income 1.0 1.7
Interest expense (2.3 ) (1.1 )
Loss on investments, net - (0.3 )
Other income (expenses), net (0.1 ) (0.2 )
Total Other Income (Expenses), Net (1.4 ) 0.1
Income Before Income Taxes 7.1 4.6
Provision for Income Taxes 0.9 0.6
Net Income 6.2 % 4.0 %
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Discussion and Analysis of Results of Operations
Net Revenues - Our net revenues for the three month periods ended July 31, 2009 and July 25, 2008 were as follows:
Three Months Ended
July 31, 2009 July 25, 2008 % Change
Net revenues $ 838.0 $ 868.8 (4 )%
Net revenues decreased by $30.8 million in the three month period ended July 31, 2009, and were down 4% from the comparable period in the prior year. The decrease in net revenues was due to decreases in product revenues, partially offset by increases in software entitlements and maintenance revenues, as well as in service revenues.
Sales through our indirect channels represented 69% and 61% of net revenues for the three month periods ended July 31, 2009 and July 25, 2008, respectively.
During the three month period ended July 31, 2009, Arrow and Avnet, who are U.S. distributors, each accounted for approximately 11% of net revenues. No customer accounted for ten percent or more of net revenues during the three month period ended July 25, 2008.
Product Revenues
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Product revenues $ 478.2 $ 547.9 (13 )%
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Product revenues decreased by $69.7 million for the three month period ended July 31, 2009, and were down 13% from the comparable period in the prior year. Our configured systems comprise bundled hardware and software products. Unit volume decreased by 7%, with the largest decrease related to high-end systems. During the three month period ended July 31, 2009, high-end, midrange and low-end systems generated approximately 20%, 60% and 20% of configured systems revenue, respectively, compared to approximately 30%, 50% and 20%, respectively in the prior year. This year over year trend is consistent with a shift in customer buying patterns towards smaller systems, which we believe is due to information technology (IT) spending constraints and difficult economic conditions. In addition, average selling prices declined on midrange and low-end systems, driven by lower list prices, unfavorable configuration mix (consisting of hardware and software components, disk capacity and disk price) and higher discounting during the three month period ended July 31, 2009. As a result, declines in configured systems revenues and add-on product revenues contributed to a 12% and a 2% decrease in product revenues, respectively.
Our systems are highly configurable to respond to customer requirements in the open systems storage markets that we serve. This wide variation in customer configurations can significantly impact revenue, cost of revenue, and gross margin performance. Price changes, unit volumes, and product configuration mix can also impact revenue, cost of revenue and gross margin performance. Disks are a significant component of our storage systems. Industry disk pricing continues to fall every year, and we pass along those price decreases to our customers while working to maintain relatively constant margins on our disk drives. While price per petabyte continues to decline, system performance, increased capacity and software to manage this increased capacity have an offsetting impact on product revenue.
Software Entitlements and Maintenance Revenues
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Software entitlements and maintenance revenues $ 165.3 $ 144.4 15 %
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Software entitlements and maintenance (SEM) revenues increased by $20.9 million for the three month period ended July 31, 2009, were up 15% from the comparable period in the prior year. This year over year increase in SEM revenues was driven by an increase in the aggregate contract value of the installed base under SEM contracts and the timing of the recognition of the related revenue.
Service Revenues
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Service revenues $ 194.4 $ 176.5 10 %
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Service revenues increased by $17.9 million for the three month period ended July 31, 2009, and were up 10% from the comparable period in the prior year. Service revenues include service maintenance, professional services and educational and training services. Service maintenance contract revenues increased 19%, driven by an increase in the installed base under service contract and the timing of the recognition of the related revenue, partially offset by a 4% decline in professional services and educational and training services revenues.
Revenues by Geographic Area
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
International $ 364.8 $ 399.5 (9 )%
United States 473.2 469.3 1 %
Net revenues $ 838.0 $ 868.8
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Total international revenues (including U.S. exports) were approximately 44% of net revenues for the three month period ended July 31, 2009, compared to 46% for the comparable period in the prior year.
Cost of Revenues
Our cost of revenues includes: (1) cost of product revenues, which includes the
costs of manufacturing and shipping of our storage systems, and amortization of
purchased intangible assets, inventory write-downs, and warranty costs; (2) cost
of software maintenance and entitlements, which includes the costs of providing
software entitlements and maintenance and third party royalty costs, and
(3) cost of service, which reflects costs associated with providing services for
support center activities and global service partnership programs.
Our gross margins are impacted by a variety of factors including pricing and discount practices, channel sales mix, revenue mix and the margin profile of new products. Service gross margin is also typically impacted by factors such as changes in the size of our installed base of products, as well as the timing of support service initiations and renewals, and incremental investments in our customer support infrastructure. If our shipment volumes, product and services mix, average selling prices and pricing actions that impact our gross margin are adversely affected, whether by the economic downturn or for other reasons, our gross margin could decline.
Cost of Product Revenues
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Cost of product revenues $ 212.5 $ 249.8 (15 )%
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Cost of product revenues decreased by $37.3 million for the three month period ended July 31, 2009, and was down 15% from the comparable period in the prior year, primarily due to decreased materials cost of $32.7 million resulting from lower unit volume and lower average per unit materials costs across all of our systems. Cost of
product revenues represented 44% and 46% of product revenue for the three month periods ended July 31, 2009 and July 25, 2008, respectively.
Cost of product revenues decreased due to the following:
Percent Change
2009 to 2010
Materials costs (13 )%
Excess and obsolete inventory 1
Other (3 )
Total change (15 )%
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Cost of Software Entitlements and Maintenance Revenues
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Cost of software entitlements and maintenance revenues $ 3.1 $ 2.2 42 %
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Cost of software entitlements and maintenance revenues (SEM) increased $0.9 million for the three month period ended July 31, 2009, and was up 42% from the comparable period in the prior year, due to an increase in field service engineering costs. Cost of SEM revenue represented 2% of SEM revenue for each of the three month periods ended July 31, 2009 and July 25, 2008.
Cost of Service Revenues
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Cost of service revenues $ 99.8 $ 100.2 - %
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Cost of service revenues decreased by $0.4 million for the three month period ended July 31, 2009 compared to the three month period ended July 25, 2008. Cost of service revenues represented 51% and 57% of service revenue for the three month periods ended July 31, 2009 and July 25, 2008, respectively, reflecting improved productivity.
Operating Expenses
Sales and Marketing, Research and Development, and General and Administrative Expenses
Compensation costs comprise the largest component of operating expenses. Included in compensation costs are salaries and related benefits, stock-based compensation costs and performance based employee incentive plan compensation costs. The increase in compensation costs during the three month period ended July 31, 2009 as compared to the three month period ended July 25, 2008 related primarily to an increase in stock-based compensation, employee incentive compensation, and a minor increase in headcount. In addition, operating expenses were higher due to additional employee compensation related to the additional week of spending in the three month period ended July 31, 2009 compared to the comparable period in the prior year.
Sales and Marketing -
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Sales and marketing expenses $ 301.4 $ 303.1 (1 )%
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Sales and marketing expense consists primarily of compensation costs, commissions, allocated facilities and IT costs, advertising and marketing promotional expense, travel and entertainment expense. Sales and marketing expenses decreased due to the following:
% Change
2009 to 2010
Compensation costs 3 %
Commissions (1 )
IT expenses related to software implementations and IT support 2
Advertising and marketing promotional expense (2 )
Travel and entertainment expense (2 )
Other (1 )
Total change (1 )%
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Research and Development -
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Research and development expenses $ 130.3 $ 125.4 4 %
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Research and development expense consists primarily of compensation costs, allocated facilities and IT costs, depreciation and amortization, and prototype, non-recurring engineering (NRE) charges and other outside services costs. Research and development expenses increased due to the following:
% Change
2009 to 2010
Compensation costs 4 %
Facilities and IT support costs 2
NRE charges 1
Outside services (2 )
Other (1 )
Total change 4 %
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We believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve market acceptance, maintain technological competitiveness, and meet an expanding range of customer requirements. We expect to continuously support current and future product development, broaden our existing product offerings and introduce new products that expand our solutions portfolio.
General and Administrative -
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
General and administrative expenses $ 59.6 $ 49.5 20 %
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General and administrative expense consists primarily of compensation costs, professional and corporate legal fees, recruiting expenses, and allocated facilities and IT costs. General and administrative expenses increased due to the following:
% Change
2010 to 2009
Compensation costs 16 %
Professional and corporate legal fees 2
IT costs 3
Other (1 )
Total change 20 %
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Restructuring and Other Charges
Three Months Ended
July 31, July 25,
2009 2008 % Change
(In millions)
Restructuring and other charges $ 1.5 $ - -
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In the three month period ended July 31, 2009, we recorded restructuring expense of $1.5 million, net, primarily related to employee severance costs associated with our restructuring plan announced in fiscal 2009, which included a program for a reduction in workforce, the closing or downsizing of certain facilities, and the establishment of a plan to outsource certain internal activities.
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