NetApp, Inc. (NTAP)
SIC breadcrumb: Manufacturing > Industrial And Commercial Machinery And Computer Equipment > SIC 3572 Computer Storage Devices
SEC company page: https://www.sec.gov/edgar/browse/?CIK=1002047. Latest filing source: 0001193125-26-259683.
Informational only - descriptive public-record data, not investment advice.
Selected Fundamentals
| Metric | Value | Unit | FY | Filed |
|---|---|---|---|---|
| Revenue | 6,237,000,000 | USD | 2026 | 2026-06-05 |
| Net income | 1,276,000,000 | USD | 2026 | 2026-06-05 |
| Assets | 10,744,000,000 | USD | 2026 | 2026-06-05 |
Financials
Annual standardized facts from SEC companyfacts as of latest extracted filing date 2026-06-05. Source: https://data.sec.gov/api/xbrl/companyfacts/CIK0001002047.json. Derived margins, ratios, and free cash flow are computed from the extracted annual SEC facts.
| Metric | 2009 | 2010 | 2011 | 2012 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | 3,406,400,000 | 3,931,400,000 | 5,122,600,000 | 6,233,200,000 | 5,657,000,000 | 5,907,000,000 | 6,237,000,000 | |||||||
| Net income | 481,000,000 | 116,000,000 | 1,169,000,000 | 819,000,000 | 730,000,000 | 937,000,000 | 1,274,000,000 | 986,000,000 | 1,186,000,000 | 1,276,000,000 | ||||
| Operating income | 621,000,000 | 1,158,000,000 | 1,221,000,000 | 945,000,000 | 1,031,000,000 | 1,157,000,000 | 1,018,000,000 | 1,214,000,000 | 1,337,000,000 | 1,674,000,000 | ||||
| Gross profit | 3,364,000,000 | 3,709,000,000 | 3,945,000,000 | 3,623,000,000 | 3,815,000,000 | 4,220,000,000 | 4,209,000,000 | 4,433,000,000 | 4,613,000,000 | 4,899,000,000 | ||||
| Diluted EPS | 1.71 | 0.42 | 4.51 | 3.52 | 3.23 | 4.09 | 5.79 | 4.63 | 5.67 | 6.35 | ||||
| Operating cash flow | 986,000,000 | 1,478,000,000 | 1,341,000,000 | 1,060,000,000 | 1,333,000,000 | 1,211,000,000 | 1,107,000,000 | 1,685,000,000 | 1,506,000,000 | 2,067,000,000 | ||||
| Capital expenditures | 175,000,000 | 145,000,000 | 173,000,000 | 124,000,000 | 162,000,000 | 226,000,000 | 239,000,000 | 155,000,000 | 168,000,000 | 198,000,000 | ||||
| Dividends paid | 208,000,000 | 214,000,000 | 403,000,000 | 439,000,000 | 427,000,000 | 446,000,000 | 432,000,000 | 416,000,000 | 424,000,000 | 413,000,000 | ||||
| Share buybacks | 705,000,000 | 794,000,000 | 2,111,000,000 | 1,411,000,000 | 125,000,000 | 600,000,000 | 850,000,000 | 900,000,000 | 1,150,000,000 | 950,000,000 | ||||
| Assets | 9,493,000,000 | 9,991,000,000 | 8,741,000,000 | 7,522,000,000 | 9,360,000,000 | 10,026,000,000 | 9,818,000,000 | 9,887,000,000 | 10,823,000,000 | 10,744,000,000 | ||||
| Liabilities | 6,713,000,000 | 7,715,000,000 | 7,651,000,000 | 7,280,000,000 | 8,675,000,000 | 9,188,000,000 | 8,659,000,000 | 8,741,000,000 | 9,783,000,000 | 9,393,000,000 | ||||
| Stockholders' equity | 2,949,000,000 | 2,276,000,000 | 1,090,000,000 | 242,000,000 | 685,000,000 | 838,000,000 | 1,159,000,000 | 1,146,000,000 | 1,040,000,000 | 1,351,000,000 | ||||
| Cash and cash equivalents | 2,444,000,000 | 2,941,000,000 | 2,325,000,000 | 2,658,000,000 | 4,529,000,000 | 4,112,000,000 | 2,316,000,000 | 1,903,000,000 | 2,742,000,000 | 2,070,000,000 | ||||
| Free cash flow | 811,000,000 | 1,333,000,000 | 1,168,000,000 | 936,000,000 | 1,171,000,000 | 985,000,000 | 868,000,000 | 1,530,000,000 | 1,338,000,000 | 1,869,000,000 |
Ratios
| Metric | 2009 | 2010 | 2011 | 2012 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net margin | 17.43% | 20.08% | 20.46% | |||||||||||
| Operating margin | 21.46% | 22.63% | 26.84% | |||||||||||
| Return on equity | 16.31% | 5.10% | 107.25% | 338.43% | 106.57% | 111.81% | 109.92% | 86.04% | 114.04% | 94.45% | ||||
| Return on assets | 5.07% | 1.16% | 13.37% | 10.89% | 7.80% | 9.35% | 12.98% | 9.97% | 10.96% | 11.88% | ||||
| Liabilities / equity | 2.28 | 3.39 | 7.02 | 30.08 | 12.66 | 10.96 | 7.47 | 7.63 | 9.41 | 6.95 | ||||
| Current ratio | 1.50 | 1.97 | 1.45 | 1.18 | 1.74 | 1.50 | 1.35 | 1.19 | 1.26 | 1.44 |
Financial Charts
Quarterly
Quarterly standardized facts from SEC companyfacts as of latest extracted filing date 2026-06-05. Source: https://data.sec.gov/api/xbrl/companyfacts/CIK0001002047.json.
| Quarter | End Date | Revenue | Net Income | Diluted EPS | Method |
|---|---|---|---|---|---|
| 2022-Q2 | 2021-10-29 | 0.98 | reported discrete quarter | ||
| 2022-Q3 | 2022-01-28 | 1.10 | reported discrete quarter | ||
| 2023-Q1 | 2022-07-29 | 0.96 | reported discrete quarter | ||
| 2023-Q2 | 2022-10-28 | 3.41 | reported discrete quarter | ||
| 2023-Q3 | 2023-01-27 | 1,526,000,000 | 65,000,000 | 0.30 | reported discrete quarter |
| 2023-Q4 | 2023-04-28 | 1,581,000,000 | 245,000,000 | derived Q4 = FY annual - nine-month YTD | |
| 2024-Q1 | 2023-07-28 | 1,432,000,000 | 149,000,000 | 0.69 | reported discrete quarter |
| 2024-Q2 | 2023-10-27 | 1,562,000,000 | 233,000,000 | 1.10 | reported discrete quarter |
| 2024-Q3 | 2024-01-26 | 1,606,000,000 | 313,000,000 | 1.48 | reported discrete quarter |
| 2024-Q4 | 2024-04-26 | 1,668,000,000 | 291,000,000 | derived Q4 = FY annual - nine-month YTD | |
| 2025-Q3 | 2025-01-24 | 1,641,000,000 | 299,000,000 | 1.44 | reported discrete quarter |
| 2025-Q4 | 2025-04-25 | 1,732,000,000 | 340,000,000 | derived Q4 = FY annual - nine-month YTD | |
| 2025-Q1 | 2025-07-25 | 1,559,000,000 | 233,000,000 | 1.15 | reported discrete quarter |
| 2025-Q2 | 2025-10-24 | 1,705,000,000 | 305,000,000 | 1.51 | reported discrete quarter |
| 2026-Q3 | 2026-01-23 | 1,713,000,000 | 334,000,000 | 1.67 | reported discrete quarter |
| 2026-Q4 | 2026-04-24 | 1,948,000,000 | 404,000,000 | derived Q4 = FY annual - nine-month YTD |
Quarterly Charts
Macro Cross-References
- CPIAUCSL - Consumer Price Index for All Urban Consumers: All Items in U.S. City Average
- UNRATE - Unemployment Rate
- FEDFUNDS - Federal Funds Effective Rate
- CES0500000003 - Average Hourly Earnings of All Employees, Total Private
- DFEDTARU - Federal Funds Target Range - Upper Limit
- DFEDTARL - Federal Funds Target Range - Lower Limit
- DGS3MO - Market Yield on U.S. Treasury Securities at 3-Month Constant Maturity
- DGS2 - Market Yield on U.S. Treasury Securities at 2-Year Constant Maturity
- DGS10 - Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity
- DGS30 - Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity
- T10Y2Y - 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity
- CPILFESL - Consumer Price Index for All Urban Consumers: All Items Less Food and Energy
- CPIUFDSL - Consumer Price Index for All Urban Consumers: Food
- CPIENGSL - Consumer Price Index for All Urban Consumers: Energy
- CUSR0000SAH1 - Consumer Price Index for All Urban Consumers: Shelter
- PCEPI - Personal Consumption Expenditures: Chain-type Price Index
- PCEPILFE - Personal Consumption Expenditures Excluding Food and Energy: Chain-type Price Index
- PPIACO - Producer Price Index by Commodity: All Commodities
- T10YIE - 10-Year Breakeven Inflation Rate
- U6RATE - Total Unemployed, Plus All Marginally Attached Workers Plus Total Employed Part Time for Economic Reasons
- PAYEMS - All Employees, Total Nonfarm
- CIVPART - Labor Force Participation Rate
- EMRATIO - Employment-Population Ratio
- UNEMPLOY - Unemployed
- CE16OV - Employment Level
- ICSA - Initial Claims
- JTSJOL - Job Openings: Total Nonfarm
- JTSQUR - Quits: Total Nonfarm
- GDPC1 - Real Gross Domestic Product
- A191RL1Q225SBEA - Real Gross Domestic Product: Percent Change from Preceding Period
- INDPRO - Industrial Production: Total Index
- TCU - Capacity Utilization: Total Index
- HOUST - New Privately-Owned Housing Units Started: Total Units
- PERMIT - New Privately-Owned Housing Units Authorized in Permit-Issuing Places: Total Units
- RSAFS - Advance Retail Sales: Retail Trade
- PCE - Personal Consumption Expenditures
- DSPIC96 - Real Disposable Personal Income
- PSAVERT - Personal Saving Rate
- M2SL - M2
- BOPGSTB - U.S. International Trade in Goods and Services: Balance
- MSPUS - Median Sales Price of Houses Sold for the United States
- HSN1F - New One Family Houses Sold: United States
- RHORUSQ156N - Homeownership Rate in the United States
- TTLCONS - Total Construction Spending: Total Construction in the United States
- RRVRUSQ156N - Rental Vacancy Rate in the United States
- TOTALSL - Total Consumer Credit Owned and Securitized
- REVOLSL - Revolving Consumer Credit Owned and Securitized
- DRCCLACBS - Delinquency Rate on Credit Card Loans, All Commercial Banks
- GDP - Gross Domestic Product
- GPDI - Gross Private Domestic Investment
- GCE - Government Consumption Expenditures and Gross Investment
- PCEC - Personal Consumption Expenditures
- NETEXP - Net Exports of Goods and Services
- GFDEBTN - Federal Debt: Total Public Debt
- GFDEGDQ188S - Federal Debt: Total Public Debt as Percent of Gross Domestic Product
- FYFSD - Federal Surplus or Deficit
- FGRECPT - Federal Government Current Receipts
- FGEXPND - Federal Government: Current Expenditures
- MANEMP - All Employees, Manufacturing
- USCONS - All Employees, Construction
- USTRADE - All Employees, Retail Trade
- USFIRE - All Employees, Financial Activities
- USGOVT - All Employees, Government
- AWHAETP - Average Weekly Hours of All Employees, Total Private
- DGORDER - Manufacturers' New Orders: Durable Goods
- NEWORDER - Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft
- BUSINV - Total Business Inventories
- EXPGS - Exports of Goods and Services
- IMPGS - Imports of Goods and Services
- IR - Import Price Index (End Use): All Commodities
- PPIFIS - Producer Price Index by Commodity: Final Demand
Latest quarter (10-Q)
Latest 10-Q source: 0001193125-26-076622.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements also can be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the actual results of NetApp, Inc. ("NetApp," “we,” “us,” "our," or the “Company”) may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those described in our Annual Report on Form 10-K for the year ended April 25, 2025 ("2025 Annual Report on Form 10-K"), including under the heading “Risk Factors” and discussed in this Form 10-Q under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with our consolidated financial statements as of and for the fiscal year ended April 25, 2025, and the notes thereto, contained in our 2025 Annual Report on Form 10-K, and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
25
Overview
Our Company
NetApp helps customers make their data infrastructure more seamless, more dynamic, and higher performing. We were incorporated in 1992, are headquartered in San Jose, California, and provide a full range of enterprise-class software, systems and services that customers use to transform their data infrastructures across data types, workloads, and environments to realize business possibilities.
We leverage over thirty years of innovation to make data infrastructure intelligent. Our unified data storage solutions deliver flexible, simplified, and silo-free infrastructure. Our active data management capabilities focus on security, compliance, and sustainability, while our adaptive operations enhance performance, efficiency, and productivity. Our extensive portfolio integrates hybrid and multi-cloud environments, addressing key customer priorities such as modernizing legacy systems, enhancing resilience against ransomware, and developing scalable, high-performance data pipelines for artificial intelligence (AI) workloads.
NetApp empowers customers to harness their data for accelerated innovation, improved operations, and competitive advantage. Our unified data storage solutions provide the flexibility to consistently and easily store any data type and support any workload. As the only enterprise-grade storage service natively embedded in the world’s largest clouds, we power data across Amazon AWS, Microsoft Azure, and Google Cloud. Our integrated data services enable active data management, security, protection, governance, and sustainability. Additionally, our operational services support adaptive operations across infrastructure, applications, and teams. Together with our Hybrid Cloud products, these services enable customers to construct a seamless, intelligent data infrastructure across hybrid multi-cloud environments.
Our operations are organized into two segments: Hybrid Cloud and Public Cloud.
Hybrid Cloud offers a unified data storage portfolio of storage management and infrastructure solutions that helps customers modernize their data centers. Our Hybrid Cloud portfolio accommodates both structured and unstructured data with unified storage optimized for flash, disk, and cloud storage, capable of handling data-intensive workloads and applications. Hybrid Cloud includes software, hardware, and related support, along with professional and other services.
Public Cloud offers a portfolio of products delivered primarily as-a-service, including related support. This portfolio includes cloud storage, data services, and operational services. These services are generally available on the leading public clouds, including Amazon AWS, Microsoft Azure, and Google Cloud.
Stock Repurchase and Dividend Activity
During the first nine months of fiscal 2026, we repurchased 7.0 million shares of our common stock at an average price of $107.26 per share, for an aggregate purchase price of $750 million. We also declared aggregate cash dividends of $1.56 per share in that period, for which we paid $310 million.
Restructuring Events
In the first nine months of fiscal 2026, we approved a restructuring plan to redirect resources to highest return activities and reduce costs. Aggregate charges recorded from restructuring plans during the first nine months of fiscal 2026 totaled $22 million.
Results of Operations
Our fiscal year is reported as a 52- or 53-week year that ends on the last Friday in April. Fiscal years 2026 and 2025, ending on April 24, 2026 and April 25, 2025, respectively, are each 52-week years, with 13 weeks in each of their quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in April and the associated quarters, months and periods of those fiscal years.
26
The following table sets forth certain condensed consolidated statements of income data as a percentage of net revenues for the periods indicated:
| Three Months Ended | Nine Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| January 23, 2026 | January 24, 2025 | January 23, 2026 | January 24, 2025 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product | 46 | % | 46 | % | 45 | % | 45 | % | ||||||||
| Services | 54 | 54 | 55 | 55 | ||||||||||||
| Net revenues | 100 | 100 | 100 | 100 | ||||||||||||
| Cost of revenues: | ||||||||||||||||
| Cost of product | 21 | 20 | 20 | 19 | ||||||||||||
| Cost of services | 9 | 10 | 9 | 11 | ||||||||||||
| Gross profit | 71 | 70 | 71 | 71 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 27 | 27 | 28 | 29 | ||||||||||||
| Research and development | 14 | 15 | 15 | 16 | ||||||||||||
| General and administrative | 5 | 5 | 5 | 5 | ||||||||||||
| Restructuring charges | — | 1 | — | 1 | ||||||||||||
| Acquisition-related expense | — | — | — | — | ||||||||||||
| Total operating expenses | 45 | 48 | 48 | 50 | ||||||||||||
| Income from operations | 25 | 22 | 23 | 20 | ||||||||||||
| Other (expense) income, net | — | — | — | 1 | ||||||||||||
| Income before income taxes | 25 | 23 | 23 | 21 | ||||||||||||
| Provision for income taxes | 6 | 4 | 5 | 4 | ||||||||||||
| Net income | 19 | % | 18 | % | 18 | % | 17 | % |
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Net Revenues (in millions, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| January 23, 2026 | January 24, 2025 | % Change | January 23, 2026 | January 24, 2025 | % Change | |||||||||||||||||||
| Net revenues | $ | 1,713 | $ | 1,641 | 4 | % | $ | 4,977 | $ | 4,840 | 3 | % |
The increase in net revenues for the third quarter and first nine months of fiscal 2026 compared to the corresponding periods of fiscal 2025 was due to an increase in both product and services revenues. Product revenues as a percentage of net revenues remained relatively flat in the third quarter and first nine months of fiscal 2026, as compared to the corresponding periods of fiscal 2025. Fluctuations in foreign currency exchange rates favorably impacted net revenues percentage growth by approximately two percentage points in the third quarter and first nine months of fiscal 2026, compared to the corresponding periods of fiscal 2025.
Product Revenues (in millions, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| January 23, 2026 | January 24, 2025 | % Change | January 23, 2026 | January 24, 2025 | % Change | |||||||||||||||||||
| Product revenues | $ | 786 | $ | 758 | 4 | % | $ | 2,228 | $ | 2,195 | 2 | % |
Hybrid Cloud
Product revenues are derived through the sale of our Hybrid Cloud solutions and consist of sales of configured all-flash array systems (including All-Flash FAS A-Series and All-Flash FAS C-Series with capacity flash) and hybrid systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, StorageGrid, OEM products, and add-on optional software.
Total product revenues increased in the third quarter and first nine months of fiscal 2026 compared to the corresponding periods of the prior year primarily due to higher sales of all-flash array systems and the favorable impact from foreign exchange rate fluctuations.
27
Services Revenues (in millions, except percentages):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| January 23, 2026 | January 24, 2025 | % Change | January 23, 2026 | January 24, 2025 | % Change | |||||||||||||||||||
| Services revenues | $ | 927 | $ | 883 | 5 | % | $ | 2,749 | $ | 2,645 | 4 | % | ||||||||||||
| Support | 654 | 621 | 5 | % | 1,948 | 1,887 | 3 | % | ||||||||||||||||
| Professional and other services | 99 | 88 | 13 | % | 295 | 257 | 15 | % | ||||||||||||||||
| Public cloud | 174 | 174 | — | % | 506 | 501 | 1 | % |
Hybrid Cloud
Hybrid Cloud services revenues are derived from the sale of: (1) support, which includes both hardware and software support contracts (the latter of which entitle customers to receive unspecified product upgrades and enhancements, bug fixes and patch releases), and (2) professional and other services, which include customer education and training.
Support revenues increased in the third quarter and first nine months of fiscal 2026 compared to the corresponding periods of the prior year, primarily due to a higher aggregate support contract value for our installed base and the favorable impact from foreign exchange rate fluctuations.
Professional and other services revenues increased in the third quarter and first nine months of fiscal 2026 compared to the corresponding periods of the prior year primarily due to an increase in revenues from our Keystone storage-as-a-service offering.
Public Cloud
Public Cloud revenues are derived from the sale of public cloud offerings delivered primarily as-a-service, which include cloud storage, data services and operational services.
Public Cloud revenues were flat in the third quarter and increased marginally in the first nine months of fiscal 2026 compared to the corresponding periods of the prior year, due to higher customer demand, driven by NetApp’s diversified cloud offerings and overall growth in the cloud market, offset by the loss of revenue from our Spot by NetApp business which we sold in the fourth quarter of fiscal 2025.
Cost of Revenues
Our cost of revenues consists of:
(1) cost of product revenues, composed of (a) cost of Hybrid Cloud product revenues, which in
[Excerpt truncated for page length; source filing is linked above.]
Latest 10-K MD&A
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the financial statements and the accompanying notes set forth under Part II, Item 8. – Financial Statements and Supplementary Data. The following discussion also contains trend information and other forward-looking statements that involve a number of risks and uncertainties. The Risk Factors set forth in Part I, Item 1A. – Risk Factors are hereby incorporated into the discussion by reference.
Executive Overview
Our Company
NetApp is a global leader in Intelligent Data Infrastructure, empowering organizations to realize the full potential of their data in a rapidly evolving digital world. Headquartered in San Jose, California, and serving customers in approximately 150 countries, NetApp delivers innovative solutions that enable seamless data management, protection, and mobility across on-premises, hybrid, and multi-cloud environments.
Our flagship ONTAP® data management software, together with a comprehensive portfolio of all-flash, hybrid-flash, and cloud-native offerings, forms the foundation for customers’ digital transformation initiatives. NetApp’s deep integration with all major public cloud providers—AWS, Microsoft Azure, and Google Cloud—enables our customers to run critical workloads anywhere, with consistent performance, security, and governance.
NetApp's strategic focus is on modernizing data infrastructure, enabling resilient and secure operations, optimizing cloud strategies, and accelerating artificial intelligence (AI) adoption. Through continued investment in innovation, we have expanded our portfolio to include advanced AI-ready infrastructure, Storage-as-a-Service (Keystone), and robust cyber resilience solutions. Our partnerships with leading technology companies and a global ecosystem of channel partners further extend our reach and solution capabilities.
Our operations are organized into two segments: Hybrid Cloud and Public Cloud.
Hybrid Cloud offers a unified data storage portfolio of storage management and infrastructure solutions that helps customers modernize their data centers. Our Hybrid Cloud portfolio accommodates both structured and unstructured data with unified storage optimized for flash, disk, and cloud storage, capable of handling data-intensive workloads and applications. Hybrid Cloud includes software, hardware, and related support, along with professional and other services.
Public Cloud offers a portfolio of products delivered primarily as-a-service, including related support. This portfolio includes cloud storage, data services, and operational services. These services are generally available on the leading public clouds, including AWS, Microsoft Azure, and Google Cloud.
Global Business Environment
Supply Chain
Inflationary pressures and supply chain constraints have impacted our operations beginning in the second half of fiscal 2026. We have experienced increased costs for memory and other components, which have affected our gross margins, and we expect costs will remain elevated, or continue to increase, in the near term. Additionally, the tight supply environment for specific products, which is anticipated to persist, could pose challenges in meeting customer demand for those products.
To address these challenges, we have implemented several strategic actions:
•
We raised our pricing in the fourth quarter of fiscal 2026, in line with market trends. We expect to continue adjusting prices as necessary to offset rising costs and remain aligned with the market. While we aim to match supplier costs with our pricing to customers, we recognize the need to give customers time to adjust to these changes.
•
We are leveraging our relationships with multiple suppliers where available to enable component availability and manage costs effectively. This strategy helps us maintain competitive positions in the market from a pricing standpoint. Our history of successful supplier management positions us well to navigate these challenges.
•
We continue to offer a wide range of solutions to meet various customer needs and priorities. This includes competitive storage options, all-flash solutions, hybrid-flash solutions, public cloud solutions, and our Keystone Storage-as-a-Service offering. By providing diverse options, we aim to align with our customers’ budget priorities and deliver the best value offerings.
37
These actions are part of our ongoing efforts to mitigate the impact of inflation and supply chain constraints on our operating results. We will continue to monitor these trends and uncertainties and adjust our strategies as needed to maintain our financial performance.
Financial Results and Key Performance Metrics Overview
The following table provides an overview of key financial metrics for the years indicated (in millions, except per share amounts and percentages):
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | April 26, 2024 | ||||||||||
| Net revenues | $ | 6,925 | $ | 6,572 | $ | 6,268 | ||||||
| Gross profit | $ | 4,899 | $ | 4,613 | $ | 4,433 | ||||||
| Gross margin | 71 | % | 70 | % | 71 | % | ||||||
| Income from operations | $ | 1,674 | $ | 1,337 | $ | 1,214 | ||||||
| Income from operations as a percentage of net revenues | 24 | % | 20 | % | 19 | % | ||||||
| Provision for income taxes | $ | 372 | $ | 197 | $ | 277 | ||||||
| Net income | $ | 1,276 | $ | 1,186 | $ | 986 | ||||||
| Diluted net income per share | $ | 6.35 | $ | 5.67 | $ | 4.63 | ||||||
| Net cash provided by operating activities | $ | 2,067 | $ | 1,506 | $ | 1,685 |
| April 24, 2026 | April 25, 2025 | ||||||
|---|---|---|---|---|---|---|---|
| Deferred revenue | $ | 4,845 | $ | 4,536 |
•
Net revenues: Our net revenues increased 5% in fiscal 2026 compared to fiscal 2025, due to increases in both product revenues and services revenues.
•
Gross margin: Our gross margin increased less than one percentage point in fiscal 2026 compared to fiscal 2025, due to the increase in gross margins on services revenues, partially offset by lower gross margins on product revenues.
•
Income from operations as a percentage of net revenues: Our income from operations as a percentage of net revenues increased by four percentage points in fiscal 2026 compared to fiscal 2025, primarily due to higher net revenues.
•
Provision for income taxes: Our provision for income taxes increased in fiscal 2026 compared to fiscal 2025 primarily due to benefits related to the Internal Revenue Service ("IRS") examination of our fiscal 2018 and 2019 U.S. income tax returns in the prior year.
•
Net income and Diluted net income per share: The increase in both net income and diluted net income per share in fiscal 2026 compared to fiscal 2025 reflect the factors discussed above.
Stock Repurchase Program and Dividend Activity
During fiscal 2026, we repurchased 9.0 million shares of our common stock at an average price of $105.89 per share, for an aggregate purchase price of $950 million. We also declared aggregate cash dividends of $2.08 per share in fiscal 2026, for which we paid a total of $413 million.
Restructuring Events
During fiscal 2026, we executed a restructuring plan and recognized expenses totaling $21 million consisting primarily of employee severance-related costs related to the current year and prior year plans.
Senior Notes Repayment
On June 23, 2025, upon maturity, we repaid the 1.875% Senior Notes due June 2025 for an aggregate amount of $757 million, comprised of the principal and unpaid interest.
38
Results of Operations
Our fiscal year is reported on a 52- or 53-week year that ends on the last Friday in April. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal months with calendar months. Fiscal years 2026, 2025 and 2024, which ended on April 24, 2026, April 25, 2025 and April 26, 2024, respectively, are all 52-week years, with 13 weeks in each of their quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in April and the associated quarters, months and periods of those fiscal years.
The following table sets forth certain consolidated statements of income data as a percentage of net revenues for the periods indicated:
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | April 26, 2024 | ||||||||||
| Revenues: | ||||||||||||
| Product | 46 | % | 46 | % | 45 | % | ||||||
| Services | 54 | 54 | 55 | |||||||||
| Net revenues | 100 | 100 | 100 | |||||||||
| Cost of revenues: | ||||||||||||
| Cost of product | 20 | 20 | 18 | |||||||||
| Cost of services | 9 | 10 | 11 | |||||||||
| Gross profit | 71 | 70 | 71 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 27 | 28 | 29 | |||||||||
| Research and development | 14 | 15 | 16 | |||||||||
| General and administrative | 5 | 5 | 5 | |||||||||
| Restructuring charges | — | 1 | 1 | |||||||||
| Acquisition-related expense | — | — | — | |||||||||
| Total operating expenses | 47 | 50 | 51 | |||||||||
| Income from operations | 24 | 20 | 19 | |||||||||
| Other (expense) income, net | — | 1 | 1 | |||||||||
| Income before income taxes | 24 | 21 | 20 | |||||||||
| Provision for income taxes | 5 | 3 | 4 | |||||||||
| Net income | 18 | % | 18 | % | 16 | % |
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Net Revenues (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Net revenues | $ | 6,925 | $ | 6,572 | 5 | % | $ | 6,268 | 5 | % |
The increase in net revenues for fiscal 2026 compared to fiscal 2025 was due to an increase in both product revenues and services revenues. Product and services revenues as a percentage of net revenues remained relatively flat in fiscal 2026 as compared to fiscal 2025. Fluctuations in foreign currency exchange rates favorably impacted net revenues percentage growth year-over-year by two percentage points.
The increase in net revenues for fiscal 2025 compared to fiscal 2024 was due to an increase in both product revenues and services revenues. Product revenues as a percentage of net revenues increased by one percentage point in fiscal 2025 compared to fiscal 2024, while services revenues as a percentage of net revenues decreased by one percentage point.
39
Two customers, each of which is a distributor, accounted for 10% or more of net revenues:
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | April 26, 2024 | ||||||||||
| Customer A | 22 | % | 21 | % | 22 | % | ||||||
| Customer B | 21 | % | 24 | % | 22 | % |
Product Revenues (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Product revenues | $ | 3,194 | $ | 3,040 | 5 | % | $ | 2,849 | 7 | % |
Hybrid Cloud
Product revenues are derived through the sale of our Hybrid Cloud solutions and consist of sales of configured all-flash array systems (including AFF A-Series and AFF C-Series with capacity flash) and hybrid systems (including FAS), which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, StorageGrid, OEM products and add-on optional software.
Total product revenues increased in fiscal 2026 compared to fiscal 2025, primarily due to higher sales of all-flash array systems and the favorable impact from foreign exchange rate fluctuations. Product revenues in fiscal 2026 also benefited from the execution of a multi-year enterprise agreement.
Total product revenues increased in fiscal 2025 compared to fiscal 2024, primarily due to higher sales of all-flash array systems, partially offset by a decrease in sales of hybrid systems.
Services Revenues (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Services revenues | $ | 3,731 | $ | 3,532 | 6 | % | $ | 3,419 | 3 | % | ||||||||||
| Support | 2,636 | 2,512 | 5 | % | 2,488 | 1 | % | |||||||||||||
| Professional and other services | 407 | 355 | 15 | % | 320 | 11 | % | |||||||||||||
| Public cloud | 688 | 665 | 3 | % | 611 | 9 | % |
Hybrid Cloud
Hybrid Cloud services revenues are derived from the sale of: (1) support, which includes both hardware and software support contracts (the latter of which entitle customers to receive unspecified product upgrades and enhancements, bug fixes and patch releases), and (2) professional and other services, which include customer education and training.
Support revenues increased in fiscal 2026 compared to fiscal 2025 primarily due to a higher aggregate support contract value for our installed base and the favorable impact from foreign exchange rate fluctuations. Support revenues increased marginally in fiscal 2025 compared to fiscal 2024.
Professional and other services revenues increased in fiscal 2026 and fiscal 2025 compared to the respective prior years primarily reflecting higher revenues from our Keystone Storage-as-a-Service offering.
Public Cloud
Public Cloud revenues are derived from the sale of public cloud offerings delivered primarily as-a-service, which include cloud storage, data services and operational services.
Public Cloud revenues increased in fiscal 2026 and fiscal 2025 compared to the respective prior years primarily due to higher customer demand, driven by NetApp’s diversified cloud offerings and overall growth in the cloud market. The smaller increase in fiscal 2026 reflects the loss of revenue from our Spot by NetApp business which we sold in the fourth quarter of fiscal 2025.
40
Hybrid Cloud Segment Net Revenues by Storage Category (in millions, except percentages):
The following table presents Hybrid Cloud segment net revenues by storage category for the periods indicated:
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | April 26, 2024 | ||||||||||
| Hybrid Cloud segment net revenues | $ | 6,237 | $ | 5,907 | $ | 5,657 | ||||||
| All-flash revenues as a percentage of Hybrid Cloud segment net revenues | 67 | % | 64 | % | 58 | % | ||||||
| Hybrid-flash and other revenues as a percentage of Hybrid Cloud segment net revenues | 33 | % | 36 | % | 42 | % |
Percentages may not add due to rounding
The increases in all-flash revenues (comprised of all-flash product and related service revenues) as a percentage of total Hybrid Cloud segment net revenues for fiscal 2026 and fiscal 2025 as compared to the respective prior years reflect growing customer demand for our all-flash storage solutions, aided by all-flash market expansion.
Net Revenues by Geographic Area:
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | April 26, 2024 | ||||||||||
| United States, Canada and Latin America (Americas) | 51 | % | 51 | % | 51 | % | ||||||
| Americas Commercial | 41 | % | 40 | % | 40 | % | ||||||
| U.S. Public Sector | 10 | % | 11 | % | 11 | % | ||||||
| Europe, Middle East and Africa (EMEA) | 34 | % | 34 | % | 34 | % | ||||||
| Asia Pacific (APAC) | 15 | % | 15 | % | 15 | % |
Percentages may not add due to rounding
Sales to United States (U.S.) public sector markets includes revenue from the U.S. federal government and U.S. state governments, local municipalities and education institutions. Demand across geographies was relatively consistent for each fiscal year presented.
Cost of Revenues
Our cost of revenues consists of:
(1) cost of product revenues, composed of (a) cost of Hybrid Cloud product revenues, which includes the costs of manufacturing and shipping our products, inventory write-downs, and warranty costs, and (b) unallocated cost of product revenues, which includes stock-based compensation, and;
(2) cost of services revenues, composed of (a) cost of support revenues, which includes the costs of providing support activities for hardware and software support, global support partnership programs, and third-party royalty costs, (b) cost of professional and other services revenues, constituting the cost of delivering such services which includes depreciation expense, (c) cost of public cloud revenues, constituting the cost of providing our Public Cloud offerings which includes depreciation and amortization expense and third-party datacenter fees, and (d) unallocated cost of services revenues, which includes stock-based compensation and amortization of intangibles.
Cost of Product Revenues (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Cost of product revenues | $ | 1,401 | $ | 1,284 | 9 | % | $ | 1,137 | 13 | % | ||||||||||
| Hybrid Cloud | 1,395 | 1,278 | 9 | % | 1,131 | 13 | % | |||||||||||||
| Unallocated | 6 | 6 | — | % | 6 | — | % |
41
Hybrid Cloud
Cost of Hybrid Cloud product revenues represented 44%, 42% and 40% of Hybrid Cloud product revenues in fiscal 2026, 2025 and 2024, respectively. Materials costs represented 91%, 89% and 88% of cost of Hybrid Cloud product revenues in fiscal 2026, 2025 and 2024, respectively.
Materials costs increased by $126 million in fiscal 2026 compared to fiscal 2025 primarily reflecting the increase in product revenues and higher component costs. Materials costs increased by $140 million in fiscal 2025 compared to fiscal 2024 primarily reflecting the increase in product revenues.
Hybrid Cloud product gross margins decreased by two percentage points in fiscal 2026 compared to fiscal 2025 primarily due to higher component costs, partially offset by the favorable impact from a multi-year enterprise agreement. Hybrid Cloud product gross margins decreased by two percentage points in fiscal 2025 compared to fiscal 2024 primarily due to higher component costs.
In response to rising component costs, we raised our prices in the fourth quarter of fiscal 2026, which we expect to support product gross margins in early fiscal 2027. We expect to continue adjusting our pricing as necessary to align with any significant changes in component costs.
Unallocated
Unallocated cost of product revenues were consistent for each fiscal year presented.
Cost of Services Revenues (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Cost of services revenues | $ | 625 | $ | 675 | (7 | )% | $ | 698 | (3 | )% | ||||||||||
| Support | 198 | 197 | 1 | % | 195 | 1 | % | |||||||||||||
| Professional and other services | 281 | 261 | 8 | % | 243 | 7 | % | |||||||||||||
| Public cloud | 113 | 165 | (32 | )% | 203 | (19 | )% | |||||||||||||
| Unallocated | 33 | 52 | (37 | )% | 57 | (9 | )% |
Hybrid Cloud
Cost of Hybrid Cloud services revenues, which are composed of the costs of support and professional and other services, increased in fiscal 2026 and fiscal 2025 compared to the respective prior years reflecting the increase in Hybrid Cloud services revenues. Cost of Hybrid Cloud services revenues represented 16% of Hybrid Cloud services revenues in fiscal 2026, 2025 and 2024.
Hybrid Cloud support gross margins were similar in fiscal 2026, fiscal 2025 and fiscal 2024. Hybrid Cloud professional and other services gross margins increased by five percentage points in fiscal 2026 compared to fiscal 2025 and by two percentage points in fiscal 2025 compared to fiscal 2024 primarily due to the mix of services provided in each year.
Public Cloud
Cost of Public Cloud revenues decreased, while Public Cloud gross margins increased by eight percentage points, in fiscal 2026 and fiscal 2025 compared to the respective prior years. These fluctuations were due to cost optimization that included a decrease in fixed assets depreciation, and the mix of offerings provided which was impacted by the sale of our Spot by NetApp business in the fourth quarter of fiscal 2025.
Unallocated
Unallocated cost of services revenues decreased in fiscal 2026 and fiscal 2025 compared to the respective prior years due to the derecognition of certain intangible assets resulting from the sale of our Spot by NetApp business during the fourth quarter of fiscal 2025.
42
Operating Expenses
Sales and Marketing, Research and Development and General and Administrative Expenses
Sales and marketing, research and development, and general and administrative expenses for fiscal 2026 totaled $3,204 million, or 46% of net revenues, representing a decrease of three percentage points compared to fiscal 2025, primarily due to an increase in net revenues. While fluctuations in foreign currency exchange rates favorably impacted net revenues in fiscal 2026 compared to fiscal 2025, they adversely impacted sales and marketing, research and development and general and administrative expenses.
Sales and marketing, research and development, and general and administrative expenses for fiscal 2025 totaled $3,188 million, or 49% of net revenues, representing a decrease of one percentage point compared to fiscal 2024.
Compensation costs represent the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation expense and employee incentive compensation plan costs.
Total compensation costs included in sales and marketing, research and development and general and administrative expenses remained relatively flat in fiscal 2026, 2025 and 2024.
Sales and Marketing (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Sales and marketing expenses | $ | 1,869 | $ | 1,865 | — | % | $ | 1,828 | 2 | % |
Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, facilities and IT support costs, advertising and marketing promotional expense and travel and entertainment expense.
Sales and marketing expenses in fiscal 2026 were relatively flat compared to fiscal 2025. The increase in sales and marketing expenses in fiscal 2025 compared to fiscal 2024 was primarily due to an increase in sales commission expenses.
Research and Development (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Research and development expenses | $ | 991 | $ | 1,012 | (2 | )% | $ | 1,029 | (2 | )% |
Research and development expenses consist primarily of compensation costs, facilities and IT support costs, depreciation, equipment and software related costs, prototypes, non-recurring engineering charges and other outside services costs.
The decrease in research and development expenses in fiscal 2026 compared to fiscal 2025 was primarily attributable to lower compensation costs and lower spend on engineering projects. The decrease in research and development expenses in fiscal 2025 compared to fiscal 2024 was primarily due to lower compensation costs.
General and Administrative (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| General and administrative expenses | $ | 344 | $ | 311 | 11 | % | $ | 308 | 1 | % |
General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and facilities and IT support costs.
The increase in general and administrative expenses in fiscal 2026 compared to fiscal 2025 was primarily due to increases in all components of compensation costs, predominately salaries and stock-based compensation expense, and higher spend on professional services. General and administrative expenses remained relatively flat in fiscal 2025 compared to fiscal 2024.
43
Restructuring Charges (in millions, except percentages):
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Restructuring charges | $ | 21 | $ | 83 | (75 | )% | $ | 44 | 89 | % |
In an effort to reduce our cost structure and redirect resources to our highest return activities, in fiscal 2026, 2025 and 2024, we initiated a number of business realignment plans designed to streamline our business and focus on key strategic opportunities. These plans resulted in aggregate charges of $21 million, $83 million, and $44 million, respectively, consisting primarily of employee severance-related costs. Additionally, the aggregate charges for fiscal 2025 and fiscal 2024 included optimization of our global office space for our hybrid work model. See Note 11 – Restructuring Charges of the Notes to Consolidated Financial Statements included in Part II, Item 8 for more details regarding our restructuring plans.
Other (Expense) Income, Net (in millions, except percentages)
The components of other (expense) income, net were as follows:
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Interest income | $ | 113 | $ | 112 | 1 | % | $ | 112 | — | % | ||||||||||
| Interest expense | (109 | ) | (64 | ) | 70 | % | (64 | ) | — | % | ||||||||||
| Other, net | (30 | ) | (2 | ) | NM | 1 | NM | |||||||||||||
| Total | $ | (26 | ) | $ | 46 | (157 | )% | $ | 49 | (6 | )% |
NM - Not Meaningful
Interest income in fiscal 2026 was relatively flat compared to fiscal 2025. Interest expense increased in fiscal 2026 compared to fiscal 2025 due to a higher average outstanding aggregate principal amount of Senior Notes, with a higher average coupon rate. The difference in Other, net in fiscal 2026 compared to fiscal 2025 is primarily due to fluctuations in foreign exchange gains and losses year-over-year.
Each component of other (expense) income, net was relatively flat in fiscal 2025 compared to fiscal 2024.
Provision for Income Taxes (in millions, except percentages):
Our provision for income taxes and effective tax rates were as follows:
| Year Ended | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 24, 2026 | April 25, 2025 | % Change | April 26, 2024 | % Change | ||||||||||||||||
| Provision for income taxes | $ | 372 | $ | 197 | 89 | % | $ | 277 | (29 | )% | ||||||||||
| Effective tax rate | 22.6 | % | 14.2 | % | NM | 21.9 | % | NM |
NM - Not Meaningful
The differences in the effective tax rates between fiscal years were primarily due to fiscal 2025 benefits related to the Internal Revenue Service (“IRS”) substantially completing the examination of our fiscal 2018 and fiscal 2019 U.S. income tax returns, which resulted in the recognition of a tax benefit of $36 million attributable to the release of related tax reserves.
Liquidity, Capital Resources and Cash Requirements
| (In millions) | April 24, 2026 | April 25, 2025 | |||||
|---|---|---|---|---|---|---|---|
| Cash, cash equivalents and short-term investments | $ | 3,584 | $ | 3,846 | |||
| Principal amount of debt | $ | 2,500 | $ | 3,250 |
44
The following is a summary of our cash flow activities:
| Year Ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | April 24, 2026 | April 25, 2025 | ||||||
| Net cash provided by operating activities | $ | 2,067 | $ | 1,506 | ||||
| Net cash (used in) provided by investing activities | (595 | ) | 147 | |||||
| Net cash used in financing activities | (2,147 | ) | (828 | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1 | 15 | ||||||
| Net change in cash, cash equivalents and restricted cash | $ | (674 | ) | $ | 840 |
As of April 24, 2026, our cash, cash equivalents and short-term investments totaled $3.6 billion, reflecting a decrease of $262 million from April 25, 2025. The decrease was primarily due to a $750 million principal repayment of our 1.875% Senior Notes due June 2025, $950 million used for the repurchase of our common stock, $413 million used for the payment of dividends, and $198 million used for purchases of property and equipment, partially offset by $2.1 billion provided by operating activities. Net working capital was $1.8 billion as of April 24, 2026, an increase of $566 million compared to April 25, 2025.
Cash Flows from Operating Activities
During fiscal 2026, cash provided by operating activities reflected net income of $1.3 billion which was increased for non-cash depreciation and amortization expense of $200 million and non-cash stock-based compensation expense of $382 million.
Significant changes in assets and liabilities during fiscal 2026 included the following:
•
Deferred revenue increased by $281 million, primarily due to an increase in deferred revenue for software and hardware support contracts.
During fiscal 2025, cash provided by operating activities reflected net income of $1.2 billion which was increased for non-cash depreciation and amortization expense of $243 million and non-cash stock-based compensation expense of $386 million.
Significant changes in assets and liabilities during fiscal 2025 included the following:
•
Accounts receivable increased by $219 million, primarily reflecting higher billing in the fourth quarter of fiscal 2025 compared to the fourth quarter of fiscal 2024.
•
Deferred revenue increased by $208 million, primarily due to an increase in deferred revenue for software and hardware support contracts.
•
Long-term taxes payable decreased by $207 million, primarily due to settlements associated with certain IRS tax examinations and changes in prior period tax positions.
We expect that cash provided by operating activities may materially fluctuate in future periods due to a number of factors, including fluctuations in our operating results, shipping linearity, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, and the timing and amount of compensation, income taxes and other payments.
Cash Flows from Investing Activities
During fiscal 2026, we used $412 million for the purchases of investments, net of maturities and sales, and paid $198 million for capital expenditures.
During fiscal 2025, we generated $245 million primarily from maturities and sales of investments, net of purchases, and paid $168 million for capital expenditures. Additionally, we received proceeds of $70 million from the sale of our Spot by NetApp business.
45
Cash Flows from Financing Activities
During fiscal 2026, we used $950 million for the repurchase of 9.0 million shares of common stock, $413 million for the payment of dividends and $750 million principal repayment upon maturity.
During fiscal 2025, we used $1.2 billion for the repurchase of 10.2 million shares of common stock, $424 million for the payment of dividends and $400 million principal repayment upon maturity, partially offset by $1.24 billion of net proceeds from the issuance of Senior Notes.
Key factors that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable, accounts payable and inventories, the timing and amount of stock repurchases and payment of cash dividends, the impact of foreign exchange rate changes, our ability to effectively integrate acquired products, businesses and technologies and the timing of repayments of our debt. Based on past performance and our current business outlook, we believe that our sources of liquidity, including cash, cash equivalents and short-term investments, cash generated from operations, and our ability to access capital markets and committed credit lines will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months and thereafter for the foreseeable future. We may choose to periodically raise additional debt capital based on certain conditions, including the refinancing of upcoming maturities and/or for potential strategic acquisitions and investments. Our ability to obtain this or any additional financing that we may pursue or need, will depend on, among other things, our business plans, operating performance and the condition of the capital markets at the time we seek financing. We may not be able to obtain such financing on terms acceptable to us or at all. In the event our liquidity is insufficient and we are unable to enter into new financing arrangements, we may be required to curtail spending and implement additional cost saving measures and restructuring actions. We cannot be certain that we will continue to generate cash flows at or above current levels. For a discussion of risks related to our cash flows and liquidity requirements, see Item 1A. Risk Factors.
Liquidity
Our principal sources of liquidity as of April 24, 2026 consisted of cash, cash equivalents and short-term investments, cash we expect to generate from operations, and our credit facility and commercial paper program.
Cash, cash equivalents and short-term investments consisted of the following (in millions):
| April 24, 2026 | April 25, 2025 | ||||||
|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 2,070 | $ | 2,742 | |||
| Short-term investments | 1,514 | 1,104 | |||||
| Total | $ | 3,584 | $ | 3,846 |
As of April 24, 2026 and April 25, 2025, $2.3 billion and $2.5 billion, respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based in U.S. dollar-denominated holdings, while $1.3 billion was available in the U.S as of the end of each fiscal year.
Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, fund research and development, meet capital expenditure needs, invest in critical or complementary technologies through asset purchases and/or business acquisitions, service interest and principal payments on our debt, fund our stock repurchase program, and pay dividends, as and if declared. In the ordinary course of business, we engage in periodic reviews of opportunities to invest in or acquire companies or units in companies to expand our total addressable market, leverage technological synergies and establish new streams of revenue.
The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counterparties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of April 24, 2026.
Our investment portfolio has been and will continue to be exposed to market risk due to trends in the credit and capital markets. We continue to closely monitor current economic and market events to minimize the market risk of our investment portfolio. We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. We utilize a variety of planning and financing strategies in an effort to ensure our worldwide cash is available when and where it is needed. We also have an automatic
46
shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC). We may in the future offer an additional unspecified amount of debt, equity and other securities.
Senior Notes
The following table summarizes the principal amount of our Senior Notes as of April 24, 2026 (in millions):
| Amount | |||
|---|---|---|---|
| 2.375% Senior Notes Due June 2027 | $ | 550 | |
| 2.70% Senior Notes Due June 2030 | 700 | ||
| 5.50% Senior Notes Due March 2032 | 625 | ||
| 5.70% Senior Notes Due March 2035 | 625 | ||
| Total | $ | 2,500 |
Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 7 – Financing Arrangements of the Notes to Consolidated Financial Statements included in Part II, Item 8.
On June 23, 2025, upon maturity, we repaid the 1.875% Senior Notes due June 2025 for an aggregate amount of $757 million, comprised of the principal and unpaid interest.
Credit Facility and Commercial Paper Program
We have a senior unsecured credit agreement with a syndicated group of lenders. The credit agreement, which was amended in March 2025, provides for a $1.0 billion revolving unsecured credit facility, with a sublimit of $50 million available for the issuance of letters of credit on our behalf. The credit facility matures on March 5, 2030, with an option for us to extend the maturity date for two additional 1-year periods, subject to certain conditions. The proceeds of the loans may be used by us for general corporate purposes and as liquidity support for our existing commercial paper program. As of April 24, 2026, we were compliant with all associated covenants in the agreement. No amounts were drawn against this credit facility during any of the periods presented.
We also have a commercial paper program (the “Program”), under which we may issue unsecured commercial paper notes. Amounts available under the Program may be borrowed, repaid and re-borrowed, with the aggregate face or principal amount of the notes outstanding under the Program at any time not to exceed $1.0 billion. The maturities of the notes can vary, but may not exceed 397 days from the date of issue. The notes are sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The proceeds from the issuance of the notes are used for general corporate purposes. No commercial paper notes were outstanding as of April 24, 2026.
Material Capital Expenditure Requirements
We expect to fund our capital expenditures, including our commitments related to facilities, equipment, operating leases and internal-use software development projects for at least the next 12 months through existing cash, cash equivalents, investments and cash generated from operations. The timing and amount of our capital requirements cannot be precisely determined and will depend on a number of factors, including future demand for products, changes in the enterprise storage and data management industry, hiring plans and our decisions related to the financing of our facilities and equipment requirements.
Transition Tax Payments
The Tax Cuts and Jobs Act of 2017 imposed a mandatory, one-time transition tax on accumulated foreign earnings and profits that had not previously been subject to U.S. income tax. A final transition tax payment of $179 million was paid during the second quarter of fiscal 2026.
Dividends and Stock Repurchase Program
On May 21, 2026, we declared a cash dividend of $0.52 per share of common stock, payable on July 29, 2026 to holders of record as of the close of business on July 10, 2026.
47
Under our common stock repurchase program, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, in privately negotiated transactions, through accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management. The stock repurchase program may be suspended or discontinued at any time. As of April 24, 2026, the remaining authorized amount for stock repurchases under this program was $0.5 billion. On May 21, 2026 our Board of Directors authorized the repurchase of an additional $1.0 billion of our common stock.
Purchase Commitments
In the ordinary course of business, we make commitments to third-party contract manufacturers and component suppliers to manage manufacturer lead times and meet product forecasts, and to other parties, to purchase various key components used in the manufacture of our products. In addition, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not yet received goods or services. These off-balance sheet purchase commitments totaled $1.4 billion at April 24, 2026, of which $1.1 billion is due in fiscal 2027, with the remainder due thereafter.
Legal Contingencies
We are subject to various legal proceedings and claims which arise in the normal course of business. See further details on such matters in Note 16 – Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8.
Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.
The summary of significant accounting policies is included in Note 1 – Description of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Part II, Item 8. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, and if changes in the estimate that are reasonably possible could materially impact the financial statements. The accounting policies described below reflect the significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements.
Revenue Recognition
Our contracts with customers often include the transfer of multiple products and services to the customer. In determining the amount and timing of revenue recognition, we assess which products and services are distinct performance obligations and allocate the transaction price, which may include fixed and/or variable amounts, among each performance obligation on a relative standalone selling price (SSP) basis. The following are the key estimates and assumptions and corresponding uncertainties included in this approach:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We evaluate whether products and services promised in our contracts with customers are distinct performance obligations that should be accounted for separately versus together. | | In certain contracts, the determination of our distinct performance obligations requires significant judgment. As our business and offerings to customers change over time, the products and services we determine to be distinct performance obligations may change. Such changes may adversely impact the amount of revenue and gross margin we report in a particular period. | |
| | In determining the transaction price of our contracts, we estimate variable consideration based on the expected value, primarily relying on our history. In certain situations, we may also use the most likely amount as the basis of our estimate. | | We may have insufficient relevant historical data or other information to arrive at an accurate estimate of variable consideration using either the “expected value” or “most likely amount” method. Additionally, changes in business practices, such as those related to sales returns or marketing programs, |
48
| may introduce new forms of variable consideration, as well as more complexity and uncertainty in the estimation process. | ||||
|---|---|---|---|---|
| | In contracts with multiple performance obligations, we establish SSPs based on the price at which products and services are sold separately. If SSPs are not observable through past transactions, we estimate them by maximizing the use of observable inputs including pricing strategy, market data, internally-approved pricing guidelines related to the performance obligations and other observable inputs. | | As our business and offerings evolve over time, modifications to our pricing and discounting methodologies, changes in the scope and nature of product and service offerings and/or changes in customer segmentation may result in a lack of consistency, making it difficult to establish and/or maintain SSPs. Changes in SSPs could result in different and unanticipated allocations of revenue in contracts with multiple performance obligations. These factors, among others, may adversely impact the amount of revenue and gross margin we report in a particular period. |
Goodwill and Purchased Intangible Assets
We allocate the purchase price of acquisitions to identifiable assets acquired and liabilities assumed at their acquisition date fair values based on established valuation techniques. Goodwill represents the residual value as of the acquisition date, which in most cases is measured as the excess of the purchase consideration transferred over the net of the acquisition date fair values of the assets acquired and liabilities assumed.
The carrying values of purchased intangible assets are reviewed whenever events and circumstances indicate that the net book value of an asset may not be recovered through expected future cash flows from its use and eventual disposition. We periodically review the estimated remaining useful lives of our intangible assets. This review may result in impairment charges or shortened useful lives, resulting in charges to our consolidated statements of income.
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of one of our reporting units may exceed its fair value. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. For our annual goodwill impairment test in the fourth quarter of fiscal 2026, we performed a qualitative assessment of goodwill impairment by evaluating relevant factors to determine whether it is more likely than not that the fair value of each of our reporting units is less than their carrying values. As a result of the qualitative assessment, we determined the quantitative test was not necessary and there was no impairment of goodwill.
49
The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our goodwill and purchased intangible assets:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | The assessment of fair value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction in accordance with the accounting guidance for the fair value measurement of nonfinancial assets.The valuation of purchased intangible assets is principally based on estimates of the future performance and cash flows expected to be generated by the acquired assets from the acquired business. | | While we employ experts to determine the acquisition date fair value of acquired intangibles, the fair values of assets acquired and liabilities assumed are based on significant management assumptions and estimates, which are inherently uncertain and highly subjective and as a result, actual results may differ from estimates. If different assumptions were to be used, it could materially impact the purchase price allocation. | |
| | Evaluations of possible goodwill and purchased intangible asset impairment require us to make judgments and assumptions related to the allocation of our balance sheet and income statement amounts and estimate future cash flows and fair market values of our reporting units and assets. | | In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill or purchased intangible assets. Assumptions and estimates about expected future cash flows and the fair values of our reporting units and purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as the adverse impact of unanticipated changes in macroeconomic conditions, and technological changes or new product introductions from competitors. They can also be affected by internal factors such as changes in business strategy or in forecasted product life cycles and roadmaps. Our ongoing consideration of these and other factors could result in future impairment charges or accelerated amortization expense, which could adversely affect our operating results. |
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets or liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The following are the key estimates and assumptions and corresponding uncertainties for our income taxes:
50
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | Our income tax provision is based on existing tax law and advanced pricing agreements or letter rulings we have with various tax authorities. | | Our provision for income taxes is subject to volatility and could be adversely impacted by future changes in existing tax laws, such as a change in tax rate, possible U.S. changes to the taxation of earnings of our foreign subsidiaries, and uncertainties as to future renewals of favorable tax agreements and rulings. | |
| | The determination of whether we should record or adjust a valuation allowance against our deferred tax assets is based on assumptions regarding our future profitability. | | Our future profits could differ from current expectations resulting in a change to our determination as to the amount of deferred tax assets that are more likely than not to be realized. We could adjust our valuation allowance with a corresponding impact to the tax provision in the period in which such determination is made. | |
| | The estimates for our uncertain tax positions are based primarily on company specific circumstances, applicable tax laws, tax opinions from outside firms and past results from examinations of our income tax returns. | | Significant judgment is required in evaluating our uncertain tax positions. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome or tax court rulings of these matters will not be different from that which is reflected in our historical tax provisions and accruals. |
MD&A history
Prior-year 10-K MD&A spans are extracted from SEC filings with the same bounded parser used for the latest filing. The latest 10-K appears above; prior years are below.
FY 2025 10-K MD&A
SEC filing source: 0000950170-25-083705.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the financial statements and the accompanying notes set forth under Part II, Item 8. – Financial Statements and Supplementary Data. The following discussion also contains trend information and other forward-looking statements that involve a number of risks and uncertainties. The Risk Factors set forth in Part I, Item 1A. – Risk Factors are hereby incorporated into the discussion by reference.
Executive Overview
Our Company
NetApp helps customers make their data infrastructure more seamless, more dynamic, and higher performing. We were incorporated in 1992, are headquartered in San Jose, California, and provide a full range of enterprise-class software, systems and services that customers use to transform their data infrastructures across data types, workloads, and environments to realize business possibilities.
We leverage over thirty years of innovation to make data infrastructure intelligent. Our unified data storage solutions deliver flexible, simplified, and silo-free infrastructure. Our active data management capabilities focus on security, compliance, and sustainability, while our adaptive operations enhance performance, efficiency, and productivity. Our extensive portfolio integrates hybrid and multi-cloud environments, addressing key customer priorities such as modernizing legacy systems, enhancing resilience against ransomware, and developing scalable, high-performance data pipelines for artificial intelligence (AI) workloads.
NetApp empowers customers to harness their data for accelerated innovation, improved operations, and competitive advantage. Our unified data storage solutions provide the flexibility to consistently and easily store any data type and support any workload. As the only enterprise-grade storage service natively embedded in the world’s largest clouds, we power data across Amazon AWS, Microsoft Azure, and Google Cloud. Our integrated data services enable active data management, security, protection, governance, and sustainability. Additionally, our operational services support adaptive operations across infrastructure, applications, and teams. Together with our Hybrid Cloud products, these services enable customers to construct a seamless, intelligent data infrastructure across hybrid multi-cloud environments.
Our operations are organized into two segments: Hybrid Cloud and Public Cloud.
Hybrid Cloud offers a unified data storage portfolio of storage management and infrastructure solutions that helps customers modernize their data centers. Our Hybrid Cloud portfolio accommodates both structured and unstructured data with unified storage optimized for flash, disk, and cloud storage, capable of handling data-intensive workloads and applications. Hybrid Cloud includes software, hardware, and related support, along with professional and other services.
Public Cloud offers a portfolio of products delivered primarily as-a-service, including related support. This portfolio includes cloud storage, data services, and operational services. These services are generally available on the leading public clouds, including Amazon AWS, Microsoft Azure, and Google Cloud.
Financial Results and Key Performance Metrics Overview
The following table provides an overview of key financial metrics for each of the last three fiscal years (in millions, except per share amounts and percentages):
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 25, 2025 | April 26, 2024 | April 28, 2023 | ||||||||||
| Net revenues | $ | 6,572 | $ | 6,268 | $ | 6,362 | ||||||
| Gross profit | $ | 4,613 | $ | 4,433 | $ | 4,209 | ||||||
| Gross margin | 70 | % | 71 | % | 66 | % | ||||||
| Income from operations | $ | 1,337 | $ | 1,214 | $ | 1,018 | ||||||
| Income from operations as a percentage of net revenues | 20 | % | 19 | % | 16 | % | ||||||
| Provision (benefit) for income taxes | $ | 197 | $ | 277 | $ | (208 | ) | |||||
| Net income | $ | 1,186 | $ | 986 | $ | 1,274 | ||||||
| Diluted net income per share | $ | 5.67 | $ | 4.63 | $ | 5.79 | ||||||
| Net cash provided by operating activities | $ | 1,506 | $ | 1,685 | $ | 1,107 |
| April 25, 2025 | April 26, 2024 | ||||||
|---|---|---|---|---|---|---|---|
| Deferred revenue and financed unearned services revenue | $ | 4,536 | $ | 4,234 |
36
•
Net revenues: Our net revenues increased approximately 5% in fiscal 2025 compared to fiscal 2024, due to increases in both product revenues and services revenues.
•
Gross margin: Our gross margin decreased less than one percentage point in fiscal 2025 compared to fiscal 2024, due to the decrease in gross margins on product revenues.
•
Income from operations as a percentage of net revenues: Our income from operations as a percentage of net revenues increased by one percentage point in fiscal 2025 compared to fiscal 2024, primarily due to higher net revenues.
•
Provision (benefit) for income taxes: Our provision for income taxes decreased in fiscal 2025 compared to fiscal 2024 primarily as a result of differences in discrete tax impacts in each year.
•
Net income and Diluted net income per share: The increase in both net income and diluted net income per share in fiscal 2025 compared to fiscal 2024 reflect the factors discussed above.
Stock Repurchase Program and Dividend Activity
During fiscal 2025, we repurchased 10.2 million shares of our common stock at an average price of $112.55 per share, for an aggregate purchase price of $1.2 billion. We also declared aggregate cash dividends of $2.08 per share in fiscal 2025, for which we paid a total of $424 million.
Restructuring Events
During fiscal 2025, we executed several restructuring plans and recognized expenses totaling $83 million consisting primarily of employee severance-related costs.
Senior Notes Issuance
In March 2025, we issued $625 million aggregate principal amount of 5.50% Senior Notes due 2032 and $625 million aggregate principal amount of 5.70% Senior Notes due 2035, for which we received total proceeds of $1.24 billion, net of discount and issuance costs.
37
Results of Operations
Our fiscal year is reported on a 52- or 53-week year that ends on the last Friday in April. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal months with calendar months. Fiscal years 2025, 2024 and 2023, which ended on April 25, 2025, April 26, 2024 and April 28, 2023, respectively, are all 52-week years, with 13 weeks in each of their quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in April and the associated quarters, months and periods of those fiscal years.
The following table sets forth certain Consolidated Statements of Income data as a percentage of net revenues for the periods indicated:
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | 2023 | ||||||||||
| Revenues: | ||||||||||||
| Product | 46 | % | 45 | % | 48 | % | ||||||
| Services | 54 | 55 | 52 | |||||||||
| Net revenues | 100 | 100 | 100 | |||||||||
| Cost of revenues: | ||||||||||||
| Cost of product | 20 | 18 | 24 | |||||||||
| Cost of services | 10 | 11 | 10 | |||||||||
| Gross profit | 70 | 71 | 66 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 28 | 29 | 29 | |||||||||
| Research and development | 15 | 16 | 15 | |||||||||
| General and administrative | 5 | 5 | 4 | |||||||||
| Restructuring charges | 1 | 1 | 2 | |||||||||
| Acquisition-related expense | — | — | — | |||||||||
| Total operating expenses | 50 | 51 | 50 | |||||||||
| Income from operations | 20 | 19 | 16 | |||||||||
| Other income, net | 1 | 1 | 1 | |||||||||
| Income before income taxes | 21 | 20 | 17 | |||||||||
| Provision (benefit) for income taxes | 3 | 4 | (3 | ) | ||||||||
| Net income | 18 | % | 16 | % | 20 | % |
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Net Revenues (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Net revenues | $ | 6,572 | $ | 6,268 | 5 | % | $ | 6,362 | (1 | )% |
The increase in net revenues for fiscal 2025 compared to fiscal 2024 was due to an increase in both product revenues and services revenues. Product revenues as a percentage of net revenues increased by approximately one percentage point in fiscal 2025 compared to fiscal 2024, while services revenues as a percentage of net revenues decreased by approximately one percentage point.
The decrease in net revenues for fiscal 2024 compared to fiscal 2023 was due to a decrease in product revenues partially offset by an increase in services revenues. Product revenues as a percentage of net revenues decreased by approximately three percentage points in fiscal 2024 compared to fiscal 2023, while services revenues as a percentage of net revenues increased by approximately three percentage points.
Sales through our indirect channels represented 78%, 76% and 78% of net revenues in fiscal 2025, 2024 and 2023, respectively.
The following customers, each of which is a distributor, accounted for 10% or more of net revenues:
38
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | 2023 | ||||||||||
| Arrow Electronics, Inc. | 21 | % | 22 | % | 24 | % | ||||||
| TD Synnex Corporation (previously presented as Tech Data Corporation) | 24 | % | 22 | % | 21 | % |
Product Revenues (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Product revenues | $ | 3,040 | $ | 2,849 | 7 | % | $ | 3,049 | (7 | )% |
Hybrid Cloud
In prior years, we presented the hardware and software components of our GAAP product revenues to illustrate the significance and value of the Company’s software. Because our revenue recognition policy under GAAP defines a configured storage system, inclusive of the operating system software essential to its functionality, as a single performance obligation, hardware and software components of our product revenues are considered non-GAAP measures. Effective in fiscal 2025, we are no longer presenting the non-GAAP hardware and software components of our product revenues, as management no longer considers them to be key financial measures. Our current strategy is expected to deliver investor value through growth in total revenues, including product revenues, while maintaining operational discipline to drive earnings leverage. While software continues to be the primary value driver of our products, NetApp is primarily focused on driving growth in total product revenues, through the sale of configured storage systems comprised of both hardware and software, with less focus on the pricing of each component. Additionally, we are considering potential opportunities to simplify pricing for certain products in the future, which may eliminate the existence of separate prices for hardware and software components and/or impact our ability to allocate between them.
Product revenues are derived through the sale of our Hybrid Cloud solutions and consist of sales of configured all-flash array systems (including All-Flash FAS A-Series and All-Flash FAS C-Series with capacity flash) and hybrid systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, StorageGrid, OEM products, NetApp HCI and add-on optional software.
Total product revenues increased in fiscal 2025 compared to fiscal 2024, primarily due to higher sales of C-Series all-flash array systems, partially offset by a decrease in sales of hybrid systems.
Total product revenues decreased in fiscal 2024 compared to fiscal 2023, primarily due to lower sales of hybrid systems due to softening customer demand, partially offset by an increase in sales of C-Series all-flash array systems.
Services Revenues (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Services revenues | $ | 3,532 | $ | 3,419 | 3 | % | $ | 3,313 | 3 | % | ||||||||||
| Support | 2,512 | 2,488 | 1 | % | 2,419 | 3 | % | |||||||||||||
| Professional and other services | 355 | 320 | 11 | % | 319 | — | % | |||||||||||||
| Public cloud | 665 | 611 | 9 | % | 575 | 6 | % |
Hybrid Cloud
Hybrid Cloud services revenues are derived from the sale of: (1) support, which includes both hardware and software support contracts (the latter of which entitle customers to receive unspecified product upgrades and enhancements, bug fixes and patch releases), and (2) professional and other services, which include customer education and training.
Support revenues increased marginally in fiscal 2025 compared to fiscal 2024 and increased in fiscal 2024 compared to fiscal 2023 as a result of a higher aggregate support contract value for our installed base.
Professional and other services revenues increased in fiscal 2025 compared to fiscal 2024 primarily due to an increase in revenues from our Keystone storage-as-a-service offering and remained relatively flat in fiscal 2024 compared to fiscal 2023.
Public Cloud
39
Public Cloud revenues are derived from the sale of public cloud offerings delivered primarily as-a-service, which include cloud storage, data services and operational services.
Public Cloud revenues increased in fiscal 2025 and fiscal 2024 compared to the respective prior years primarily due to customer demand for NetApp’s diversified cloud offerings, coupled with overall growth in the cloud market.
Revenues by Geographic Area:
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | 2023 | ||||||||||
| United States, Canada and Latin America (Americas) | 51 | % | 51 | % | 51 | % | ||||||
| Europe, Middle East and Africa (EMEA) | 34 | % | 34 | % | 34 | % | ||||||
| Asia Pacific (APAC) | 15 | % | 15 | % | 15 | % |
Percentages may not add due to rounding
Americas revenues consist of sales to Americas commercial and United States (U.S.) public sector markets. Demand across geographies was relatively consistent for each fiscal year presented.
Cost of Revenues
Our cost of revenues consists of:
(1) cost of product revenues, composed of (a) cost of Hybrid Cloud product revenues, which includes the costs of manufacturing and shipping our products, inventory write-downs, and warranty costs, and (b) unallocated cost of product revenues, which includes stock-based compensation and amortization of intangibles, and;
(2) cost of services revenues, composed of (a) cost of support revenues, which includes the costs of providing support activities for hardware and software support, global support partnership programs, and third party royalty costs, (b) cost of professional and other services revenues, (c) cost of public cloud revenues, constituting the cost of providing our Public Cloud offerings which includes depreciation and amortization expense and third party datacenter fees, and (d) unallocated cost of services revenues, which includes stock-based compensation and amortization of intangibles.
Cost of Product Revenues (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Cost of product revenues | $ | 1,284 | $ | 1,137 | 13 | % | $ | 1,517 | (25 | )% | ||||||||||
| Hybrid Cloud | 1,278 | 1,131 | 13 | % | 1,511 | (25 | )% | |||||||||||||
| Unallocated | 6 | 6 | — | % | 6 | — | % |
Hybrid Cloud
Cost of Hybrid Cloud product revenues represented 42%, 40% and 50% of Hybrid Cloud product revenues in fiscal 2025, 2024 and 2023, respectively. Materials costs represented 89%, 88% and 94% of cost of Hybrid Cloud product revenues in fiscal 2025, 2024 and 2023, respectively.
Materials costs increased by $140 million in fiscal 2025 compared to fiscal 2024 primarily reflecting the increase in product revenues.
Hybrid Cloud product gross margins decreased by approximately two percentage points in fiscal 2025 compared to fiscal 2024 primarily due to higher component costs.
Materials costs decreased by $418 million in fiscal 2024 compared to fiscal 2023 reflecting lower component and freight costs as a result of supply chain improvements. Materials costs were also impacted by the decrease in product revenues in fiscal 2024.
Hybrid Cloud product gross margins increased by approximately ten percentage points in fiscal 2024 compared to fiscal 2023 primarily due to lower component and freight costs.
Unallocated
40
Unallocated cost of product revenues were consistent for each fiscal year presented.
Cost of Services Revenues (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Cost of services revenues | $ | 675 | $ | 698 | (3 | )% | $ | 636 | 10 | % | ||||||||||
| Support | 197 | 195 | 1 | % | 181 | 8 | % | |||||||||||||
| Professional and other services | 261 | 243 | 7 | % | 211 | 15 | % | |||||||||||||
| Public cloud | 165 | 203 | (19 | )% | 184 | 10 | % | |||||||||||||
| Unallocated | 52 | 57 | (9 | )% | 60 | (5 | )% |
Hybrid Cloud
Cost of Hybrid Cloud services revenues, which are composed of the costs of support and professional and other services, increased in fiscal 2025 and fiscal 2024 compared to the respective prior years reflecting the increase in Hybrid Cloud services revenues. Cost of Hybrid Cloud services revenues represented 16%, 16% and 14% of Hybrid Cloud services revenues in fiscal 2025, 2024 and 2023, respectively.
Hybrid Cloud support gross margins were similar in fiscal 2025, fiscal 2024 and fiscal 2023. Hybrid Cloud professional and other services gross margins increased by approximately two percentage points in fiscal 2025 compared to fiscal 2024 while they decreased by approximately ten percentage points in fiscal 2024 compared to fiscal 2023 primarily due to the mix of services provided.
Public Cloud
Cost of Public Cloud revenues decreased in fiscal 2025 compared to fiscal 2024, while Public Cloud gross margins increased by eight percentage points in fiscal 2025 compared to fiscal 2024. The decrease in cost of Public Cloud revenues and improved gross margins was due to cost optimization that included a decrease in fixed assets depreciation and the mix of offerings provided.
Cost of Public Cloud revenues increased in fiscal 2024 compared to fiscal 2023, reflecting the increase in Public Cloud revenues. Public Cloud gross margins decreased by one percentage point in fiscal 2024 compared to fiscal 2023 primarily due to the mix of offerings provided.
Unallocated
Unallocated cost of services revenues decreased in fiscal 2025 compared to fiscal 2024 due to the derecognition of certain intangible assets as a result of the sale of our cloud optimization and management software business known as Spot by NetApp during the fourth quarter of fiscal 2025. Unallocated cost of services revenues decreased in fiscal 2024 compared to fiscal 2023 due to certain intangible assets becoming fully amortized during the first quarter of fiscal 2024.
Operating Expenses
Sales and Marketing, Research and Development and General and Administrative Expenses
Sales and marketing, research and development, and general and administrative expenses for fiscal 2025 totaled $3,188 million, or 49% of net revenues, representing a decrease of one percentage point compared to fiscal 2024.
Sales and marketing, research and development, and general and administrative expenses for fiscal 2024 totaled $3,165 million, or 50% of net revenues, representing an increase of two percentage points compared to fiscal 2023.
Compensation costs represent the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation expense and employee incentive compensation plan costs.
Total compensation costs included in sales and marketing, research and development and general and administrative expenses in fiscal 2025 were relatively flat compared to fiscal 2024.
Total compensation costs included in sales and marketing, research and development and general and administrative expenses increased by $115 million, or 6%, during fiscal 2024 compared to fiscal 2023, primarily due to higher incentive compensation expense
41
reflecting higher operating performance against goals. The increase was partially offset by lower salaries expense, reflecting a decrease in average headcount of 7%.
Sales and Marketing (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Sales and marketing expenses | $ | 1,865 | $ | 1,828 | 2 | % | $ | 1,829 | — | % |
Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, facilities and IT support costs, advertising and marketing promotional expense and travel and entertainment expense.
The increase in sales and marketing expenses in fiscal 2025 compared to fiscal 2024 was primarily due to an increase in sales commission expenses.
All primary components of sales and marketing expenses were relatively consistent in fiscal 2024 compared to fiscal 2023.
Research and Development (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Research and development expenses | $ | 1,012 | $ | 1,029 | (2 | )% | $ | 956 | 8 | % |
Research and development expenses consist primarily of compensation costs, facilities and IT support costs, depreciation, equipment and software related costs, prototypes, non-recurring engineering charges and other outside services costs.
The decrease in research and development expenses in fiscal 2025 compared to fiscal 2024 was primarily due to lower compensation costs.
The increase in research and development expenses in fiscal 2024 compared to fiscal 2023 was primarily due to higher compensation costs, attributable to higher incentive compensation expense and stock-based compensation expense, partially offset by lower salaries expense, reflecting a decrease in average headcount of 5%.
General and Administrative (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| General and administrative expenses | $ | 311 | $ | 308 | 1 | % | $ | 265 | 16 | % |
General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and facilities and IT support costs.
General and administrative expenses remained relatively flat in fiscal 2025 compared to fiscal 2024.
The increase in general and administrative expenses in fiscal 2024 compared to fiscal 2023 was attributable to increases in all components of compensation costs, but predominately incentive compensation expense. Professional and legal fees and outside services expense was also slightly higher in fiscal 2024 due to higher spending on certain business transformation projects.
Restructuring Charges (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Restructuring charges | $ | 83 | $ | 44 | 89 | % | $ | 120 | (63 | )% |
42
In an effort to reduce our cost structure and redirect resources to our highest return activities, in fiscal 2025, 2024 and 2023, we initiated a number of business realignment plans designed to streamline our business and focus on key strategic opportunities. These plans resulted in aggregate charges of $83 million, $44 million, and $120 million, respectively, consisting primarily of employee severance-related costs. Additionally, the aggregate charges for fiscal 2025 and fiscal 2024 included optimization of our global office space for our hybrid work model. See Note 12 – Restructuring Charges of the Notes to Consolidated Financial Statements included in Part II, Item 8 for more details regarding our restructuring plans.
Acquisition-related Expense (in millions, except percentages):
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Acquisition-related expense | $ | 5 | $ | 10 | (50 | )% | $ | 21 | (52 | )% |
We incurred $5 million, $10 million and $21 million of acquisition-related expenses, primarily consisting of legal and consulting fees, in fiscal 2025, fiscal 2024 and fiscal 2023, respectively, associated with our acquisitions and subsequent integrations.
Other Income, Net (in millions, except percentages)
The components of other income, net were as follows:
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Interest income | $ | 112 | $ | 112 | — | % | $ | 69 | 62 | % | ||||||||||
| Interest expense | (64 | ) | (64 | ) | — | % | (67 | ) | (4 | )% | ||||||||||
| Other, net | (2 | ) | 1 | NM | 46 | NM | ||||||||||||||
| Total | $ | 46 | $ | 49 | (6 | )% | $ | 48 | 2 | % |
NM - Not Meaningful
Interest income and interest expense in fiscal 2025 were relatively flat compared to fiscal 2024. Each component of other income, net was relatively flat in fiscal 2025 compared to fiscal 2024.
Interest income increased in fiscal 2024 compared to fiscal 2023 primarily due to higher yields earned on our cash and investments.
Interest expense decreased in fiscal 2024 compared to fiscal 2023 due to the extinguishment of certain senior notes in the second quarter of fiscal 2023.
Other, net for fiscal 2023 includes $22 million of other income for non-refundable, up-front payments from customers in Russia for support contracts, which we were not able to fulfill due to imposed sanctions and for which we have no remaining legal obligation to perform. Other, net for fiscal 2023 also includes a $32 million gain recognized on our sale of a minority equity interest in a privately held company for proceeds of $59 million. The remaining difference in Other, net for fiscal 2024 compared to fiscal 2023 is primarily due to differences in foreign exchange gains and losses.
Provision (Benefit) for Income Taxes (in millions, except percentages):
Our provision (benefit) for income taxes and effective tax rates were as follows:
| Fiscal Year | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | % Change | 2023 | % Change | ||||||||||||||||
| Provision (benefit) for income taxes | $ | 197 | $ | 277 | (29 | )% | $ | (208 | ) | (233 | )% | |||||||||
| Effective tax rate | 14.2 | % | 21.9 | % | NM | (19.5 | )% | NM |
NM - Not Meaningful
The differences in the effective tax rates between fiscal years were primarily due to fiscal 2025 benefits related to the Internal Revenue Service (“IRS”) examination of our fiscal 2018 and fiscal 2019 U.S. income tax returns and fiscal 2023 benefits resulting from an intra-entity asset transfer of certain IP, partially offset by discrete tax expense recorded as a result of the Danish Supreme Court ruling received January 9, 2023.
During the fourth quarter of fiscal 2025, the IRS substantially completed the examination of our fiscal 2018 and fiscal 2019 U.S. income tax returns, and we recognized a tax benefit of $36 million attributable to the release of related tax reserves.
43
During fiscal 2023, we completed an intra-entity asset transfer of certain IP to our international headquarters (the “IP Transfer”). The transaction resulted in a step-up of tax-deductible basis in the transferred assets, and accordingly, created a temporary difference where the tax basis exceeded the financial statement basis of such intangible assets, which resulted in the recognition of a discrete tax benefit and related deferred tax asset of $524 million during the second quarter of fiscal 2023. Management applied significant judgment when determining the fair value of the IP, which serves as the tax basis of the deferred tax asset. With the assistance of third-party valuation specialists, the fair value of the IP was determined principally based on the present value of projected cash flows related to the IP which reflects management’s assumptions regarding projected revenues, earnings before interest and taxes, and a discount rate. The tax-deductible amortization related to the transferred IP rights will be recognized in future periods and any amortization that is unused in a particular year can be carried forward indefinitely. The deferred tax asset and the tax benefit were measured based on the enacted tax rates expected to apply in the years the asset is expected to be realized. We expect to realize the deferred tax asset resulting from the IP Transfer and will assess the realizability of the deferred tax asset quarterly. Any Organisation for Economic Co-operation and Development’s actions adopted internationally could impact our financial results in future periods. The impact of the transaction to net cash provided by or used in operating, investing and financing activities on the consolidated statements of cash flows during fiscal 2023 was not material.
During fiscal 2023, the Danish Supreme Court issued a non-appealable ruling on the distributions declared in 2005 and 2006. The Danish Supreme Court ruled the 2005 dividend was subject to at-source dividend withholding tax while the smaller 2006 distribution would not be subject to withholding tax. During fiscal 2023, we recorded $69 million of tax expense, which includes $23 million of withholding tax and $46 million of interest.
Liquidity, Capital Resources and Cash Requirements
| (In millions) | April 25, 2025 | April 26, 2024 | |||||
|---|---|---|---|---|---|---|---|
| Cash, cash equivalents and short-term investments | $ | 3,846 | $ | 3,252 | |||
| Principal amount of debt | $ | 3,250 | $ | 2,400 |
The following is a summary of our cash flow activities:
| Fiscal Year | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | 2025 | 2024 | ||||||
| Net cash provided by operating activities | $ | 1,506 | $ | 1,685 | ||||
| Net cash provided by (used in) investing activities | 147 | (735 | ) | |||||
| Net cash used in financing activities | (828 | ) | (1,344 | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 15 | (19 | ) | |||||
| Net change in cash, cash equivalents and restricted cash | $ | 840 | $ | (413 | ) |
As of April 25, 2025, our cash, cash equivalents and short-term investments totaled $3.8 billion, reflecting an increase of $594 million from April 26, 2024. The increase was primarily due to $1.24 billion of net proceeds from the issuance of Senior Notes and $1.5 billion of cash generated from operating activities, partially offset by $1.2 billion used to repurchase shares of our common stock, a $400 million principal repayment of our 3.30% Senior Notes due September 2024, $424 million used for the payment of dividends, and $168 million in purchases of property and equipment. Net working capital was $1.2 billion as of April 25, 2025, an increase of $398 million when compared to April 26, 2024, primarily due to the increases in cash, cash equivalents and short-term investments discussed above.
Cash Flows from Operating Activities
During fiscal 2025, cash provided by operating activities reflected net income of $1.2 billion which was increased for non-cash depreciation and amortization expense of $243 million and non-cash stock-based compensation expense of $386 million.
Significant changes in assets and liabilities during fiscal 2025 included the following:
•
Accounts receivable increased by $219 million, primarily reflecting higher billing in the fourth quarter of fiscal 2025 compared to the fourth quarter of fiscal 2024.
•
Deferred revenue and financed unearned services revenue increased by $208 million, primarily due to an increase in deferred revenue for software and hardware support contracts.
•
Long-term taxes payable decreased by $207 million, primarily due to settlements associated with certain IRS tax examinations and changes in prior period tax positions.
44
During fiscal 2024, cash provided by operating activities reflected net income of $1.0 billion which was increased for non-cash depreciation and amortization expense of $255 million and non-cash stock-based compensation expense of $357 million.
Significant changes in assets and liabilities during fiscal 2024 included the following:
•
Accounts payable increased by $123 million, primarily reflecting the timing of inventory purchases from, and payments to, our contract manufacturers.
•
Accrued expenses increased by $113 million, primarily due to higher employee compensation accruals as of the end of fiscal 2024 compared to fiscal 2023 related to incentive compensation and commissions plans.
We expect that cash provided by operating activities may materially fluctuate in future periods due to a number of factors, including fluctuations in our operating results, shipping linearity, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, and the timing and amount of compensation, income taxes and other payments.
Cash Flows from Investing Activities
During fiscal 2025, we generated $245 million primarily from maturities and sales of investments, net of purchases, and paid $168 million for capital expenditures. Additionally, we received proceeds of $70 million from the sale of our Spot by NetApp business.
During fiscal 2024, we used $580 million for the purchases of investments, net of maturities and sales, and $155 million for capital expenditures.
Cash Flows from Financing Activities
During fiscal 2025, we used $1.2 billion for the repurchase of 10.2 million shares of common stock, $424 million for the payment of dividends and $400 million principal repayment upon maturity, partially offset by $1.24 billion of net proceeds from the issuance of Senior Notes.
During fiscal 2024, we used $900 million for the repurchase of 11.5 million shares of common stock, and $416 million for the payment of dividends.
Key factors that that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable, accounts payable and inventories, the timing and amount of stock repurchases and payment of cash dividends, the impact of foreign exchange rate changes, our ability to effectively integrate acquired products, businesses and technologies and the timing of repayments of our debt. Based on past performance and our current business outlook, we believe that our sources of liquidity, including cash, cash equivalents and short-term investments, cash generated from operations, and our ability to access capital markets and committed credit lines will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months and thereafter for the foreseeable future. We may choose to periodically raise additional debt capital based on certain conditions, including the refinancing of upcoming maturities and/or for potential strategic acquisitions and investments. Our ability to obtain this or any additional financing that we may pursue or need, will depend on, among other things, our business plans, operating performance and the condition of the capital markets at the time we seek financing. We may not be able to obtain such financing on terms acceptable to us or at all. In the event our liquidity is insufficient and we are unable to enter into new financing arrangements, we may be required to curtail spending and implement additional cost saving measures and restructuring actions. We cannot be certain that we will continue to generate cash flows at or above current levels. For further discussion of factors that could affect our cash flows and liquidity requirements, see Item 1A. Risk Factors.
Liquidity
Our principal sources of liquidity as of April 25, 2025 consisted of cash, cash equivalents and short-term investments, cash we expect to generate from operations, and our commercial paper program and related credit facility.
Cash, cash equivalents and short-term investments consisted of the following (in millions):
| April 25, 2025 | April 26, 2024 | ||||||
|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 2,742 | $ | 1,903 | |||
| Short-term investments | 1,104 | 1,349 | |||||
| Total | $ | 3,846 | $ | 3,252 |
45
As of April 25, 2025 and April 26, 2024, $2.5 billion and $2.1 billion, respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based in U.S. dollar-denominated holdings, while $1.3 billion and $1.2 billion, respectively, were available in the U.S.
Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, fund research and development, meet capital expenditure needs, invest in critical or complementary technologies through asset purchases and/or business acquisitions, service interest and principal payments on our debt, fund our stock repurchase program, and pay dividends, as and if declared. In the ordinary course of business, we engage in periodic reviews of opportunities to invest in or acquire companies or units in companies to expand our total addressable market, leverage technological synergies and establish new streams of revenue, particularly in our Public Cloud segment.
The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of April 25, 2025.
Our investment portfolio has been and will continue to be exposed to market risk due to trends in the credit and capital markets. We continue to closely monitor current economic and market events to minimize the market risk of our investment portfolio. We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. We utilize a variety of planning and financing strategies in an effort to ensure our worldwide cash is available when and where it is needed. We also have an automatic shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC). We may in the future offer an additional unspecified amount of debt, equity and other securities.
Senior Notes
The following table summarizes the principal amount of our Senior Notes as of April 25, 2025 (in millions):
| Amount | |||
|---|---|---|---|
| 1.875% Senior Notes Due June 2025 | $ | 750 | |
| 2.375% Senior Notes Due June 2027 | 550 | ||
| 2.70% Senior Notes Due June 2030 | 700 | ||
| 5.50% Senior Notes Due June 2032 | 625 | ||
| 5.70% Senior Notes Due June 2035 | 625 | ||
| Total | $ | 3,250 |
Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 8 – Financing Arrangements of the Notes to Consolidated Financial Statements included in Part II, Item 8.
In March 2025, we issued $625 million aggregate principal amount of 5.50% Senior Notes due 2032 and $625 million aggregate principal amount of 5.70% Senior Notes due 2035, for which we received total proceeds of $1.24 billion, net of discount and issuance costs. Interest on these Senior Notes is payable semi-annually in March and September.
On September 30, 2024, upon maturity, we repaid our 3.30% Senior Notes due September 2024 for an aggregate amount of $407 million, comprised of the principal and unpaid interest.
Commercial Paper Program and Credit Facility
We have a commercial paper program (the “Program”), under which we may issue unsecured commercial paper notes. Amounts available under the Program may be borrowed, repaid and re-borrowed, with the aggregate face or principal amount of the notes outstanding under the Program at any time not to exceed $1.0 billion. The maturities of the notes can vary, but may not exceed 397 days from the date of issue. The notes are sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The proceeds from the issuance of the notes are used for general corporate purposes. No commercial paper notes were outstanding as of April 25, 2025.
In connection with the Program, we have a senior unsecured credit agreement with a syndicated group of lenders. The credit agreement, which was amended in March 2025, provides for a $1.0 billion revolving unsecured credit facility, with a sublimit of $50 million available for the issuance of letters of credit on our behalf. The credit facility matures on March 5, 2030, with an option for us
46
to extend the maturity date for two additional 1-year periods, subject to certain conditions. The proceeds of the loans may be used by us for general corporate purposes and as liquidity support for our existing commercial paper program. As of April 25, 2025, we were compliant with all associated covenants in the agreement. No amounts were drawn against this credit facility during any of the periods presented.
Capital Expenditure Requirements
We expect to fund our capital expenditures, including our commitments related to facilities, equipment, operating leases and internal-use software development projects over the next few years through existing cash, cash equivalents, investments and cash generated from operations. The timing and amount of our capital requirements cannot be precisely determined and will depend on a number of factors, including future demand for products, changes in the network storage industry, hiring plans and our decisions related to the financing of our facilities and equipment requirements. We anticipate capital expenditures for fiscal 2026 to be between $175 million and $225 million.
Transition Tax Payments
The Tax Cuts and Jobs Act of 2017 imposed a mandatory, one-time transition tax on accumulated foreign earnings and profits that had not previously been subject to U.S. income tax. As of April 25, 2025, a final transition tax payment of $178 million remains outstanding and is expected to be paid during fiscal 2026. During fiscal 2025, transition tax payments totaled $115 million.
Dividends and Stock Repurchase Program
On May 22, 2025, we declared a cash dividend of $0.52 per share of common stock, payable on July 23, 2025 to holders of record as of the close of business on July 3, 2025.
As of April 25, 2025, our Board of Directors had authorized the repurchase of up to $17.1 billion of our common stock under our stock repurchase program. Under this program, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, in privately negotiated transactions, through accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management. The stock repurchase program may be suspended or discontinued at any time. Since the May 13, 2003 inception of this program through April 25, 2025, we repurchased a total of 382 million shares of our common stock at an average price of $43.93 per share, for an aggregate purchase price of $16.8 billion. As of April 25, 2025, the remaining authorized amount for stock repurchases under this program was $0.4 billion. On May 22, 2025 our Board of Directors authorized the repurchase of an additional $1.1 billion of our common stock.
Purchase Commitments
In the ordinary course of business, we make commitments to third-party contract manufacturers and component suppliers to manage manufacturer lead times and meet product forecasts, and to other parties, to purchase various key components used in the manufacture of our products. In addition, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not yet received goods or services. These off-balance sheet purchase commitments totaled $1.0 billion at April 25, 2025, of which $0.6 billion is due in fiscal 2026, with the remainder due thereafter.
Financing Guarantees
While most of our arrangements for sales include short-term payment terms, from time to time we provide long-term financing to creditworthy customers. We have generally sold receivables financed through these arrangements on a non-recourse basis to third party financing institutions within 10 days of the contracts’ dates of execution, and we classify the proceeds from these sales as cash flows from operating activities in our consolidated statements of cash flows. We account for the sales of these receivables as “true sales” as defined in the accounting standards on transfers of financial assets, as we are considered to have surrendered control of these financing receivables. We sold $65 million and $67 million of receivables during fiscal 2025 and 2024, respectively.
In addition, we enter into arrangements with leasing companies for the sale of our hardware systems products. These leasing companies, in turn, lease our products to end-users. The leasing companies generally have no recourse to us in the event of default by the end-user.
Some of the leasing arrangements described above have been financed on a recourse basis through third-party financing institutions. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. As of April 25, 2025 and April 26, 2024, the aggregate amount
47
by which such contingencies exceeded the associated liabilities was not significant. To date, we have not experienced significant losses under our lease financing programs or other financing arrangements.
We have entered into service contracts with certain of our end-user customers that are supported by third-party financing arrangements. If a service contract is terminated as a result of our non-performance under the contract or our failure to comply with the terms of the financing arrangement, we could, under certain circumstances, be required to acquire certain assets related to the service contract or to pay the aggregate unpaid payments under such arrangements. As of April 25, 2025, we have not been required to make any payments under these arrangements, and we believe the likelihood of having to acquire a material amount of assets or make payments under these arrangements is remote. The portion of the financial arrangement that represents unearned services revenue is included in deferred revenue and financed unearned services revenue in our consolidated balance sheets.
Legal Contingencies
We are subject to various legal proceedings and claims which arise in the normal course of business. See further details on such matters in Note 17 – Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.
The summary of significant accounting policies is included in Note 1 – Description of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Part II, Item 8. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. The accounting policies described below reflect the significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements.
Revenue Recognition
Our contracts with customers often include the transfer of multiple products and services to the customer. In determining the amount and timing of revenue recognition, we assess which products and services are distinct performance obligations and allocate the transaction price, which may include fixed and/or variable amounts, among each performance obligation on a relative standalone selling price (SSP) basis. The following are the key estimates and assumptions and corresponding uncertainties included in this approach:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We evaluate whether products and services promised in our contracts with customers are distinct performance obligations that should be accounted for separately versus together. | | In certain contracts, the determination of our distinct performance obligations requires significant judgment. As our business and offerings to customers change over time, the products and services we determine to be distinct performance obligations may change. Such changes may adversely impact the amount of revenue and gross margin we report in a particular period. | |
| | In determining the transaction price of our contracts, we estimate variable consideration based on the expected value, primarily relying on our history. In certain situations, we may also use the most likely amount as the basis of our estimate. | | We may have insufficient relevant historical data or other information to arrive at an accurate estimate of variable consideration using either the “expected value” or “most likely amount” method. Additionally, changes in business practices, such as those related to sales returns or marketing programs, may introduce new forms of variable consideration, as well as more complexity and uncertainty in the estimation process. |
48
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|---|---|---|---|
| | In contracts with multiple performance obligations, we establish SSPs based on the price at which products and services are sold separately. If SSPs are not observable through past transactions, we estimate them by maximizing the use of observable inputs including pricing strategy, market data, internally-approved pricing guidelines related to the performance obligations and other observable inputs. | | As our business and offerings evolve over time, modifications to our pricing and discounting methodologies, changes in the scope and nature of product and service offerings and/or changes in customer segmentation may result in a lack of consistency, making it difficult to establish and/or maintain SSPs. Changes in SSPs could result in different and unanticipated allocations of revenue in contracts with multiple performance obligations. These factors, among others, may adversely impact the amount of revenue and gross margin we report in a particular period. |
Inventory Valuation and Purchase Order Accruals
Inventories consist primarily of purchased components and finished goods and are stated at the lower of cost or net realizable value, which approximates actual cost on a first-in, first-out basis. A provision is recorded when inventory is determined to be in excess of anticipated demand or obsolete in order to adjust inventory to its estimated realizable value. The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our inventories:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We periodically perform an excess and obsolete analysis of our inventory. Inventories are written down based on excess and obsolete reserves determined primarily on assumptions about future demand forecasts and market conditions. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. | | Although we use our best estimates to forecast future product demand, any significant unanticipated changes in demand, including due to macroeconomic uncertainties, or obsolescence related to technological developments, new product introductions, customer requirements, competition or other factors could have a significant impact on the valuation of our inventory. If actual market conditions are less favorable than those projected, additional write-downs and other charges against earnings that adversely impact gross margins may be required. If actual market conditions are more favorable, we may realize higher gross profits in the period when the written-down inventory is sold. We are subject to a variety of environmental laws relating to the manufacture of our products. If there are changes to the current regulations, we may be required to make product design changes which may result in excess or obsolete inventory, which could adversely impact our operating results. | |
| | We make commitments to our third-party contract manufacturers and other suppliers to manage lead times and meet product forecasts and to other parties to purchase various key components used in the manufacture of our products. We establish accruals for estimated losses on non-cancelable purchase commitments when we believe it is probable that the components will not be utilized in future operations. | | If the actual materials demand is significantly lower than our forecast, we may be required to increase our recorded liabilities for estimated losses on non-cancelable purchase commitments. |
Goodwill and Purchased Intangible Assets
We allocate the purchase price of acquisitions to identifiable assets acquired and liabilities assumed at their acquisition date fair values based on established valuation techniques. Goodwill represents the residual value as of the acquisition date, which in most cases is measured as the excess of the purchase consideration transferred over the net of the acquisition date fair values of the assets acquired and liabilities assumed.
The carrying values of purchased intangible assets are reviewed whenever events and circumstances indicate that the net book value of an asset may not be recovered through expected future cash flows from its use and eventual disposition. We periodically review the estimated remaining useful lives of our intangible assets. This review may result in impairment charges or shortened useful lives, resulting in charges to our consolidated statements of income.
49
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of one of our reporting units may exceed its fair value. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. For our annual goodwill impairment test in the fourth quarter of fiscal 2025, we performed a qualitative assessment of goodwill impairment by evaluating relevant factors to determine whether it is more likely than not that the fair value of each of our reporting units is less than their carrying values. As a result of the qualitative assessment, we determined the quantitative test was not necessary and there was no impairment of goodwill.
50
The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our goodwill and purchased intangible assets:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | The assessment of fair value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction in accordance with the accounting guidance for the fair value measurement of nonfinancial assets.The valuation of purchased intangible assets is principally based on estimates of the future performance and cash flows expected to be generated by the acquired assets from the acquired business. | | While we employ experts to determine the acquisition date fair value of acquired intangibles, the fair values of assets acquired and liabilities assumed are based on significant management assumptions and estimates, which are inherently uncertain and highly subjective and as a result, actual results may differ from estimates. If different assumptions were to be used, it could materially impact the purchase price allocation. | |
| | Evaluations of possible goodwill and purchased intangible asset impairment require us to make judgments and assumptions related to the allocation of our balance sheet and income statement amounts and estimate future cash flows and fair market values of our reporting units and assets. | | In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill or purchased intangible assets. Assumptions and estimates about expected future cash flows and the fair values of our reporting units and purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as the adverse impact of unanticipated changes in macroeconomic conditions, and technological changes or new product introductions from competitors. They can also be affected by internal factors such as changes in business strategy or in forecasted product life cycles and roadmaps. Our ongoing consideration of these and other factors could result in future impairment charges or accelerated amortization expense, which could adversely affect our operating results. |
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets or liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The following are the key estimates and assumptions and corresponding uncertainties for our income taxes:
51
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | Our income tax provision is based on existing tax law and advanced pricing agreements or letter rulings we have with various tax authorities. | | Our provision for income taxes is subject to volatility and could be adversely impacted by future changes in existing tax laws, such as a change in tax rate, possible U.S. changes to the taxation of earnings of our foreign subsidiaries, and uncertainties as to future renewals of favorable tax agreements and rulings. | |
| | The determination of whether we should record or adjust a valuation allowance against our deferred tax assets is based on assumptions regarding our future profitability. | | Our future profits could differ from current expectations resulting in a change to our determination as to the amount of deferred tax assets that are more likely than not to be realized. We could adjust our valuation allowance with a corresponding impact to the tax provision in the period in which such determination is made. | |
| | The estimates for our uncertain tax positions are based primarily on company specific circumstances, applicable tax laws, tax opinions from outside firms and past results from examinations of our income tax returns. | | Significant judgment is required in evaluating our uncertain tax positions. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome or tax court rulings of these matters will not be different from that which is reflected in our historical tax provisions and accruals. |
FY 2024 10-K MD&A
SEC filing source: 0000950170-24-071327.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the financial statements and the accompanying notes set forth under Part II, Item 8. – Financial Statements and Supplementary Data. The following discussion also contains trend information and other forward-looking statements that involve a number of risks and uncertainties. The Risk Factors set forth in Part I, Item 1A. – Risk Factors are hereby incorporated into the discussion by reference.
Executive Overview
Our Company
NetApp makes data infrastructure intelligent by combining unified data storage, integrated data services, and CloudOps solutions. We create silo-free infrastructure, and harness observability and artificial intelligence to enable seamless data management across environments to help our customers achieve their business priorities. No matter the data type, workload, or environment, with NetApp customers can modernize their data infrastructure and better leverage their data to accelerate innovation, improve operations, and drive competitive advantage.
Our unified data storage delivers flexibility by enabling customers to store any data type and power any workload, simply and consistently on a single storage operating system, optimized for cloud and flash. As the only enterprise-grade storage service natively embedded in the world’s largest clouds, our data storage powers any data across AWS, Microsoft Azure, and Google Cloud. Our integrated data services enable active data management through superior data security, protection, governance, and sustainability. Our CloudOps solutions enable adaptive operations across infrastructure, applications, and teams.
Our operations are organized into two segments: Hybrid Cloud and Public Cloud.
Hybrid Cloud offers a unified data storage portfolio of storage management and infrastructure solutions that help customers modernize their data centers. With the power of on-premises, private cloud and public cloud capabilities to assist customers in modernizing applications with a single solution that supports file, block, and object storage, we deliver a data infrastructure solution for all environments and workloads. Our Hybrid Cloud portfolio supports structured and unstructured data with unified storage optimized for flash, disk, and cloud storage to handle data-intensive workloads and applications. Hybrid Cloud is composed of software, hardware, and related support, as well as professional and other services.
Public Cloud offers a portfolio of products delivered primarily as-a-service, including related support. This portfolio includes cloud storage and CloudOps services. As the only provider of enterprise-grade storage services natively embedded in the world’s largest public cloud providers, NetApp helps organizations harness the power of their data and applications. NetApp’s CloudOps solutions leverage AI to maximize productivity across infrastructure and applications, boost team productivity, and reduce operations costs. These solutions and services are generally available on the leading public clouds, including Amazon AWS, Microsoft Azure, and Google Cloud Platform.
Global Business Environment
Macroeconomic Conditions
Continuing economic uncertainty, political conditions and fiscal challenges in the U.S. and abroad have resulted and may continue to result in adverse macroeconomic conditions, including inflation, rising interest rates, foreign exchange volatility, slower growth and possibly a recession. In particular, in fiscal 2024, we continued to experience a weakened demand environment, characterized by cloud optimizations and increased budget scrutiny, which resulted in smaller deal sizes, longer selling cycles, and the delay of some deals.
If these macroeconomic uncertainties persist or worsen in fiscal 2025, we may observe a further reduction in customer demand for our offerings, which could impact our operating results.
Supply Chain
Supply chain constraints, which substantially began to impact us in the first half of fiscal 2023, led to elevated product component and freight costs during fiscal 2023. Comparatively, the supply chain substantially improved during fiscal 2024, resulting in lower costs.
36
Financial Results and Key Performance Metrics Overview
The following table provides an overview of key financial metrics for each of the last three fiscal years (in millions, except per share amounts and percentages):
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 26, 2024 | April 28, 2023 | April 29, 2022 | ||||||||||
| Net revenues | $ | 6,268 | $ | 6,362 | $ | 6,318 | ||||||
| Gross profit | $ | 4,433 | $ | 4,209 | $ | 4,220 | ||||||
| Gross margin | 71 | % | 66 | % | 67 | % | ||||||
| Income from operations | $ | 1,214 | $ | 1,018 | $ | 1,157 | ||||||
| Income from operations as a percentage of net revenues | 19 | % | 16 | % | 18 | % | ||||||
| Provision (benefit) for income taxes | $ | 277 | $ | (208 | ) | $ | 158 | |||||
| Net income | $ | 986 | $ | 1,274 | $ | 937 | ||||||
| Diluted net income per share | $ | 4.63 | $ | 5.79 | $ | 4.09 | ||||||
| Net cash provided by operating activities | $ | 1,685 | $ | 1,107 | $ | 1,211 |
| April 26, 2024 | April 28, 2023 | ||||||
|---|---|---|---|---|---|---|---|
| Deferred revenue and financed unearned services revenue | $ | 4,234 | $ | 4,313 |
•
Net revenues: Our net revenues decreased approximately 1% in fiscal 2024 compared to fiscal 2023, due to a decrease in product revenues, partially offset by an increase in services revenues.
•
Gross margin: Our gross margin increased five percentage points in fiscal 2024 compared to fiscal 2023, due to the increase in gross margins on product revenues.
•
Income from operations as a percentage of net revenues: Our income from operations as a percentage of net revenues increased by three percentage points in fiscal 2024 compared to fiscal 2023, primarily due to a higher gross margin.
•
Provision (benefit) for income taxes: We had a provision from income taxes in fiscal 2024, compared to a benefit from income taxes in fiscal 2023, due to a discrete tax benefit of $524 million in fiscal 2023 that resulted from an intra-entity asset transfer of certain intellectual property.
•
Net income and Diluted net income per share: The decrease in both net income and diluted net income per share in fiscal 2024 compared to fiscal 2023 reflect the factors discussed above. Lower net income in fiscal 2024 compared to fiscal 2023 unfavorably impacted diluted net income per share.
Stock Repurchase Program and Dividend Activity
During fiscal 2024, we repurchased approximately 12 million shares of our common stock at an average price of $77.87 per share, for an aggregate purchase price of $900 million. We also declared aggregate cash dividends of $2.00 per share in fiscal 2024, for which we paid a total of $416 million.
Restructuring Events
During fiscal 2024, we executed two restructuring plans and recognized expenses totaling $44 million consisting primarily of employee severance-related costs and lease termination costs.
37
Results of Operations
Our fiscal year is reported on a 52- or 53-week year that ends on the last Friday in April. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal months with calendar months. Fiscal years 2024, 2023 and 2022, which ended on April 26, 2024, April 28, 2023 and April 29, 2022, respectively, are all 52-week years, with 13 weeks in each of their quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in April and the associated quarters, months and periods of those fiscal years.
The following table sets forth certain Consolidated Statements of Income data as a percentage of net revenues for the periods indicated:
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| Revenues: | ||||||||||||
| Product | 45 | % | 48 | % | 52 | % | ||||||
| Services | 55 | 52 | 48 | |||||||||
| Net revenues | 100 | 100 | 100 | |||||||||
| Cost of revenues: | ||||||||||||
| Cost of product | 18 | 24 | 25 | |||||||||
| Cost of services | 11 | 10 | 9 | |||||||||
| Gross profit | 71 | 66 | 67 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 29 | 29 | 29 | |||||||||
| Research and development | 16 | 15 | 14 | |||||||||
| General and administrative | 5 | 4 | 4 | |||||||||
| Restructuring charges | 1 | 2 | 1 | |||||||||
| Acquisition-related expense | — | — | — | |||||||||
| Total operating expenses | 51 | 50 | 48 | |||||||||
| Income from operations | 19 | 16 | 18 | |||||||||
| Other income (expense), net | 1 | 1 | (1 | ) | ||||||||
| Income before income taxes | 20 | 17 | 17 | |||||||||
| Provision (benefit) for income taxes | 4 | (3 | ) | 3 | ||||||||
| Net income | 16 | % | 20 | % | 15 | % |
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Net Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Net revenues | $ | 6,268 | $ | 6,362 | (1 | )% | $ | 6,318 | 1 | % |
The decrease in net revenues for fiscal 2024 compared to fiscal 2023 was due to a decrease in product revenues partially offset by an increase in services revenues. Product revenues as a percentage of net revenues decreased by approximately three percentage points in fiscal 2024 compared to fiscal 2023, while services revenues as a percentage of net revenues increased by approximately three percentage points.
The increase in net revenues for fiscal 2023 compared to fiscal 2022 was due to an increase in services revenue partially offset by a decrease in product revenues. Product revenues as a percentage of net revenues decreased by approximately four percentage points in fiscal 2023 compared to fiscal 2022, while services revenues as a percentage of net revenues increased by approximately four percentage points. Fluctuations in foreign currency exchange rates adversely impacted net revenues percent growth by approximately four percentage points in fiscal 2023 compared to fiscal 2022.
Sales through our indirect channels represented 76%, 78% and 77% of net revenues in fiscal 2024, 2023 and 2022, respectively.
The following customers, each of which is a distributor, accounted for 10% or more of net revenues:
38
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| Arrow Electronics, Inc. | 22 | % | 24 | % | 24 | % | ||||||
| TD Synnex Corporation (previously presented as Tech Data Corporation) | 22 | % | 21 | % | 21 | % |
Product Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Product revenues | $ | 2,849 | $ | 3,049 | (7 | )% | $ | 3,284 | (7 | )% | |||||||||||
| Hardware (Non-GAAP) | 1,251 | 1,251 | — | % | 1,358 | (8 | )% | ||||||||||||||
| Software (Non-GAAP) | 1,598 | 1,798 | (11 | )% | 1,926 | (7 | )% |
Hybrid Cloud
Product revenues are derived through the sale of our Hybrid Cloud solutions and consist of sales of configured all-flash array systems (including All-Flash FAS A-Series and All-Flash FAS C-Series with capacity flash) and hybrid systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, StorageGrid, OEM products, NetApp HCI and add-on optional software.
In order to provide visibility into the value created by our software innovation and R&D investment, we disclose the software and hardware components of our product revenues. Software product revenues includes the OS software and optional add-on software solutions attached to our systems across our entire product set, while hardware product revenues include the non-software component of our systems across the entire set. Because our revenue recognition policy under GAAP defines a configured storage system, inclusive of the operating system software essential to its functionality, as a single performance obligation, the hardware and software components of our product revenues are considered non-GAAP measures. The hardware and software components of our product revenues are derived from an estimated fair value allocation of the transaction price of our contracts with customers, down to the level of the product hardware and software components. This allocation is primarily based on the contractual prices at which NetApp has historically billed customers for such respective components.
Total product revenues decreased in fiscal 2024 compared to fiscal 2023, primarily due to lower sales of hybrid systems due to softening customer demand, partially offset by an increase in sales of C-Series all-flash array systems.
Total product revenues decreased in fiscal 2023 compared to fiscal 2022, primarily due to lower sales of A-Series all-flash array systems, as a result of softening customer demand. Product revenues were also unfavorably impacted by foreign exchange rate fluctuations. These decreases were partially offset by an increase in sales of hybrid systems.
Revenues from the hardware component of product revenues represented 44%, 41% and 41% of product revenues in fiscal 2024, 2023 and 2022, respectively. The software component of product revenues represented 56%, 59% and 59% of product revenues in fiscal 2024, 2023 and 2022, respectively. The decrease in the software component percentage of product revenues in fiscal 2024 as compared to fiscal 2023 was primarily due to the mix of systems sold. The software component percentage of product revenues remained relatively flat in fiscal 2023 as compared to fiscal 2022 despite the decrease in sales of A-Series all-flash array systems, which contain a higher proportion of software components than other Hybrid Cloud products, primarily due to the mix of other Hybrid Cloud products sold.
Services Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Services revenues | $ | 3,419 | $ | 3,313 | 3 | % | $ | 3,034 | 9 | % | |||||||||||
| Support | 2,488 | 2,419 | 3 | % | 2,344 | 3 | % | ||||||||||||||
| Professional and other services | 320 | 319 | — | % | 294 | 9 | % | ||||||||||||||
| Public cloud | 611 | 575 | 6 | % | 396 | 45 | % |
Hybrid Cloud
Hybrid Cloud services revenues are derived from the sale of: (1) support, which includes both hardware and software support contracts (the latter of which entitle customers to receive unspecified product upgrades and enhancements, bug fixes and patch releases), and (2) professional and other services, which include customer education and training.
39
Support revenues increased in fiscal 2024 compared to fiscal 2023 as a result of a higher aggregate support contract value for our installed base.
Support revenues increased in fiscal 2023 compared to fiscal 2022, despite the unfavorable impact from foreign exchange rate fluctuations, primarily due to a higher aggregate support contract value for our installed base during fiscal 2023.
Professional and other services revenues remained relatively flat in fiscal 2024 compared to fiscal 2023. The increase in fiscal 2023 compared to fiscal 2022 was primarily due to an increase in other services revenues.
Public Cloud
Public Cloud revenues are derived from the sale of public cloud offerings delivered primarily as-a-service, which include cloud storage and data services, and cloud operations services.
Public Cloud revenues increased in fiscal 2024 and fiscal 2023 compared to the respective prior years primarily due to growing customer demand for NetApp's diversified cloud offerings, coupled with overall growth in the cloud market. The acquisitions of Instaclustr early in the first quarter of fiscal 2023 and CloudCheckr, Inc. (CloudCheckr) in the third quarter of fiscal 2022 also contributed to the increase in Public Cloud revenues in fiscal 2023 compared to fiscal 2022.
Revenues by Geographic Area:
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||
| United States, Canada and Latin America (Americas) | 51 | % | 51 | % | 53 | % | ||||||
| Europe, Middle East and Africa (EMEA) | 34 | % | 34 | % | 32 | % | ||||||
| Asia Pacific (APAC) | 15 | % | 15 | % | 15 | % |
Percentages may not add due to rounding
Effective in fiscal 2024, management began evaluating revenues by geographic region based on the location to which products and services are delivered, rather than based on the location from which the customer relationship is managed. Prior year numbers have been recast to conform to the current year presentation.
Americas revenues consist of sales to Americas commercial and United States (U.S.) public sector markets. Demand across geographies was relatively consistent in fiscal 2024 compared to fiscal 2023. Americas revenues were negatively impacted by adverse macroeconomic conditions which resulted in a weakened demand environment in fiscal 2023 compared to fiscal 2022, which continued into fiscal 2024.
Cost of Revenues
Our cost of revenues consists of:
(1) cost of product revenues, composed of (a) cost of Hybrid Cloud product revenues, which includes the costs of manufacturing and shipping our products, inventory write-downs, and warranty costs, and (b) unallocated cost of product revenues, which includes stock-based compensation and amortization of intangibles, and;
(2) cost of services revenues, composed of (a) cost of support revenues, which includes the costs of providing support activities for hardware and software support, global support partnership programs, and third party royalty costs, (b) cost of professional and other services revenues, (c) cost of public cloud revenues, constituting the cost of providing our Public Cloud offerings which includes depreciation and amortization expense and third party datacenter fees, and (d) unallocated cost of services revenues, which includes stock-based compensation and amortization of intangibles.
Cost of Product Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Cost of product revenues | $ | 1,137 | $ | 1,517 | (25 | )% | $ | 1,554 | (2 | )% | |||||||||||
| Hybrid Cloud | 1,131 | 1,511 | (25 | )% | 1,541 | (2 | )% | ||||||||||||||
| Unallocated | 6 | 6 | — | % | 13 | (54 | )% |
40
Hybrid Cloud
Cost of Hybrid Cloud product revenues represented 40%, 50% and 47% of Hybrid Cloud product revenues in fiscal 2024, 2023 and 2022, respectively. Materials costs represented 88%, 94% and 93% of cost of Hybrid Cloud product revenues in fiscal 2024, 2023 and 2022, respectively.
Materials costs decreased by approximately $418 million in fiscal 2024 compared to fiscal 2023 reflecting lower component and freight costs as a result of supply chain improvements. Materials costs were also impacted by the decrease in product revenues in fiscal 2024.
Hybrid Cloud gross margins increased by approximately ten percentage points in fiscal 2024 compared to fiscal 2023 primarily due to lower component and freight costs.
Materials costs were approximately flat in fiscal 2023 compared to fiscal 2022 reflecting the decrease in product revenues, offset by higher component and freight costs as a result of supply chain challenges.
Hybrid Cloud gross margins decreased by approximately three percentage points in fiscal 2023 compared to fiscal 2022 primarily due to higher component and freight costs and the adverse impacts of fluctuations in foreign currency exchange rates.
Unallocated
Unallocated cost of product revenues remained relatively flat in fiscal 2024 compared to fiscal 2023 while they decreased in fiscal 2023 compared to fiscal 2022 due to certain intangible assets becoming fully amortized.
Cost of Services Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Cost of services revenues | $ | 698 | $ | 636 | 10 | % | $ | 544 | 17 | % | |||||||||||
| Support | 195 | 181 | 8 | % | 184 | (2 | )% | ||||||||||||||
| Professional and other services | 243 | 211 | 15 | % | 205 | 3 | % | ||||||||||||||
| Public cloud | 203 | 184 | 10 | % | 118 | 56 | % | ||||||||||||||
| Unallocated | 57 | 60 | (5 | )% | 37 | 62 | % |
Hybrid Cloud
Cost of Hybrid Cloud services revenues, which are composed of the costs of support and professional and other services, increased in fiscal 2024 and fiscal 2023 compared to the respective prior years reflecting the increase in Hybrid Cloud services revenues. Cost of Hybrid Cloud services revenues represented 16%, 14% and 15% of Hybrid Cloud services revenues in fiscal 2024, 2023 and 2022, respectively.
Hybrid Cloud support gross margins were similar in fiscal 2024, fiscal 2023 and fiscal 2022. Hybrid Cloud professional and other services gross margins decreased by approximately ten percentage points in fiscal 2024 compared to fiscal 2023 while they increased by approximately four percentage points in fiscal 2023 compared to fiscal 2022 primarily due to the mix of services provided.
Public Cloud
Cost of Public Cloud revenues increased in fiscal 2024 and in fiscal 2023 compared to the respective prior years, reflecting the increase in Public Cloud revenues in each period. Public Cloud gross margins decreased by one percentage point in fiscal 2024 and two percentage points in fiscal 2023 compared to the respective prior years primarily due to the mix of offerings provided.
Unallocated
Unallocated cost of services revenues decreased in fiscal 2024 compared to fiscal 2023 due to certain intangible assets becoming fully amortized during the first quarter of fiscal 2024. Unallocated cost of services revenues increased in fiscal 2023 compared to fiscal 2023 due to our acquisitions of Instaclustr early in the first quarter of fiscal 2023 and CloudCheckr in the third quarter of fiscal 2022, which resulted in higher amortization expense from acquired intangible assets.
41
Operating Expenses
Sales and Marketing, Research and Development and General and Administrative Expenses
Sales and marketing, research and development, and general and administrative expenses for fiscal 2024 totaled $3,165 million, or 50% of net revenues, representing an increase of two percentage points compared to fiscal 2023.
Sales and marketing, research and development, and general and administrative expenses for fiscal 2023 totaled $3,050 million, or 48% of net revenues, relatively consistent with fiscal 2022. While fluctuations in foreign currency exchange rates adversely impacted net revenues in fiscal 2023 compared to fiscal 2022, they favorably impacted sales and marketing, research and development and general and administrative expenses by approximately 3% in fiscal 2023.
Compensation costs represent the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation expense and employee incentive compensation plan costs.
Total compensation costs included in sales and marketing, research and development and general and administrative expenses increased by $115 million, or 6%, during fiscal 2024 compared to fiscal 2023, primarily due to higher incentive compensation expense reflecting higher operating performance against goals. The increase was partially offset by lower salaries expense, reflecting a decrease in average headcount of 7%.
Total compensation costs included in sales and marketing, research and development and general and administrative expenses increased by $101 million, or 6%, during fiscal 2023 compared to fiscal 2022, primarily due to higher salaries, benefits and stock-based compensation expense, reflecting an increase in average headcount of 8%. The increase was partially offset by lower incentive compensation expense.
Sales and Marketing (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Sales and marketing expenses | $ | 1,828 | $ | 1,829 | — | % | $ | 1,857 | (2 | )% |
Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, facilities and IT support costs, advertising and marketing promotional expense and travel and entertainment expense. The changes in sales and marketing expenses consisted of the following (in percentage points of the total change):
| Fiscal 2024 to Fiscal 2023 | Fiscal 2023 to Fiscal 2022 | |||||||
|---|---|---|---|---|---|---|---|---|
| Compensation costs | — | 2 | ||||||
| Commissions | — | (3 | ) | |||||
| Advertising and marketing promotional expense | — | (2 | ) | |||||
| Travel and entertainment | — | 1 | ||||||
| Total change | — | (2 | ) |
All primary components of sales and marketing expenses were relatively consistent in fiscal 2024 compared to fiscal 2023.
The increase in compensation costs for fiscal 2023 compared to fiscal 2022 reflected an increase in average headcount of approximately 6%. The impact of the increase in headcount was partially offset by lower incentive compensation expense and the impact of foreign exchange rate fluctuations.
The decrease in commissions expense for fiscal 2023 compared to fiscal 2022 was primarily due to lower performance against sales goals.
Advertising and marketing promotional expense decreased in fiscal 2023 compared to fiscal 2022, primarily due to lower spending on certain marketing programs.
Travel and entertainment expense increased in fiscal 2023 compared to fiscal 2022, as COVID-19 related travel restrictions eased.
42
Research and Development (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Research and development expenses | $ | 1,029 | $ | 956 | 8 | % | $ | 881 | 9 | % |
Research and development expenses consist primarily of compensation costs, facilities and IT support costs, depreciation, equipment and software related costs, prototypes, non-recurring engineering charges and other outside services costs. Changes in research and development expenses consisted of the following (in percentage points of the total change):
| Fiscal 2024 to Fiscal 2023 | Fiscal 2023 to Fiscal 2022 | ||||||
|---|---|---|---|---|---|---|---|
| Compensation costs | 8 | 8 | |||||
| Development projects and outside services | — | 1 | |||||
| Total change | 8 | 9 |
The increase in compensation costs for fiscal 2024 compared to fiscal 2023 was due to higher incentive compensation expense and stock-based compensation expense, partially offset by lower salaries expense, reflecting a decrease in average headcount of 5%.
The increase in compensation costs for fiscal 2023 compared to fiscal 2022 was primarily attributable to an increase in average headcount of 11%. The impact of the increase in headcount was partially offset by lower incentive compensation expense and the impact of foreign exchange rate fluctuations. The increase in development projects and outside services for fiscal 2023 compared to fiscal 2022 was primarily due to the higher spending on certain engineering projects.
General and Administrative (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| General and administrative expenses | $ | 308 | $ | 265 | 16 | % | $ | 279 | (5 | )% |
General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and facilities and IT support costs. Changes in general and administrative expense consisted of the following (in percentage points of the total change):
| Fiscal 2024 to Fiscal 2023 | Fiscal 2023 to Fiscal 2022 | |||||||
|---|---|---|---|---|---|---|---|---|
| Compensation costs | 14 | (1 | ) | |||||
| Professional and legal fees and outside services | 1 | 1 | ||||||
| Facilities and IT support costs | — | (5 | ) | |||||
| Other | 1 | — | ||||||
| Total change | 16 | (5 | ) |
The increase in compensation costs in fiscal 2024 compared to fiscal 2023 was attributable to increases in all components of compensation costs, but primarily incentive compensation expense. The increase in professional and legal fees and outside services expense in fiscal 2024 was primarily due to higher spending on certain business transformation projects.
The decrease in compensation costs in fiscal 2023 compared to fiscal 2022 was primarily attributable to lower incentive compensation expense, partially offset by the increase in salaries and stock-based compensation expenses. The increases in professional and legal fees and outside services expense in fiscal 2023 were primarily due to higher spending on certain business transformation projects. The decrease in facilities and IT support costs in fiscal 2023 was primarily related to lower spending for certain IT projects.
Restructuring Charges (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Restructuring charges | $ | 44 | $ | 120 | (63 | )% | $ | 33 | 264 | % |
43
In an effort to reduce our cost structure and redirect resources to our highest return activities, in fiscal 2024, 2023 and 2022, we initiated a number of business realignment plans designed to streamline our business and focus on key strategic opportunities. These plans resulted in aggregate reductions of our global workforce of approximately 2% in fiscal 2024, 9% in fiscal 2023, and 1% in fiscal 2022, and aggregate charges of $44 million, $120 million, and $33 million, respectively, consisting primarily of employee severance-related costs. Additionally, the aggregate charges for fiscal 2024 included optimization of our global office space for our hybrid work model, while the aggregate charges in fiscal 2023 and fiscal 2022 included legal and tax-related consulting fees associated with the establishment of an international headquarters in Cork, Ireland. See Note 12 – Restructuring Charges of the Notes to Consolidated Financial Statements included in Part II, Item 8 for more details regarding our restructuring plans.
Acquisition-related Expense (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Acquisition-related expense | $ | 10 | $ | 21 | (52 | )% | $ | 13 | 62 | % |
We incurred $10 million, $21 million and $13 million of acquisition-related expenses, primarily consisting of legal and consulting fees, in fiscal 2024, fiscal 2023 and fiscal 2022, respectively, associated with our acquisitions and subsequent integrations.
Other Income (Expense), Net (in millions, except percentages)
The components of other income (expense), net were as follows:
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Interest income | $ | 112 | $ | 69 | 62 | % | $ | 7 | 886 | % | |||||||||||
| Interest expense | (64 | ) | (67 | ) | (4 | )% | (73 | ) | (8 | )% | |||||||||||
| Other, net | 1 | 46 | NM | 4 | NM | ||||||||||||||||
| Total | $ | 49 | $ | 48 | NM | $ | (62 | ) | NM |
NM - Not Meaningful
Interest income increased in fiscal 2024 and fiscal 2023 compared to previous years was primarily due to higher yields earned on our cash and investments.
Interest expense decreased in fiscal 2024 and fiscal 2023 compared to previous years due to the extinguishment of certain senior notes in the second quarter of fiscal 2023.
Other, net for fiscal 2023 includes $22 million of other income for non-refundable, up-front payments from customers in Russia for support contracts, which we were not able to fulfill due to imposed sanctions and for which we have no remaining legal obligation to perform. Other, net for fiscal 2023 also includes a $32 million gain recognized on our sale of a minority equity interest in a privately held company for proceeds of approximately $59 million. The remaining differences in Other, net for fiscal 2024 compared to fiscal 2023, and for fiscal 2023 compared to fiscal 2022, are primarily due to differences in foreign exchange gains and losses in each fiscal year.
Provision (Benefit) for Income Taxes (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | % Change | 2022 | % Change | |||||||||||||||||
| Provision (benefit) for income taxes | $ | 277 | $ | (208 | ) | (233 | )% | $ | 158 | (232 | )% |
Our effective tax rate for fiscal 2024 was 21.9% compared to (19.5)% in fiscal 2023 and 14.4% in fiscal 2022. The differences in the effective tax rates between fiscal years were primarily due to fiscal 2023 benefits resulting from an intra-entity asset transfer of certain IP, partially offset by discrete tax expense recorded as a result of the Danish Supreme Court ruling received January 9, 2023.
During fiscal 2023, we completed an intra-entity asset transfer of certain IP to our international headquarters (the “IP Transfer”). The transaction resulted in a step-up of tax-deductible basis in the transferred assets, and accordingly, created a temporary difference where the tax basis exceeded the financial statement basis of such intangible assets, which resulted in the recognition of a discrete tax benefit and related deferred tax asset of $524 million during the second quarter of fiscal 2023. Management applied significant judgment when determining the fair value of the IP, which serves as the tax basis of the deferred tax asset. With the assistance of third-party valuation specialists, the fair value of the IP was determined principally based on the present value of projected cash flows related to the IP which reflects management’s assumptions regarding projected revenues, earnings before interest and taxes, and a
44
discount rate. The tax-deductible amortization related to the transferred IP rights will be recognized in future periods and any amortization that is unused in a particular year can be carried forward indefinitely. The deferred tax asset and the tax benefit were measured based on the enacted tax rates expected to apply in the years the asset is expected to be realized. We expect to realize the deferred tax asset resulting from the IP Transfer and will assess the realizability of the deferred tax asset quarterly. Any Organisation for Economic Co-operation and Development’s (“OECD”) actions adopted internationally could impact our financial results in future periods. The impact of the transaction to net cash provided by or used in operating, investing and financing activities on the consolidated statements of cash flows during fiscal 2023 was not material.
During fiscal 2023, the Danish Supreme Court issued a non-appealable ruling on the distributions declared in 2005 and 2006. The Danish Supreme Court ruled the 2005 dividend was subject to at-source dividend withholding tax while the smaller 2006 distribution would not be subject to withholding tax. During fiscal 2023, we recorded $69 million of tax expense, which includes $23 million of withholding tax and $46 million of interest.
Liquidity, Capital Resources and Cash Requirements
| (In millions, except percentages) | April 26, 2024 | April 28, 2023 | |||||
|---|---|---|---|---|---|---|---|
| Cash, cash equivalents and short-term investments | $ | 3,252 | $ | 3,070 | |||
| Principal amount of debt | $ | 2,400 | $ | 2,400 |
The following is a summary of our cash flow activities:
| Fiscal Year | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | 2024 | 2023 | ||||||
| Net cash provided by operating activities | $ | 1,685 | $ | 1,107 | ||||
| Net cash used in investing activities | (735 | ) | (1,390 | ) | ||||
| Net cash used in financing activities | (1,344 | ) | (1,513 | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (19 | ) | (1 | ) | ||||
| Net change in cash, cash equivalents and restricted cash | $ | (413 | ) | $ | (1,797 | ) |
As of April 26, 2024, our cash, cash equivalents and short-term investments totaled $3.3 billion, reflecting an increase of $0.2 billion from April 28, 2023. The increase was primarily due to $1.7 billion of cash generated from operating activities, partially offset by $900 million used to repurchase shares of our common stock, $416 million used for the payment of dividends, and $155 million in purchases of property and equipment. Net working capital was $791 million as of April 26, 2024, a reduction of $422 million when compared to April 28, 2023, primarily due to the reclassification of $400 million principal amount of our senior notes from long-term to current liabilities.
Cash Flows from Operating Activities
During fiscal 2024, we generated cash from operating activities of $1.7 billion, reflecting net income of $1.0 billion which was increased for non-cash depreciation and amortization expense of $255 million and non-cash stock-based compensation expense of $357 million.
Significant changes in assets and liabilities during fiscal 2024 included the following:
•
Accounts payable increased by $123 million, primarily reflecting the timing of inventory purchases from, and payments to, our contract manufacturers.
•
Accrued expenses increased by $113 million, primarily due to higher employee compensation accruals as of the end of fiscal 2024 compared to fiscal 2023 related to incentive compensation and commissions plans.
During fiscal 2023, we generated cash from operating activities of $1.1 billion, reflecting net income of $1.3 billion which was reduced by $606 million for non-cash deferred tax benefits and increased for non-cash depreciation and amortization expense of $248 million and non-cash stock-based compensation expense of $312 million.
Significant changes in assets and liabilities during fiscal 2023 included the following:
•
Accounts receivable decreased $260 million, reflecting lower billing in the fourth quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022.
45
•
Accounts payable decreased by $207 million, primarily reflecting lower inventory purchases, and the timing of those purchases from, and payments to, our contract manufacturers.
•
Accrued expenses decreased by $103 million, primarily due to employee compensation payments related to fiscal 2022 incentive compensation and commissions plans.
We expect that cash provided by operating activities may materially fluctuate in future periods due to a number of factors, including fluctuations in our operating results, shipping linearity, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, and the timing and amount of compensation, income taxes and other payments.
Cash Flows from Investing Activities
During fiscal 2024, we used $580 million for the purchases of investments, net of maturities and sales, and $155 million for capital expenditures.
During fiscal 2023, we used $719 million for the purchases of investments, net of maturities and sales, paid $491 million, net of cash acquired, for a privately-held company and $239 million for capital expenditures. Additionally, we received proceeds of $59 million from the sale of one of our minority investments in fiscal 2023.
Cash Flows from Financing Activities
During fiscal 2024, cash flows used in financing activities totaled $1.3 billion and include $900 million for the repurchase of approximately 12 million shares of common stock, and $416 million for the payment of dividends.
During fiscal 2023, cash flows used in financing activities totaled $1.5 billion and include $850 million for the repurchase of approximately 13 million shares of common stock, $432 million for the payment of dividends and $250 million to redeem our Senior Notes due in December 2022.
Key factors that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable, accounts payable and inventories, the timing and amount of stock repurchases and payment of cash dividends, the impact of foreign exchange rate changes, our ability to effectively integrate acquired products, businesses and technologies and the timing of repayments of our debt. Based on past performance and our current business outlook, we believe that our sources of liquidity, including cash, cash equivalents and short-term investments, cash generated from operations, and our ability to access capital markets and committed credit lines will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months and thereafter for the foreseeable future. However, in the event our liquidity is insufficient, we may be required to curtail spending and implement additional cost saving measures and restructuring actions or enter into new financing arrangements. We cannot be certain that we will continue to generate cash flows at or above current levels or that we will be able to obtain additional financing, if necessary, on satisfactory terms, if at all. For further discussion of factors that could affect our cash flows and liquidity requirements, see Part I, Item 1A. Risk Factors.
Liquidity
Our principal sources of liquidity as of April 26, 2024 consisted of cash, cash equivalents and short-term investments, cash we expect to generate from operations, and our commercial paper program and related credit facility.
Cash, cash equivalents and short-term investments consisted of the following (in millions):
| April 26, 2024 | April 28, 2023 | ||||||
|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 1,903 | $ | 2,316 | |||
| Short-term investments | 1,349 | 754 | |||||
| Total | $ | 3,252 | $ | 3,070 |
As of April 26, 2024 and April 28, 2023, $2.1 billion and $2.2 billion, respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based in U.S. dollar-denominated holdings, while $1.2 billion and $0.9 billion, respectively, were available in the U.S.
46
Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, fund research and development, meet capital expenditure needs, invest in critical or complementary technologies through asset purchases and/or business acquisitions, service interest and principal payments on our debt, fund our stock repurchase program, and pay dividends, as and if declared. In the ordinary course of business, we engage in periodic reviews of opportunities to invest in or acquire companies or units in companies to expand our total addressable market, leverage technological synergies and establish new streams of revenue, particularly in our Public Cloud segment.
The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of April 26, 2024.
Our investment portfolio has been and will continue to be exposed to market risk due to trends in the credit and capital markets. We continue to closely monitor current economic and market events to minimize the market risk of our investment portfolio. We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. We utilize a variety of planning and financing strategies in an effort to ensure our worldwide cash is available when and where it is needed. We also have an automatic shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC). We may in the future offer an additional unspecified amount of debt, equity and other securities.
Senior Notes
The following table summarizes the principal amount of our Senior Notes as of April 26, 2024 (in millions):
| Amount | |||
|---|---|---|---|
| 3.30% Senior Notes Due September 2024 | $ | 400 | |
| 1.875% Senior Notes Due June 2025 | 750 | ||
| 2.375% Senior Notes Due June 2027 | 550 | ||
| 2.70% Senior Notes Due June 2030 | 700 | ||
| Total | $ | 2,400 |
Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 8 – Financing Arrangements of the Notes to Consolidated Financial Statements included in Part II, Item 8.
Commercial Paper Program and Credit Facility
We have a commercial paper program (the “Program”), under which we may issue unsecured commercial paper notes. Amounts available under the Program may be borrowed, repaid and re-borrowed, with the aggregate face or principal amount of the notes outstanding under the Program at any time not to exceed $1.0 billion. The maturities of the notes can vary, but may not exceed 397 days from the date of issue. The notes are sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The proceeds from the issuance of the notes are used for general corporate purposes. No commercial paper notes were outstanding as of April 26, 2024.
In connection with the Program, we have a senior unsecured credit agreement with a syndicated group of lenders. The credit agreement, which was amended in May 2023 primarily to replace the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate (SOFR) as the basis for establishing the interest rate applicable to certain borrowings under the agreement, provides for a $1.0 billion revolving unsecured credit facility, with a sublimit of $50 million available for the issuance of letters of credit on our behalf. The credit facility matures on January 22, 2026, with an option for us to extend the maturity date for two additional 1-year periods, subject to certain conditions. The proceeds of the loans may be used by us for general corporate purposes and as liquidity support for our existing commercial paper program. As of April 26, 2024, we were compliant with all associated covenants in the agreement. No amounts were drawn against this credit facility during any of the periods presented.
Capital Expenditure Requirements
We expect to fund our capital expenditures, including our commitments related to facilities, equipment, operating leases and internal-use software development projects over the next few years through existing cash, cash equivalents, investments and cash generated from operations. The timing and amount of our capital requirements cannot be precisely determined and will depend on a number of factors, including future demand for products, changes in the network storage industry, hiring plans and our decisions
47
related to the financing of our facilities and equipment requirements. We anticipate capital expenditures for fiscal 2025 to be between $150 million and $200 million.
Transition Tax Payments
The Tax Cuts and Jobs Act of 2017 imposed a mandatory, one-time transition tax on accumulated foreign earnings and profits that had not previously been subject to U.S. income tax. As of April 26, 2024, outstanding payments related to the transition tax are estimated to be approximately $215 million of which $115 million and $100 million are expected to be paid during fiscal 2025 and fiscal 2026, respectively. During fiscal 2024, transition tax payments totaled $88 million. Our estimates for future transition tax payments, however, could change with further guidance or review from U.S. federal and state tax authorities or other regulatory bodies.
Dividends and Stock Repurchase Program
On May 23, 2024, we declared a cash dividend of $0.52 per share of common stock, payable on July 24, 2024 to holders of record as of the close of business on July 5, 2024.
As of April 26, 2024, our Board of Directors had authorized the repurchase of up to $16.1 billion of our common stock under our stock repurchase program. Under this program, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, in privately negotiated transactions, through accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management. The stock repurchase program may be suspended or discontinued at any time. Since the May 13, 2003 inception of this program through April 26, 2024, we repurchased a total of 372 million shares of our common stock at an average price of $42.04 per share, for an aggregate purchase price of $15.6 billion. As of April 26, 2024, the remaining authorized amount for stock repurchases under this program was $0.5 billion. On May 23, 2024 our Board of Directors authorized the repurchase of an additional $1.0 billion of our common stock.
Purchase Commitments
In the ordinary course of business, we make commitments to third-party contract manufacturers and component suppliers to manage manufacturer lead times and meet product forecasts, and to other parties, to purchase various key components used in the manufacture of our products. In addition, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not yet received goods or services. These off-balance sheet purchase commitments totaled $0.8 billion at April 26, 2024, of which $0.6 billion is due in fiscal 2025, with the remainder due thereafter.
Financing Guarantees
While most of our arrangements for sales include short-term payment terms, from time to time we provide long-term financing to creditworthy customers. We have generally sold receivables financed through these arrangements on a non-recourse basis to third party financing institutions within 10 days of the contracts’ dates of execution, and we classify the proceeds from these sales as cash flows from operating activities in our consolidated statements of cash flows. We account for the sales of these receivables as “true sales” as defined in the accounting standards on transfers of financial assets, as we are considered to have surrendered control of these financing receivables. We sold $67 million and $38 million of receivables during fiscal 2024 and 2023, respectively.
In addition, we enter into arrangements with leasing companies for the sale of our hardware systems products. These leasing companies, in turn, lease our products to end-users. The leasing companies generally have no recourse to us in the event of default by the end-user.
Some of the leasing arrangements described above have been financed on a recourse basis through third-party financing institutions. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. As of April 26, 2024 and April 28, 2023, the aggregate amount by which such contingencies exceeded the associated liabilities was not significant. To date, we have not experienced significant losses under our lease financing programs or other financing arrangements.
We have entered into service contracts with certain of our end-user customers that are supported by third-party financing arrangements. If a service contract is terminated as a result of our non-performance under the contract or our failure to comply with the terms of the financing arrangement, we could, under certain circumstances, be required to acquire certain assets related to the service contract or to pay the aggregate unpaid payments under such arrangements. As of April 26, 2024, we have not been required to make any payments under these arrangements, and we believe the likelihood of having to acquire a material amount of assets or make
48
payments under these arrangements is remote. The portion of the financial arrangement that represents unearned services revenue is included in deferred revenue and financed unearned services revenue in our consolidated balance sheets.
Legal Contingencies
We are subject to various legal proceedings and claims which arise in the normal course of business. See further details on such matters in Note 17 – Commitments and Contingencies of the Notes to Consolidated Financial Statements included in Part II, Item 8.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.
The summary of significant accounting policies is included in Note 1 – Description of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Part II, Item 8. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. The accounting policies described below reflect the significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements.
Revenue Recognition
Our contracts with customers often include the transfer of multiple products and services to the customer. In determining the amount and timing of revenue recognition, we assess which products and services are distinct performance obligations and allocate the transaction price, which may include fixed and/or variable amounts, among each performance obligation on a relative standalone selling price (SSP) basis. The following are the key estimates and assumptions and corresponding uncertainties included in this approach:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We evaluate whether products and services promised in our contracts with customers are distinct performance obligations that should be accounted for separately versus together. | | In certain contracts, the determination of our distinct performance obligations requires significant judgment. As our business and offerings to customers change over time, the products and services we determine to be distinct performance obligations may change. Such changes may adversely impact the amount of revenue and gross margin we report in a particular period. | |
| | In determining the transaction price of our contracts, we estimate variable consideration based on the expected value, primarily relying on our history. In certain situations, we may also use the most likely amount as the basis of our estimate. | | We may have insufficient relevant historical data or other information to arrive at an accurate estimate of variable consideration using either the “expected value” or “most likely amount” method. Additionally, changes in business practices, such as those related to sales returns or marketing programs, may introduce new forms of variable consideration, as well as more complexity and uncertainty in the estimation process. | |
| | In contracts with multiple performance obligations, we establish SSPs based on the price at which products and services are sold separately. If SSPs are not observable through past transactions, we estimate them by maximizing the use of observable inputs including pricing strategy, market data, internally-approved pricing guidelines related to the performance obligations and other observable inputs. | | As our business and offerings evolve over time, modifications to our pricing and discounting methodologies, changes in the scope and nature of product and service offerings and/or changes in customer segmentation may result in a lack of consistency, making it difficult to establish and/or maintain SSPs. Changes in SSPs could result in different and unanticipated allocations of revenue in contracts with multiple performance obligations. These factors, among others, may adversely impact the amount of revenue and gross margin we report in a particular period. |
49
Inventory Valuation and Purchase Order Accruals
Inventories consist primarily of purchased components and finished goods and are stated at the lower of cost or net realizable value, which approximates actual cost on a first-in, first-out basis. A provision is recorded when inventory is determined to be in excess of anticipated demand or obsolete in order to adjust inventory to its estimated realizable value. The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our inventories:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We periodically perform an excess and obsolete analysis of our inventory. Inventories are written down based on excess and obsolete reserves determined primarily on assumptions about future demand forecasts and market conditions. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. | | Although we use our best estimates to forecast future product demand, any significant unanticipated changes in demand, including due to macroeconomic uncertainties, or obsolescence related to technological developments, new product introductions, customer requirements, competition or other factors could have a significant impact on the valuation of our inventory. If actual market conditions are less favorable than those projected, additional write-downs and other charges against earnings that adversely impact gross margins may be required. If actual market conditions are more favorable, we may realize higher gross profits in the period when the written-down inventory is sold.We are subject to a variety of environmental laws relating to the manufacture of our products. If there are changes to the current regulations, we may be required to make product design changes which may result in excess or obsolete inventory, which could adversely impact our operating results. | |
| | We make commitments to our third-party contract manufacturers and other suppliers to manage lead times and meet product forecasts and to other parties to purchase various key components used in the manufacture of our products. We establish accruals for estimated losses on non-cancelable purchase commitments when we believe it is probable that the components will not be utilized in future operations. | | If the actual materials demand is significantly lower than our forecast, we may be required to increase our recorded liabilities for estimated losses on non-cancelable purchase commitments, including incremental commitments made in response to recent developments in the broader technology supply chain, which would adversely impact our operating results. |
Goodwill and Purchased Intangible Assets
We allocate the purchase price of acquisitions to identifiable assets acquired and liabilities assumed at their acquisition date fair values based on established valuation techniques. Goodwill represents the residual value as of the acquisition date, which in most cases is measured as the excess of the purchase consideration transferred over the net of the acquisition date fair values of the assets acquired and liabilities assumed.
The carrying values of purchased intangible assets are reviewed whenever events and circumstances indicate that the net book value of an asset may not be recovered through expected future cash flows from its use and eventual disposition. We periodically review the estimated remaining useful lives of our intangible assets. This review may result in impairment charges or shortened useful lives, resulting in charges to our consolidated statements of income.
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of one of our reporting units may exceed its fair value. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. For our annual goodwill impairment test in the fourth quarter of fiscal 2024, we performed a qualitative assessment of goodwill impairment by evaluating relevant factors to determine whether it is more likely than not that the fair value of each of our reporting units is less than their carrying values. As a result of the qualitative assessment, we determined the quantitative test was not necessary and there was no impairment of goodwill.
50
The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our goodwill and purchased intangible assets:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | The assessment of fair value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction in accordance with the accounting guidance for the fair value measurement of nonfinancial assets.The valuation of purchased intangible assets is principally based on estimates of the future performance and cash flows expected to be generated by the acquired assets from the acquired business. | | While we employ experts to determine the acquisition date fair value of acquired intangibles, the fair values of assets acquired and liabilities assumed are based on significant management assumptions and estimates, which are inherently uncertain and highly subjective and as a result, actual results may differ from estimates. If different assumptions were to be used, it could materially impact the purchase price allocation. Volatile macroeconomic and market conditions have increased the level of uncertainty and subjectivity of certain management assumptions and estimates. | |
| | Evaluations of possible goodwill and purchased intangible asset impairment require us to make judgments and assumptions related to the allocation of our balance sheet and income statement amounts and estimate future cash flows and fair market values of our reporting units and assets. | | In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill or purchased intangible assets. Assumptions and estimates about expected future cash flows and the fair values of our reporting units and purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as the adverse impact of unanticipated changes in macroeconomic conditions, and technological changes or new product introductions from competitors. They can also be affected by internal factors such as changes in business strategy or in forecasted product life cycles and roadmaps. Our ongoing consideration of these and other factors could result in future impairment charges or accelerated amortization expense, which could adversely affect our operating results. |
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets or liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The following are the key estimates and assumptions and corresponding uncertainties for our income taxes:
51
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | Our income tax provision is based on existing tax law and advanced pricing agreements or letter rulings we have with various tax authorities. | | Our provision for income taxes is subject to volatility and could be adversely impacted by future changes in existing tax laws, such as a change in tax rate, possible U.S. changes to the taxation of earnings of our foreign subsidiaries, and uncertainties as to future renewals of favorable tax agreements and rulings. | |
| | The determination of whether we should record or adjust a valuation allowance against our deferred tax assets is based on assumptions regarding our future profitability. | | Our future profits could differ from current expectations resulting in a change to our determination as to the amount of deferred tax assets that are more likely than not to be realized. We could adjust our valuation allowance with a corresponding impact to the tax provision in the period in which such determination is made. | |
| | The estimates for our uncertain tax positions are based primarily on company specific circumstances, applicable tax laws, tax opinions from outside firms and past results from examinations of our income tax returns. | | Significant judgment is required in evaluating our uncertain tax positions. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome or tax court rulings of these matters will not be different from that which is reflected in our historical tax provisions and accruals. |
FY 2023 10-K MD&A
SEC filing source: 0000950170-23-027948.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the financial statements and the accompanying notes set forth under Item 8. – Financial Statements and Supplementary Data. The following discussion also contains trend information and other forward-looking statements that involve a number of risks and uncertainties. The Risk Factors set forth in Item 1A. – Risk Factors are hereby incorporated into the discussion by reference.
Executive Overview
Our Company
NetApp is a global cloud-led, data-centric software company that empowers customers with hybrid multicloud solutions built for a better future. Building on more than three decades of innovation, we give customers the freedom to manage applications and data across hybrid multicloud environments. NetApp delivers value in simplicity, security, savings, and sustainability with automation and optimization for IT teams to thrive on premises, in the clouds, and everywhere in between. We are a proven leader in all-flash storage with the only storage OS natively available on the biggest clouds, and we believe we provide industry-leading protection and security, and innovative CloudOps services.
In a world of hybrid multicloud complexity, we envision a better IT experience—an evolved cloud state where on-premises and cloud environments are united as one. We build solutions that drive faster innovation wherever our customers’ data and applications live, with unified management and AI-driven optimization, giving organizations the freedom to do what’s best for today’s business and the flexibility to adapt for tomorrow. Our infrastructure, data, and application services are hybrid multicloud by design to deliver a unified experience that is integrated with the rich services of our cloud partners.
Our operations are organized into two segments: Hybrid Cloud and Public Cloud.
Hybrid Cloud offers a portfolio of storage management and infrastructure solutions that help customers recast their traditional data centers into modern data centers with the power of the cloud. Our hybrid cloud portfolio is designed to operate with public clouds to unlock the potential of hybrid, multi-cloud operations. We offer a broad portfolio of cloud-connected all-flash, hybrid-flash, and object storage systems, powered by intelligent data management software. Hybrid Cloud is composed of software, hardware, and related support, as well as professional and other services.
Public Cloud offers a portfolio of products delivered primarily as-a-service, including related support. This portfolio includes cloud storage and data services and cloud operations services. Our enterprise-class solutions and services enable customers to control and manage storage in the cloud, consume high-performance storage services for primary workloads, and optimize cloud environments for cost and efficiency. These solutions and services are generally available on the leading public clouds, including Amazon AWS, Microsoft Azure, and Google Cloud Platform.
Global Business Environment
Macroeconomic Conditions
Continuing global economic uncertainty, political conditions and fiscal challenges in the U.S. and abroad have resulted and may continue to result in adverse macroeconomic conditions, including inflation, rising interest rates, foreign exchange volatility, slower growth and possibly a recession. In particular, in fiscal 2023, we experienced a weakened demand environment, characterized by cloud optimizations and increased budget scrutiny, which resulted in smaller deal sizes, longer selling cycles, and delays of some deals.
If these macroeconomic uncertainties persist or worsen in fiscal 2024, we may observe a further reduction in customer demand for our offerings, which could impact our operating results.
33
Supply Chain
Supply chain constraints, particularly in the first half of fiscal 2023, led to higher product component and freight costs in fiscal 2023 compared to fiscal 2022. Supply chain constraints also delayed our ability to fulfill certain customer orders during the first half of fiscal 2023.
Financial Results and Key Performance Metrics Overview
The following table provides an overview of key financial metrics for each of the last three fiscal years (in millions, except per share amounts and percentages):
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 28, 2023 | April 29, 2022 | April 30, 2021 | ||||||||||
| Net revenues | $ | 6,362 | $ | 6,318 | $ | 5,744 | ||||||
| Gross profit | $ | 4,209 | $ | 4,220 | $ | 3,815 | ||||||
| Gross profit margin percentage | 66 | % | 67 | % | 66 | % | ||||||
| Income from operations | $ | 1,018 | $ | 1,157 | $ | 1,031 | ||||||
| Income from operations as a percentage of net revenues | 16 | % | 18 | % | 18 | % | ||||||
| (Benefit) provision for income taxes | $ | (208 | ) | $ | 158 | $ | 232 | |||||
| Net income | $ | 1,274 | $ | 937 | $ | 730 | ||||||
| Diluted net income per share | $ | 5.79 | $ | 4.09 | $ | 3.23 | ||||||
| Net cash provided by operating activities | $ | 1,107 | $ | 1,211 | $ | 1,333 |
| April 28, 2023 | April 29, 2022 | ||||||
|---|---|---|---|---|---|---|---|
| Deferred revenue and financed unearned services revenue | $ | 4,313 | $ | 4,232 |
•
Net revenues: Our net revenues increased approximately 1% in fiscal 2023 compared to fiscal 2022, due to an increase in services revenues, primarily driven by an increase in public cloud revenues.
•
Gross profit margin percentage: Our gross profit margin as a percentage of net revenues decreased less than one percentage point in fiscal 2023 compared to fiscal 2022 primarily due to the decrease in gross profit margins on product revenues.
•
Income from operations as a percentage of net revenues: Our income from operations as a percentage of net revenues decreased by two percentage points in fiscal 2023 compared to fiscal 2022, primarily due to a slightly lower gross profit margin percentage and an increase in restructuring charges.
•
(Benefit) provision for income taxes: We had a benefit from income taxes in fiscal 2023, compared to a provision for income taxes in fiscal 2022, due to a discrete tax benefit of $524 million that resulted from an intra-entity asset transfer of certain intellectual property.
•
Net income and Diluted net income per share: The increase in both net income and diluted net income per share in fiscal 2023 compared to fiscal 2022 reflect the factors discussed above. Higher net income and increased share repurchases in fiscal 2023 compared to fiscal 2022 favorably impacted diluted net income per share.
Stock Repurchase Program and Dividend Activity
During fiscal 2023, we repurchased approximately 13 million shares of our common stock at an average price of $66.42 per share, for an aggregate purchase price of $850 million. We also declared aggregate cash dividends of $2.00 per share in fiscal 2023, for which we paid a total of $432 million.
Acquisition
On May 20, 2022, we acquired all the outstanding shares of privately-held Instaclustr US Holding, Inc. (Instaclustr), a leading platform provider of fully managed open-source database, pipeline and workflow applications delivered as a service, for approximately $498 million.
Restructuring Events
During fiscal 2023, we executed several restructuring plans and recognized expenses totaling $120 million consisting primarily of employee severance-related costs.
34
Results of Operations
Our fiscal year is reported on a 52- or 53-week year that ends on the last Friday in April. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal months with calendar months. Fiscal 2023, which ended on April 28, 2023, and fiscal 2022, which ended on April 29, 2022 were both 52-week years. Fiscal 2021, which ended on April 30, 2021 was a 53-week year, with 14 weeks included in its first quarter and 13 weeks in each subsequent quarter. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in April and the associated quarters, months and periods of those fiscal years.
The following table sets forth certain Consolidated Statements of Income data as a percentage of net revenues for the periods indicated:
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||
| Revenues: | ||||||||||||
| Product | 48 | % | 52 | % | 52 | % | ||||||
| Services | 52 | 48 | 48 | |||||||||
| Net revenues | 100 | 100 | 100 | |||||||||
| Cost of revenues: | ||||||||||||
| Cost of product | 24 | 25 | 25 | |||||||||
| Cost of services | 10 | 9 | 9 | |||||||||
| Gross profit | 66 | 67 | 66 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 29 | 29 | 30 | |||||||||
| Research and development | 15 | 14 | 15 | |||||||||
| General and administrative | 4 | 4 | 4 | |||||||||
| Restructuring charges | 2 | 1 | 1 | |||||||||
| Acquisition-related expense | — | — | — | |||||||||
| Gain on sale or derecognition of assets | — | — | (3 | ) | ||||||||
| Total operating expenses | 50 | 48 | 48 | |||||||||
| Income from operations | 16 | 18 | 18 | |||||||||
| Other income (expense), net | 1 | (1 | ) | (1 | ) | |||||||
| Income before income taxes | 17 | 17 | 17 | |||||||||
| (Benefit) provision for income taxes | (3 | ) | 3 | 4 | ||||||||
| Net income | 20 | % | 15 | % | 13 | % |
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Net Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Net revenues | $ | 6,362 | $ | 6,318 | 1 | % | $ | 5,744 | 10 | % |
The increase in net revenues for fiscal 2023 compared to fiscal 2022 was due to an increase in services revenue partially offset by a decrease in product revenues. Product revenues as a percentage of net revenues decreased by approximately four percentage points in fiscal 2023 compared to fiscal 2022, while services revenues as a percentage of net revenues increased by approximately four percentage points. Fluctuations in foreign currency exchange rates adversely impacted net revenues percent growth by approximately four percentage points in fiscal 2023 compared to fiscal 2022.
The increase in net revenues for fiscal 2022 compared to fiscal 2021 was due to an increase in both product revenues and services revenues, with revenues increasing despite the additional week in fiscal 2021. Product revenues and services revenues as a percentage of net revenues both remained relatively consistent in fiscal 2022 compared to fiscal 2021.
Sales through our indirect channels represented 78%, 77% and 77% of net revenues in fiscal 2023, 2022 and 2021, respectively.
The following customers, each of which is a distributor, accounted for 10% or more of net revenues:
35
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||
| Arrow Electronics, Inc. | 24 | % | 24 | % | 24 | % | ||||||
| Tech Data Corporation | 21 | % | 21 | % | 20 | % |
Product Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Product revenues | $ | 3,049 | $ | 3,284 | (7 | )% | $ | 2,991 | 10 | % | |||||||||||
| Hardware (Non-GAAP) | 1,251 | 1,358 | (8 | )% | 1,355 | — | % | ||||||||||||||
| Software (Non-GAAP) | 1,798 | 1,926 | (7 | )% | 1,636 | 18 | % |
Hybrid Cloud
Product revenues are derived through the sale of our Hybrid Cloud solutions and consist of sales of configured all-flash array systems (including All-Flash FAS and QLC-Flash FAS) and hybrid systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, StorageGrid, OEM products, NetApp HCI and add-on optional software.
In order to provide visibility into the value created by our software innovation and R&D investment, we disclose the software and hardware components of our product revenues. Software product revenues includes the OS software and optional add-on software solutions attached to our systems across our entire product set, while hardware product revenues include the non-software component of our systems across the entire set. Because our revenue recognition policy under GAAP defines a configured storage system, inclusive of the operating system software essential to its functionality, as a single performance obligation, the hardware and software components of our product revenues are considered non-GAAP measures. The hardware and software components of our product revenues are derived from an estimated fair value allocation of the transaction price of our contracts with customers, down to the level of the product hardware and software components. This allocation is primarily based on the contractual prices at which NetApp has historically billed customers for such respective components.
Total product revenues decreased in fiscal 2023 compared to fiscal 2022, primarily due to lower sales of all flash array systems, as a result of softening customer demand. Product revenues were also unfavorably impacted by foreign exchange rate fluctuations. These decreases were partially offset by an increase in sales of hybrid systems.
Total product revenues increased in fiscal 2022 compared to fiscal 2021, primarily driven by an increase in sales of all-flash array systems and, to a lesser extent, an increase in sales of StorageGrid, partially offset by a decrease in sales of NetApp HCI. Supply chain challenges related to the COVID-19 pandemic impeded our ability to fulfill certain customer orders in fiscal 2022, particularly in the fourth quarter.
Revenues from the hardware component of product revenues represented 41%, 41% and 45% of product revenues in fiscal 2023, 2022 and 2021, respectively. The software component of product revenues represented 59%, 59% and 55% of product revenues in fiscal 2023, 2022 and 2021, respectively. The software component percentage of product revenues remained relatively flat in fiscal 2023 as compared to fiscal 2022 despite the decrease in sales of all-flash array systems, which contain a higher proportion of software components than other Hybrid Cloud products, primarily due to the mix of other Hybrid Cloud products sold. The increase in the software component percentage of product revenues in fiscal 2022 is primarily due to a higher mix of all-flash array systems sales.
Services Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Services revenues | $ | 3,313 | $ | 3,034 | 9 | % | $ | 2,753 | 10 | % | |||||||||||
| Support | 2,419 | 2,344 | 3 | % | 2,277 | 3 | % | ||||||||||||||
| Professional and other services | 319 | 294 | 9 | % | 277 | 6 | % | ||||||||||||||
| Public cloud | 575 | 396 | 45 | % | 199 | 99 | % |
Hybrid Cloud
Hybrid Cloud services revenues are derived from the sale of: (1) support, which includes both hardware and software support contracts (the latter of which entitle customers to receive unspecified product upgrades and enhancements, bug fixes and patch releases), and (2) professional and other services, which include customer education and training.
36
Support revenues increased in fiscal 2023 compared to fiscal 2022, despite the unfavorable impact from foreign exchange rate fluctuations, primarily due to a higher aggregate support contract value for our installed base in the current year.
Support revenues increased in fiscal 2022 compared to fiscal 2021, despite an extra week in the first quarter of fiscal 2021 that contributed approximately $40 million of additional revenues in that period, primarily due to a higher aggregate support contract value for our installed base in fiscal 2022 compared to fiscal 2021.
Professional and other services revenues increased in fiscal 2023 compared to fiscal 2022 primarily due to an increase in other services revenues. The increase in fiscal 2022 compared to fiscal 2021 was primarily due to an increase in demand from increased product sales.
Public Cloud
Public Cloud revenues are derived from the sale of public cloud offerings delivered primarily as-a-service, which include cloud storage and data services, and cloud operations services.
Public Cloud revenues increased in fiscal 2023 and fiscal 2022 compared to the respective prior years primarily due to growing customer demand for NetApp's diversified cloud offerings, coupled with overall growth in the cloud market, and the acquisitions of Instaclustr early in the first quarter of fiscal 2023 and CloudCheckr, Inc. (CloudCheckr) in the third quarter of fiscal 2022. The acquisition of Spot, Inc. (Spot) late in the first quarter of fiscal 2021 also contributed to the increase in Public Cloud revenues in fiscal 2022 compared to fiscal 2021.
Revenues by Geographic Area:
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||
| United States, Canada and Latin America (Americas) | 53 | % | 55 | % | 54 | % | ||||||
| Europe, Middle East and Africa (EMEA) | 33 | % | 31 | % | 31 | % | ||||||
| Asia Pacific (APAC) | 14 | % | 14 | % | 15 | % |
Percentages may not add due to rounding
Americas revenues consist of sales to Americas commercial and United States (U.S.) public sector markets. During fiscal 2023, Americas revenues were negatively impacted by adverse macroeconomic conditions which resulted in a weakened demand environment. Demand across geographies was relatively consistent in fiscal 2022 compared to fiscal 2021.
Cost of Revenues
Our cost of revenues consists of:
(1) cost of product revenues, composed of (a) cost of Hybrid Cloud product revenues, which includes the costs of manufacturing and shipping our products, inventory write-downs, and warranty costs, and (b) unallocated cost of product revenues, which includes stock-based compensation and amortization of intangibles, and;
(2) cost of services revenues, composed of (a) cost of support revenues, which includes the costs of providing support activities for hardware and software support, global support partnership programs, and third party royalty costs, (b) cost of professional and other services revenues, (c) cost of public cloud revenues, constituting the cost of providing our Public Cloud offerings which includes depreciation and amortization expense and third party datacenter fees, and (d) unallocated cost of services revenues, which includes stock-based compensation and amortization of intangibles.
Cost of Product Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Cost of product revenues | $ | 1,517 | $ | 1,554 | (2 | )% | $ | 1,432 | 9 | % | |||||||||||
| Hybrid Cloud | 1,511 | 1,541 | (2 | )% | 1,402 | 10 | % | ||||||||||||||
| Unallocated | 6 | 13 | (54 | )% | 30 | (57 | )% |
Hybrid Cloud
37
Cost of Hybrid Cloud product revenues represented 50%, 47% and 47% of Hybrid Cloud product revenues in fiscal 2023, 2022 and 2021, respectively. Materials costs represented 94%, 93% and 91% of cost of Hybrid Cloud product revenues in fiscal 2023, 2022 and 2021, respectively.
Materials costs were approximately flat in fiscal 2023 compared to fiscal 2022 reflecting the decrease in product revenues, offset by higher component and freight costs as a result of supply chain challenges.
Hybrid Cloud product gross margins decreased by approximately three percentage points in fiscal 2023 compared to fiscal 2022 primarily due to higher component and freight costs and the adverse impacts of fluctuations in foreign currency exchange rates.
Materials costs increased by approximately $156 million in fiscal 2022 compared to fiscal 2021 reflecting the increase in product revenues in fiscal 2022, the mix of systems sold, and higher component and freight costs as a result of COVID-19 related supply chain challenges. Excess and obsolete inventory reserves were lower in fiscal 2022 compared to fiscal 2021.
Hybrid Cloud product gross margins remained relatively flat in fiscal 2022 compared to fiscal 2021 despite the increase in component and freight costs, which were offset primarily by a higher mix of all-flash array systems sales, which have higher margins than hybrid systems.
Unallocated
Unallocated cost of product revenues decreased in fiscal 2023 and fiscal 2022 compared to the respective prior year periods due to certain intangible assets becoming fully amortized.
Cost of Services Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Cost of services revenues | $ | 636 | $ | 544 | 17 | % | $ | 497 | 9 | % | |||||||||||
| Support | 181 | 184 | (2 | )% | 201 | (8 | )% | ||||||||||||||
| Professional and other services | 211 | 205 | 3 | % | 206 | — | % | ||||||||||||||
| Public cloud | 184 | 118 | 56 | % | 65 | 82 | % | ||||||||||||||
| Unallocated | 60 | 37 | 62 | % | 25 | 48 | % |
Hybrid Cloud
Cost of Hybrid Cloud services revenues, which are composed of the costs of support and professional and other services, increased slightly in fiscal 2023 compared to fiscal 2022 and decreased in fiscal 2022 compared to fiscal 2021. Cost of Hybrid Cloud services revenues represented 14%, 15% and 16% of Hybrid Cloud services revenues in fiscal 2023, 2022 and 2021, respectively.
Hybrid Cloud support gross margins were relatively consistent in fiscal 2023 compared to fiscal 2022, while they increased by one percentage point in fiscal 2022 compared to fiscal 2021 due to growth in support revenues achieved with a consistent cost base.
Public Cloud
Cost of Public Cloud revenues increased in fiscal 2023 and in fiscal 2022 compared to the respective prior years, reflecting the ongoing growth in Public Cloud revenues in each period. Public Cloud gross margins decreased by two percentage points in fiscal 2023 compared to fiscal 2022, primarily due to the mix of offerings provided. Public Cloud gross margins increased by three percentage points in fiscal 2022 compared to fiscal 2021, reflecting efficiencies from scaling our Public Cloud segment.
Unallocated
Unallocated cost of services revenues increased in fiscal 2023 and in fiscal 2022 compared to the respective prior years, due to our acquisitions of Instaclustr early in the first quarter of fiscal 2023 and CloudCheckr in the third quarter of fiscal 2022, which resulted in higher amortization expense from acquired intangible assets.
38
Operating Expenses
Sales and Marketing, Research and Development and General and Administrative Expenses
Sales and marketing, research and development, and general and administrative expenses for fiscal 2023 totaled $3,050 million, or 48% of net revenues, relatively consistent with fiscal 2022. While fluctuations in foreign currency exchange rates adversely impacted net revenues in fiscal 2023 compared to fiscal 2022, they favorably impacted sales and marketing, research and development and general and administrative expenses by approximately 3% in fiscal 2023.
Sales and marketing, research and development, and general and administrative expenses for fiscal 2022 totaled $3,017 million, or 48% of net revenues, representing a decrease of two percentage points compared to fiscal 2021.
Compensation costs represent the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation expense and employee incentive compensation plan costs.
Total compensation costs included in sales and marketing, research and development and general and administrative expenses increased by $101 million, or 6%, during fiscal 2023 compared to fiscal 2022, primarily due to higher salaries, benefits and stock-based compensation expense, reflecting an increase in average headcount of 8%. The increase was partially offset by lower incentive compensation expense.
Total compensation costs included in operating expenses increased by $74 million, or 4%, during fiscal 2022 compared to fiscal 2021, primarily due to higher salaries, benefits and stock-based compensation expenses, reflecting a 3% increase in average headcount. This increase was partially offset by lower incentive compensation expense. Total compensation costs for fiscal 2021 includes the impact of an additional week in the first quarter of fiscal 2021.
Sales and Marketing (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Sales and marketing expenses | $ | 1,829 | $ | 1,857 | (2 | )% | $ | 1,744 | 6 | % |
Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, facilities and IT support costs, advertising and marketing promotional expense and travel and entertainment expense. The changes in sales and marketing expenses consisted of the following (in percentage points of the total change):
| Fiscal 2023 to Fiscal 2022 | Fiscal 2022 to Fiscal 2021 | ||||||
|---|---|---|---|---|---|---|---|
| Compensation costs | 2 | 4 | |||||
| Commissions | (3 | ) | 1 | ||||
| Advertising and marketing promotional expense | (2 | ) | — | ||||
| Travel and entertainment | 1 | 1 | |||||
| Total change | (2 | ) | 6 |
The increase in compensation costs for fiscal 2023 compared to fiscal 2022 reflected an increase in average headcount of approximately 6%. The impact of the increase in headcount was partially offset by lower incentive compensation expense and the impact of foreign exchange rate fluctuations.
The increase in compensation costs in fiscal 2022 compared to fiscal 2021 reflected an increase in average headcount of approximately 5%, partially offset by the impact of one less week in fiscal 2022.
The decrease in commissions expense for fiscal 2023 compared to fiscal 2022 was primarily due to lower performance against sales goals. The increase in commissions expense in fiscal 2022 primarily reflected the increase in the average headcount of our sales team compared to fiscal 2021, partially offset by slightly lower attainment against sales goals than in fiscal 2021.
Advertising and marketing promotional expense decreased in fiscal 2023 compared to fiscal 2022, primarily due to lower spending on certain marketing programs.
Travel and entertainment expense increased in fiscal 2023 and fiscal 2022 compared to the respective prior years, as COVID-19 related travel restrictions eased.
39
Research and Development (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Research and development expenses | $ | 956 | $ | 881 | 9 | % | $ | 881 | — | % |
Research and development expenses consist primarily of compensation costs, facilities and IT support costs, depreciation, equipment and software related costs, prototypes, non-recurring engineering charges and other outside services costs. Changes in research and development expense consisted of the following (in percentage points of the total change):
| Fiscal 2023 to Fiscal 2022 | Fiscal 2022 to Fiscal 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Compensation costs | 8 | (1 | ) | |||||
| Development projects and outside services | 1 | 1 | ||||||
| Total change | 9 | — |
The increase in compensation costs for fiscal 2023 compared to fiscal 2022 was primarily attributable to an increase in average headcount of 11%. The impact of the increase in headcount was partially offset by lower incentive compensation expense and the impact of foreign exchange rate fluctuations. The increase in development projects and outside services for fiscal 2023 compared to fiscal 2022 was primarily due to the higher spending on certain engineering projects.
The decrease in compensation costs for fiscal 2022 compared to fiscal 2021 was primarily due to lower incentive compensation expense, while average headcount was relatively consistent in each period. Compensation costs for fiscal 2022 also reflected the impact of one less week in fiscal 2022. The increase in development projects and outside services during fiscal 2022 compared to fiscal 2021 was primarily due to the higher spending on certain engineering projects.
General and Administrative (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| General and administrative expenses | $ | 265 | $ | 279 | (5 | )% | $ | 257 | 9 | % |
General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and facilities and IT support costs. Changes in general and administrative expense consisted of the following (in percentage points of the total change):
| Fiscal 2023 to Fiscal 2022 | Fiscal 2022 to Fiscal 2021 | |||||||
|---|---|---|---|---|---|---|---|---|
| Compensation costs | (1 | ) | 4 | |||||
| Professional and legal fees and outside services | 1 | 4 | ||||||
| Facilities and IT support costs | (5 | ) | (1 | ) | ||||
| Other | — | 2 | ||||||
| Total change | (5 | ) | 9 |
The decrease in compensation costs in fiscal 2023 compared to fiscal 2022 was primarily attributable to lower incentive compensation expense, partially offset by the increase in salaries and stock-based compensation expenses. The increases in professional and legal fees and outside services expense in fiscal 2023 were primarily due to higher spending on certain business transformation projects. The decrease in facilities and IT support costs in fiscal 2023 was primarily related to lower spending for certain IT projects.
The increase in compensation costs in fiscal 2022 compared to fiscal 2021 were primarily attributable to a 4% increase in average headcount and higher stock-based compensation expense, which was partially offset by lower incentive compensation expense and the impact of one less week in fiscal 2022. The increases in professional and legal fees and outside services expense in fiscal 2022 were primarily due to higher spending on business transformation projects and an increase in legal fees. The decreases in facilities and IT support costs were primarily due to lower spending levels on IT projects.
40
Restructuring Charges (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Restructuring charges | $ | 120 | $ | 33 | 264 | % | $ | 42 | (21 | )% |
In an effort to reduce our cost structure and redirect resources to our highest return activities, in fiscal 2023, 2022 and 2021, we initiated a number of business realignment plans designed to streamline our business and focus on key strategic opportunities. These plans resulted in aggregate reductions of our global workforce of approximately 9% in fiscal 2023, 1% in fiscal 2022, and 6% in fiscal 2021, and aggregate charges of $120 million, $33 million and $42 million, respectively, consisting primarily of employee severance costs. The aggregate charges in fiscal 2023 and fiscal 2022 also included legal and tax-related consulting fees associated with the establishment of an international headquarters in Cork, Ireland. See Note 12 – Restructuring Charges of the Notes to Consolidated Financial Statements for more details regarding our restructuring plans.
Acquisition-related Expense (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Acquisition-related expense | $ | 21 | $ | 13 | 62 | % | $ | 16 | (19 | )% |
We incurred $21 million, $13 million and $16 million of acquisition-related expenses, primarily consisting of legal and consulting fees, in fiscal 2023, fiscal 2022 and fiscal 2021, respectively, associated with our acquisition and subsequent integration of Instaclustr, CloudCheckr and Spot, respectively.
Gain on Sale or Derecognition of Assets (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Gain on sale or derecognition of assets | $ | — | $ | — | — | $ | (156 | ) | (100 | )% |
In April 2021, we sold certain land and buildings located in Sunnyvale, California with an aggregate net book value of $210 million and received cash proceeds of $365 million, resulting in a gain, net of direct selling cost, and adjusted for below-market rent, of $156 million.
Other Income (Expense), Net (in millions, except percentages)
The components of other income (expense), net were as follows:
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Interest income | $ | 69 | $ | 7 | 886 | % | $ | 9 | (22 | )% | |||||||||||
| Interest expense | (67 | ) | (73 | ) | (8 | )% | (74 | ) | (1 | )% | |||||||||||
| Other, net | 46 | 4 | NM | (4 | ) | NM | |||||||||||||||
| Total | $ | 48 | $ | (62 | ) | NM | $ | (69 | ) | NM |
NM - Not Meaningful
Interest income increased in fiscal 2023 compared to fiscal 2022 primarily due to higher yields earned on our cash and investments. Interest income decreased during fiscal 2022 and fiscal 2021 compared to the respective prior years due to both a reduction in the size of our investment portfolio and lower yields earned on the investments.
Interest expense decreased in fiscal 2023 compared to fiscal 2022 due to the extinguishment of certain senior notes in the second quarter of fiscal 2023. Interest expense remained flat in fiscal 2022 compared to fiscal 2021 as the aggregate principal amount of our outstanding Senior Notes remained consistent.
Other, net for fiscal 2023 includes $22 million of other income for non-refundable, up-front payments from customers in Russia for support contracts, which we were not able to fulfill due to imposed sanctions and for which we have no remaining legal obligation to perform. Other, net for fiscal 2023 also includes a $32 million gain recognized on our sale of a minority equity interest in a privately held company for proceeds of approximately $59 million. The remaining differences in Other, net for fiscal 2023 as compared to fiscal 2022 are primarily due to foreign exchange gains and losses year-over-year. The differences in Other, net during fiscal 2022 as compared to fiscal 2021 are partially due to foreign exchange gains and losses year-over-year. In fiscal 2021, other, net includes a $6 million gain recognized on our sale of a minority equity interest in a privately held company for proceeds of
41
approximately $8 million. This benefit was more than offset by a $14 million loss recognized from the extinguishment of our Senior Notes due June 2021 in the first quarter of fiscal 2021.
Provision for Income Taxes (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | % Change | 2021 | % Change | |||||||||||||||||
| Provision for income taxes | $ | (208 | ) | $ | 158 | (232 | )% | $ | 232 | (32 | )% |
Our effective tax rate for fiscal 2023 was (19.5)% compared to 14.4% in fiscal 2022, primarily due to benefits resulting from an intra-entity asset transfer of certain IP, offset by discrete tax expense recorded as a result of the Danish Supreme Court ruling received January 9, 2023.
During the second quarter of fiscal 2023, we completed an intra-entity asset transfer of certain IP to our international headquarters (the “IP Transfer”). The transaction resulted in a step-up of tax-deductible basis in the transferred assets, and accordingly, created a temporary difference where the tax basis exceeded the financial statement basis of such intangible assets, which resulted in the recognition of a discrete tax benefit and related deferred tax asset of $524 million during the second quarter of fiscal 2023. Management applied significant judgment when determining the fair value of the IP, which serves as the tax basis of the deferred tax asset. With the assistance of third-party valuation specialists, the fair value of the IP was determined principally based on the present value of projected cash flows related to the IP which reflects management’s assumptions regarding projected revenues, earnings before interest and taxes, and a discount rate. The tax-deductible amortization related to the transferred IP rights will be recognized in future periods and any amortization that is unused in a particular year can be carried forward indefinitely. The deferred tax asset and the tax benefit were measured based on the enacted tax rates expected to apply in the years the asset is expected to be realized. We expect to realize the deferred tax asset resulting from the IP Transfer and will assess the realizability of the deferred tax asset quarterly. Any Organisation for Economic Co-operation and Development’s (“OECD”) actions adopted internationally could impact our financial results in future periods. The impact of the transaction to net cash provided by or used in operating, investing and financing activities on the condensed consolidated statements of cash flows during fiscal 2023 was not material.
During the third quarter of fiscal 2023, the Danish Supreme Court issued a non-appealable ruling on the distributions declared in 2005 and 2006. The Danish Supreme Court reversed the lower court's decision and ruled the 2005 dividend was subject to at-source dividend withholding tax while the smaller 2006 distribution would not be subject to withholding tax. We recorded $69 million of tax expense, which includes $23 million of withholding tax (which we paid in fiscal 2023) and $46 million of interest (which is included in accrued expenses in our consolidated balance sheet as of the end of fiscal 2023), associated with the Danish Supreme Court ruling as a discrete item during the third quarter of fiscal 2023.
Our effective tax rate for fiscal 2022 was lower than the prior year primarily due to the inclusion of one-time benefits related to the prepayment of certain intercompany expenses. Additionally, the fiscal 2021 tax provision included the impact of taxes resulting from the integration of certain acquired companies.
Liquidity, Capital Resources and Cash Requirements
| (In millions, except percentages) | April 28, 2023 | April 29, 2022 | |||||
|---|---|---|---|---|---|---|---|
| Cash, cash equivalents and short-term investments | $ | 3,070 | $ | 4,134 | |||
| Principal amount of debt | $ | 2,400 | $ | 2,650 |
The following is a summary of our cash flow activities:
| Fiscal Year | ||||||||
|---|---|---|---|---|---|---|---|---|
| (In millions) | 2023 | 2022 | ||||||
| Net cash provided by operating activities | $ | 1,107 | $ | 1,211 | ||||
| Net cash used in investing activities | (1,390 | ) | (561 | ) | ||||
| Net cash used in financing activities | (1,513 | ) | (1,017 | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1 | ) | (49 | ) | ||||
| Net change in cash, cash equivalents and restricted cash | $ | (1,797 | ) | $ | (416 | ) |
42
As of April 28, 2023, our cash, cash equivalents and short-term investments totaled $3.1 billion, reflecting a decrease of $1.1 billion from April 29, 2022. The decrease was primarily due to $850 million used to repurchase shares of our common stock, $432 million used for the payment of dividends, $239 million in purchases of property and equipment, a $250 million repayment of our Senior Notes due December 2022, and $491 million, net of cash acquired, used for the acquisition of a privately-held company, partially offset by $1.1 billion of cash from operating activities. Net working capital was $1.2 billion as of April 28, 2023, a reduction of $779 million when compared to April 29, 2022, primarily due to the decrease in cash, cash equivalents and short-term investments discussed above.
Cash Flows from Operating Activities
During fiscal 2023, we generated cash from operating activities of $1.1 billion, reflecting net income of $1.3 billion which was reduced by $606 million for non-cash deferred tax benefits and increased for non-cash depreciation and amortization expense of $248 million and non-cash stock-based compensation expense of $312 million.
Significant changes in assets and liabilities during fiscal 2023 included the following:
•
Accounts receivable decreased $260 million, reflecting lower billing in the fourth quarter of fiscal 2023 compared to the fourth quarter of fiscal 2022.
•
Accounts payable decreased by $207 million, primarily reflecting lower inventory purchases, and the timing of those purchases from, and payments to, our contract manufacturers.
•
Accrued expenses decreased by $103 million, primarily due to employee compensation payments related to fiscal 2022 incentive compensation and commissions plans.
During fiscal 2022, we generated cash from operating activities of $1.2 billion, reflecting net income of $937 million, adjusted by non-cash depreciation and amortization of $194 million and non-cash stock-based compensation expense of $245 million.
Significant changes in assets and liabilities during fiscal 2022 included the following:
•
Accounts receivable increased $313 million, primarily reflecting less favorable shipping linearity in the fourth quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021.
•
Deferred revenue and financed unearned services increased by $384 million, due to an increase in the aggregate contract value under software and hardware support contracts, primarily reflecting a higher mix of all-flash systems which carry a higher support dollar content than our other products.
•
Accounts payable increased by $181 million, primarily due to higher inventory purchase levels in fiscal 2022, and the timing of inventory purchases during the fourth quarter of each year.
•
Accrued expenses decreased by $111 million, primarily reflecting a reduction of income tax liabilities, and a decrease in accruals for incentive compensation and commissions plans.
We expect that cash provided by operating activities may materially fluctuate in future periods due to a number of factors, including fluctuations in our operating results, shipping linearity, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, and the timing and amount of compensation, income taxes and other payments.
Cash Flows from Investing Activities
During fiscal 2023, we used $719 million for the purchases of investments, net of maturities and sales, paid $491 million, net of cash acquired, for a privately-held company and $239 million for capital expenditures. Additionally, we received proceeds of $59 million from the sale of one of our minority investments in fiscal 2023.
During fiscal 2022, we generated $45 million primarily from maturities of investments in available-for-sale securities, net of purchases, and paid $226 million for capital expenditures. We paid $380 million, net of cash acquired, for three privately-held companies.
43
Cash Flows from Financing Activities
During fiscal 2023, cash flows used in financing activities totaled $1.5 billion and include $850 million for the repurchase of approximately 13 million shares of common stock, $432 million for the payment of dividends and $250 million to redeem our Senior Notes due in December 2022.
During fiscal 2022, cash flows used in financing activities totaled $1.0 billion and included $600 million for the repurchase of approximately seven million shares of common stock and $446 million for the payment of dividends.
Key factors that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable, accounts payable and inventories, the timing and amount of stock repurchases and payment of cash dividends, the impact of foreign exchange rate changes, our ability to effectively integrate acquired products, businesses and technologies and the timing of repayments of our debt. Based on past performance and our current business outlook, we believe that our sources of liquidity, including cash, cash equivalents and short-term investments, cash generated from operations, and our ability to access capital markets and committed credit lines will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months. However, in the event our liquidity is insufficient, we may be required to curtail spending and implement additional cost saving measures and restructuring actions or enter into new financing arrangements. We cannot be certain that we will continue to generate cash flows at or above current levels or that we will be able to obtain additional financing, if necessary, on satisfactory terms, if at all. For further discussion of factors that could affect our cash flows and liquidity requirements, see Item 1A. Risk Factors.
Liquidity
Our principal sources of liquidity as of April 28, 2023 consisted of cash, cash equivalents and short-term investments, cash we expect to generate from operations, and our commercial paper program and related credit facility.
Cash, cash equivalents and short-term investments consisted of the following (in millions):
| April 28, 2023 | April 29, 2022 | ||||||
|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 2,316 | $ | 4,112 | |||
| Short-term investments | 754 | 22 | |||||
| Total | $ | 3,070 | $ | 4,134 |
As of April 28, 2023 and April 29, 2022, $2.2 billion and $2.3 billion, respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based in U.S. dollar-denominated holdings, while $0.9 billion and $1.8 billion, respectively, were available in the U.S.
Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, fund research and development, meet capital expenditure needs, invest in critical or complementary technologies through asset purchases and/or business acquisitions, service interest and principal payments on our debt, fund our stock repurchase program, and pay dividends, as and if declared. In the ordinary course of business, we engage in periodic reviews of opportunities to invest in or acquire companies or units in companies to expand our total addressable market, leverage technological synergies and establish new streams of revenue, particularly in our Public Cloud segment.
The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of April 28, 2023.
Our investment portfolio has been and will continue to be exposed to market risk due to trends in the credit and capital markets. We continue to closely monitor current economic and market events to minimize the market risk of our investment portfolio. We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. We utilize a variety of planning and financing strategies in an effort to ensure our worldwide cash is available when and where it is needed. We also have an automatic shelf registration statement on file with the Securities and Exchange Commission (SEC). We may in the future offer an additional unspecified amount of debt, equity and other securities.
44
Senior Notes
The following table summarizes the principal amount of our Senior Notes as of April 28, 2023 (in millions):
| Amount | |||
|---|---|---|---|
| 3.30% Senior Notes Due September 2024 | $ | 400 | |
| 1.875% Senior Notes Due June 2025 | 750 | ||
| 2.375% Senior Notes Due June 2027 | 550 | ||
| 2.70% Senior Notes Due June 2030 | 700 | ||
| Total | $ | 2,400 |
Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 8 – Financing Arrangements of the Notes to Consolidated Financial Statements.
On September 15, 2022, we extinguished our 3.25% Senior Notes due December 2022 for an aggregate cash redemption price of $252 million, comprised of the principal and unpaid interest.
Commercial Paper Program and Credit Facility
We have a commercial paper program (the Program), under which we may issue unsecured commercial paper notes. Amounts available under the Program may be borrowed, repaid and re-borrowed, with the aggregate face or principal amount of the notes outstanding under the Program at any time not to exceed $1.0 billion. The maturities of the notes can vary, but may not exceed 397 days from the date of issue. The notes are sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The proceeds from the issuance of the notes are used for general corporate purposes. No commercial paper notes were outstanding as of April 28, 2023.
In connection with the Program, we have a senior unsecured credit agreement with a syndicated group of lenders. The credit agreement, which was amended in May 2023 primarily to replace the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate (SOFR) as the basis for establishing the interest rate applicable to certain borrowings under the agreement, provides for a $1.0 billion revolving unsecured credit facility, with a sublimit of $50 million available for the issuance of letters of credit on our behalf. The credit facility matures on January 22, 2026, with an option for us to extend the maturity date for two additional 1-year periods, subject to certain conditions. The proceeds of the loans may be used by us for general corporate purposes and as liquidity support for our existing commercial paper program. As of April 28, 2023, we were compliant with all associated covenants in the agreement. No amounts were drawn against this credit facility during any of the periods presented.
Capital Expenditure Requirements
We expect to fund our capital expenditures, including our commitments related to facilities, equipment, operating leases and internal-use software development projects over the next few years through existing cash, cash equivalents, investments and cash generated from operations. The timing and amount of our capital requirements cannot be precisely determined and will depend on a number of factors, including future demand for products, changes in the network storage industry, hiring plans and our decisions related to the financing of our facilities and equipment requirements. We anticipate capital expenditures for fiscal 2024 to be between $175 million and $225 million.
Transition Tax Payments
The Tax Cuts and Jobs Act of 2017 imposed a mandatory, one-time transition tax on accumulated foreign earnings and profits that had not previously been subject to U.S. income tax. As of April 28, 2023, outstanding payments related to the transition tax are estimated to be approximately $303 million of which $88 million, $115 million and $100 million are expected to be paid during fiscal 2024, fiscal 2025 and fiscal 2026, respectively. During fiscal 2023, transition tax payments totaled $48 million. Our estimates for future transition tax payments, however, could change with further guidance or review from U.S. federal and state tax authorities or other regulatory bodies.
Dividends and Stock Repurchase Program
On May 26, 2023, we declared a cash dividend of $0.50 per share of common stock, payable on July 26, 2023 to holders of record as of the close of business on July 7, 2023.
45
As of April 28, 2023, our Board of Directors had authorized the repurchase of up to $15.1 billion of our common stock under our stock repurchase program. Under this program, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, in privately negotiated transactions, through accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management. The stock repurchase program may be suspended or discontinued at any time. Since the May 13, 2003 inception of this program through April 28, 2023, we repurchased a total of 360 million shares of our common stock at an average price of $40.89 per share, for an aggregate purchase price of $14.7 billion. As of April 28, 2023, the remaining authorized amount for stock repurchases under this program was $0.4 billion. On May 26, 2023 our Board of Directors authorized the repurchase of an additional $1.0 billion of our common stock.
Purchase Commitments
In the ordinary course of business, we make commitments to third-party contract manufacturers and component suppliers to manage manufacturer lead times and meet product forecasts, and to other parties, to purchase various key components used in the manufacture of our products. In addition, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not yet received goods or services. These off-balance sheet purchase commitments totaled $0.7 billion at April 28, 2023, of which $0.5 billion is due in fiscal 2024, with the remainder due thereafter.
Financing Guarantees
While most of our arrangements for sales include short-term payment terms, from time to time we provide long-term financing to creditworthy customers. We have generally sold receivables financed through these arrangements on a non-recourse basis to third party financing institutions within 10 days of the contracts’ dates of execution, and we classify the proceeds from these sales as cash flows from operating activities in our consolidated statements of cash flows. We account for the sales of these receivables as “true sales” as defined in the accounting standards on transfers of financial assets, as we are considered to have surrendered control of these financing receivables. We sold $38 million and $59 million of receivables during fiscal 2023 and 2022, respectively.
In addition, we enter into arrangements with leasing companies for the sale of our hardware systems products. These leasing companies, in turn, lease our products to end-users. The leasing companies generally have no recourse to us in the event of default by the end-user.
Some of the leasing arrangements described above have been financed on a recourse basis through third-party financing institutions. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. As of April 28, 2023 and April 29, 2022, the aggregate amount by which such contingencies exceeded the associated liabilities was not significant. To date, we have not experienced significant losses under our lease financing programs or other financing arrangements.
We have entered into service contracts with certain of our end-user customers that are supported by third-party financing arrangements. If a service contract is terminated as a result of our non-performance under the contract or our failure to comply with the terms of the financing arrangement, we could, under certain circumstances, be required to acquire certain assets related to the service contract or to pay the aggregate unpaid payments under such arrangements. As of April 28, 2023, we have not been required to make any payments under these arrangements, and we believe the likelihood of having to acquire a material amount of assets or make payments under these arrangements is remote. The portion of the financial arrangement that represents unearned services revenue is included in deferred revenue and financed unearned services revenue in our consolidated balance sheets.
Legal Contingencies
We are subject to various legal proceedings and claims which arise in the normal course of business. See further details on such matters in Note 17 – Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.
46
The summary of significant accounting policies is included in Note 1 – Description of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. The accounting policies described below reflect the significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements.
Revenue Recognition
Our contracts with customers often include the transfer of multiple products and services to the customer. In determining the amount and timing of revenue recognition, we assess which products and services are distinct performance obligations and allocate the transaction price, which may include fixed and/or variable amounts, among each performance obligation on a relative standalone selling price (SSP) basis. The following are the key estimates and assumptions and corresponding uncertainties included in this approach:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We evaluate whether products and services promised in our contracts with customers are distinct performance obligations that should be accounted for separately versus together. | | In certain contracts, the determination of our distinct performance obligations requires significant judgment. As our business and offerings to customers change over time, the products and services we determine to be distinct performance obligations may change. Such changes may adversely impact the amount of revenue and gross margin we report in a particular period. | |
| | In determining the transaction price of our contracts, we estimate variable consideration based on the expected value, primarily relying on our history. In certain situations, we may also use the most likely amount as the basis of our estimate. | | We may have insufficient relevant historical data or other information to arrive at an accurate estimate of variable consideration using either the “expected value” or “most likely amount” method. Additionally, changes in business practices, such as those related to sales returns or marketing programs, may introduce new forms of variable consideration, as well as more complexity and uncertainty in the estimation process. | |
| | In contracts with multiple performance obligations, we establish SSPs based on the price at which products and services are sold separately. If SSPs are not observable through past transactions, we estimate them by maximizing the use of observable inputs including pricing strategy, market data, internally-approved pricing guidelines related to the performance obligations and other observable inputs. | | As our business and offerings evolve over time, modifications to our pricing and discounting methodologies, changes in the scope and nature of product and service offerings and/or changes in customer segmentation may result in a lack of consistency, making it difficult to establish and/or maintain SSPs. Changes in SSPs could result in different and unanticipated allocations of revenue in contracts with multiple performance obligations. These factors, among others, may adversely impact the amount of revenue and gross margin we report in a particular period. |
Inventory Valuation and Purchase Order Accruals
Inventories consist primarily of purchased components and finished goods and are stated at the lower of cost or net realizable value, which approximates actual cost on a first-in, first-out basis. A provision is recorded when inventory is determined to be in excess of anticipated demand or obsolete in order to adjust inventory to its estimated realizable value. The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our inventories:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We periodically perform an excess and obsolete analysis of our inventory. Inventories are written down based on excess and obsolete reserves determined primarily on assumptions about future demand forecasts and market conditions. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances | | Although we use our best estimates to forecast future product demand, any significant unanticipated changes in demand, including due to macroeconomic uncertainties, or obsolescence related to technological developments, new product introductions, customer requirements, competition or other factors could have a significant impact on the valuation of our inventory. If actual market conditions are less favorable than |
47
| do not result in the restoration or increase in that newly established cost basis. | those projected, additional write-downs and other charges against earnings that adversely impact gross margins may be required. If actual market conditions are more favorable, we may realize higher gross profits in the period when the written-down inventory is sold.We are subject to a variety of environmental laws relating to the manufacture of our products. If there are changes to the current regulations, we may be required to make product design changes which may result in excess or obsolete inventory, which could adversely impact our operating results. | |||
|---|---|---|---|---|
| | We make commitments to our third-party contract manufacturers and other suppliers to manage lead times and meet product forecasts and to other parties to purchase various key components used in the manufacture of our products. We establish accruals for estimated losses on non-cancelable purchase commitments when we believe it is probable that the components will not be utilized in future operations. | | If the actual materials demand is significantly lower than our forecast, we may be required to increase our recorded liabilities for estimated losses on non-cancelable purchase commitments, including incremental commitments made in response to recent developments in the broader technology supply chain, which would adversely impact our operating results. |
Goodwill and Purchased Intangible Assets
We allocate the purchase price of acquisitions to identifiable assets acquired and liabilities assumed at their acquisition date fair values based on established valuation techniques. Goodwill represents the residual value as of the acquisition date, which in most cases is measured as the excess of the purchase consideration transferred over the net of the acquisition date fair values of the assets acquired and liabilities assumed.
The carrying values of purchased intangible assets are reviewed whenever events and circumstances indicate that the net book value of an asset may not be recovered through expected future cash flows from its use and eventual disposition. We periodically review the estimated remaining useful lives of our intangible assets. This review may result in impairment charges or shortened useful lives, resulting in charges to our consolidated statements of income.
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of one of our reporting units may exceed its fair value. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. For our annual goodwill impairment test in the fourth quarter of fiscal 2023, we performed a quantitative test and determined the fair value of each of our reporting units substantially exceeded its carrying amount, therefore, there was no impairment of goodwill.
48
The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our goodwill and purchased intangible assets:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | The assessment of fair value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction in accordance with the accounting guidance for the fair value measurement of nonfinancial assets.The valuation of purchased intangible assets is principally based on estimates of the future performance and cash flows expected to be generated by the acquired assets from the acquired business. | | While we employ experts to determine the acquisition date fair value of acquired intangibles, the fair values of assets acquired and liabilities assumed are based on significant management assumptions and estimates, which are inherently uncertain and highly subjective and as a result, actual results may differ from estimates. If different assumptions were to be used, it could materially impact the purchase price allocation. Volatile macroeconomic and market conditions have increased the level of uncertainty and subjectivity of certain management assumptions and estimates. | |
| | Evaluations of possible goodwill and purchased intangible asset impairment require us to make judgments and assumptions related to the allocation of our balance sheet and income statement amounts and estimate future cash flows and fair market values of our reporting units and assets. | | In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill or purchased intangible assets. Assumptions and estimates about expected future cash flows and the fair values of our reporting units and purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as the adverse impact of unanticipated changes in macroeconomic conditions, and technological changes or new product introductions from competitors. They can also be affected by internal factors such as changes in business strategy or in forecasted product life cycles and roadmaps. Our ongoing consideration of these and other factors could result in future impairment charges or accelerated amortization expense, which could adversely affect our operating results. |
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets or liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The following are the key estimates and assumptions and corresponding uncertainties for our income taxes, including those specifically related to the intra-entity asset transfer of the IP to our international headquarters during fiscal 2023:
49
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | Our income tax provision is based on existing tax law and advanced pricing agreements or letter rulings we have with various tax authorities. | | Our provision for income taxes is subject to volatility and could be adversely impacted by future changes in existing tax laws, such as a change in tax rate, possible U.S. changes to the taxation of earnings of our foreign subsidiaries, and uncertainties as to future renewals of favorable tax agreements and rulings. | |
| | The determination of whether we should record or adjust a valuation allowance against our deferred tax assets is based on assumptions regarding our future profitability. | | Our future profits could differ from current expectations resulting in a change to our determination as to the amount of deferred tax assets that are more likely than not to be realized. We could adjust our valuation allowance with a corresponding impact to the tax provision in the period in which such determination is made. | |
| | The estimates for our uncertain tax positions are based primarily on company specific circumstances, applicable tax laws, tax opinions from outside firms and past results from examinations of our income tax returns. | | Significant judgment is required in evaluating our uncertain tax positions. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome or tax court rulings of these matters will not be different from that which is reflected in our historical tax provisions and accruals. | |
| | The assessment of the fair value of the IP transferred to our international headquarters is based on factors that market participants would use in an orderly transaction in accordance with the accounting guidance for the fair value measurement of nonfinancial assets and transfer pricing principles from the Organisation for Economic Co-operation and Development. The valuation of our IP is principally based on the present value of projected cash flows related to the IP which reflects management’s assumptions regarding projected revenues, earnings before interest and taxes, and a discount rate. | | While we employ experts to assist with the determination of the fair value of IP, its fair value is based on significant management assumptions and estimates, which are inherently uncertain and highly subjective, and as a result, actual results may differ from estimates. If different assumptions were to be used, it could materially impact the IP valuation. Volatile macroeconomic and market conditions have increased the level of uncertainty and subjectivity of certain management assumptions and estimates. |
FY 2022 10-K MD&A
SEC filing source: 0000950170-22-011708.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the financial statements and the accompanying notes set forth under Item 8. – Financial Statements and Supplementary Data. The following discussion also contains trend information and other forward-looking statements that involve a number of risks and uncertainties. The Risk Factors set forth in Item 1A. – Risk Factors are hereby incorporated into the discussion by reference.
Executive Overview
Our Company
NetApp is a global cloud-led, data-centric software company that gives organizations the freedom to put data to work in the applications that elevate their business. We help our customers get the most out of their data with industry-leading public cloud services, and hybrid cloud solutions. Building on a rich history of innovation, we give customers the freedom to manage applications and data across hybrid multicloud environments. No matter where a customer’s data is or how the business uses it, NetApp helps to bring it together in a data fabric. For nearly three decades, NetApp has supported customers to accelerate their unique data fabrics and extend their workflows into a hybrid cloud environment with the right tools and right capabilities.
As our products and solutions portfolios evolve, market dynamics change, and management continues to assess our largest opportunities, we periodically change how we manage our business. As of the end of our first quarter of fiscal 2022, our Chief Operating Decision Maker (CODM), who is our Chief Executive Officer, realigned internal reporting and began using financial information for components of our business, organized based on category of product/solution, to evaluate performance and allocate resources. This resulted in the creation of two reportable segments for financial reporting purposes: Hybrid Cloud and Public Cloud. Our CODM measures the performance of each segment based on segment revenue and segment gross profit.
Hybrid Cloud offers a portfolio of storage management and infrastructure solutions that help customers recast their data centers with the power of cloud. This portfolio is designed to operate with public clouds to unlock the potential of hybrid, multi-cloud operations. We offer a broad portfolio of cloud-connected all-flash, hybrid-flash, and object storage systems, powered by intelligent data management software. Hybrid Cloud is composed of software, hardware, and related support, as well as professional and other services.
Public Cloud offers a portfolio of products delivered primarily as-a-service, including related support. This portfolio includes cloud storage and data services, and cloud operations services. Our enterprise-class solutions and services enable customers to control and manage storage in the cloud, consume high-performance storage services for primary workloads, and optimize cloud environments for cost and efficiency. These solutions and services are generally available on the leading public clouds, including Microsoft Azure, Google Cloud Platform and Amazon AWS.
Global Business Environment
Macroeconomic Conditions
Continuing global economic uncertainty, political conditions and fiscal challenges in the U.S. and abroad could result in adverse macroeconomic conditions, including inflation, slower growth or recession. In particular, in fiscal 2022, we experienced inflationary pressure and constraints in our supply chain.
Supply chain constraints, particularly in the second half of fiscal 2022, led to higher product component and freight costs which increased our cost of revenues. Supply chain constraints also delayed our ability to fulfill certain customer orders during the fiscal year. Given the uncertainties that exist in the broader technology supply chain, we are continuing to invest in inventory and certain longer-term commitments to help mitigate the impact of supply shortages.
If these macroeconomic uncertainties or supply chain challenges persist or worsen in fiscal 2023, we may observe reduced customer demand for our offerings, increased competition for critical components, challenges fulfilling certain customer orders or continued increases in component and freight costs which could impact our operating results, including our ability to achieve historical levels of revenue growth.
COVID-19
The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in many of the regions in which we sell our products and services and conduct our business operations. We have taken precautionary measures intended to minimize the risk of the virus to our employees, our customers, and the communities in which we operate. Since March 2020, the vast majority of our employees have been working remotely and we have limited business
34
travel. As a result of COVID-19, we continued to observe certain customers delaying purchases of our products and services, while other customers accelerated or placed new orders to address the demands of remote working and digital business.
Russia Sanctions
Beginning in February 2022, in response to Russian military actions in Ukraine, the U.S. and other countries imposed sanctions on Russia, and we suspended business operations, including sales, support on existing contracts and professional services, in Russia and Belarus. The impact of these actions was not significant to our fiscal 2022 financial results. However, their ultimate magnitude and duration remain uncertain, and we will continue to closely monitor their potential impacts to our business.
The magnitude and duration of the disruption to our business, and impact to our operational and financial performance of the factors above remain uncertain. Refer to Item 1A. – Risk Factors for the significant risks we have identified related to the global business environment.
Financial Results and Key Performance Metrics Overview
The following table provides an overview of key financial metrics for each of the last three fiscal years (in millions, except per share amounts and percentages):
| Year Ended | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| April 29, 2022 | April 30, 2021 | April 24, 2020 | ||||||||||
| Net revenues | $ | 6,318 | $ | 5,744 | $ | 5,412 | ||||||
| Gross profit | $ | 4,220 | $ | 3,815 | $ | 3,623 | ||||||
| Gross profit margin percentage | 67 | % | 66 | % | 67 | % | ||||||
| Income from operations | $ | 1,157 | $ | 1,031 | $ | 945 | ||||||
| Income from operations as a percentage of net revenues | 18 | % | 18 | % | 17 | % | ||||||
| Provision for income taxes | $ | 158 | $ | 232 | $ | 125 | ||||||
| Net income | $ | 937 | $ | 730 | $ | 819 | ||||||
| Diluted net income per share | $ | 4.09 | $ | 3.23 | $ | 3.52 | ||||||
| Net cash provided by operating activities | $ | 1,211 | $ | 1,333 | $ | 1,060 |
| April 29, 2022 | April 30, 2021 | ||||||
|---|---|---|---|---|---|---|---|
| Deferred revenue and financed unearned services revenue | $ | 4,232 | $ | 4,003 |
•
Net revenues: Our net revenues increased 10% in fiscal 2022 compared to fiscal 2021, due to an increase in both product revenues and services revenues, with the latter primarily driven by an increase in public cloud revenues.
•
Gross profit margin percentage: Our gross profit margin as a percentage of net revenues increased less than one percentage point in fiscal 2022 compared to fiscal 2021 primarily due to a slight increase in gross profit margins on product revenues.
•
Income from operations as a percentage of net revenues: Our income from operations as a percentage of net revenues increased by less than one percentage point in fiscal 2022 compared to fiscal 2021, primarily due to a slightly higher gross profit margin percentage and lower sales and marketing, research and development, and general and administrative expenses as a percentage of net revenues, partially offset by the gain on sale of certain properties in fiscal 2021 that did not recur in fiscal 2022.
•
Provision for income taxes: Our provision for income taxes decreased in fiscal 2022 compared to fiscal 2021 primarily due to one-time benefits in fiscal 2022 related to the prepayment of certain intercompany expenses.
•
Net income and Diluted net income per share: The increase in both net income and diluted net income per share in fiscal 2022 compared to fiscal 2021 reflect the factors discussed above. Higher net income and increased share repurchases in fiscal year 2022 compared to fiscal 2021 favorably impacted diluted net income per share.
•
Operating cash flows: Operating cash flows decreased by 8% in fiscal 2022 compared to fiscal 2021, primarily reflecting the timing of accounts receivables billings and collections and employee compensation payments, partially offset by higher net income.
•
Deferred revenue and financed unearned services revenue: Total deferred revenue and financed unearned services revenue increased $229 million, or 6%, as of fiscal 2022 compared to fiscal 2021 due to an increase in the aggregate contract value under software and hardware support contracts, primarily reflecting a higher mix of all-flash systems which carry a higher support dollar content than our other products.
35
Stock Repurchase Program and Dividend Activity
During fiscal 2022, we repurchased approximately 7 million shares of our common stock at an average price of $84.49 per share, for an aggregate purchase price of $600 million. We also declared aggregate cash dividends of $2.00 per share in fiscal 2022, for which we paid a total of $446 million.
Acquisitions
On May 20, 2022, in the first quarter of fiscal 2023, we acquired all the outstanding shares of privately-held Instaclustr, Inc., a leading platform provider of fully managed open-source database, pipeline and workflow applications delivered as a service, for approximately $500 million.
On February 18, 2022, we acquired all the outstanding shares of privately-held NeurOps Inc. (which operated under the name "Fylamynt"), for approximately $27 million. Fylamynt is an innovative CloudOps automation technology company that enables customers to build, run, manage and analyze workflows securely in any cloud with little to no code.
On November 5, 2021, we acquired all the outstanding shares of privately-held CloudCheckr Inc., (CloudCheckr) for approximately $347 million. CloudCheckr is a leading cloud optimization platform that provides cloud visibility and insights to lower costs, maintain security and compliance, and optimize cloud resources.
On June 18, 2021, we acquired all the outstanding shares of privately-held Data Mechanics Inc., a provider of managed platforms for big data processing and cloud analytics, for approximately $15 million.
Restructuring Events
During fiscal 2022, we executed several restructuring plans and recognized expenses totaling $33 million consisting primarily of lease termination fees, office relocation costs, and employee severance-related costs.
36
Results of Operations
Our fiscal year is reported on a 52- or 53-week year that ends on the last Friday in April. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal months with calendar months. Fiscal year 2022, which ended on April 29, 2022, and fiscal year 2020, which ended on April 24, 2020 were both 52-week years. Fiscal year 2021, which ended on April 30, 2021 was a 53-week year, with 14 weeks included in its first quarter and 13 weeks in each subsequent quarter. Unless otherwise stated, references to particular years, quarters, months and periods refer to our fiscal years ended in April and the associated quarters, months and periods of those fiscal years.
The following table sets forth certain Consolidated Statements of Income data as a percentage of net revenues for the periods indicated:
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Revenues: | ||||||||||||
| Product | 52 | % | 52 | % | 55 | % | ||||||
| Services | 48 | 48 | 45 | |||||||||
| Net revenues | 100 | 100 | 100 | |||||||||
| Cost of revenues: | ||||||||||||
| Cost of product | 25 | 25 | 25 | |||||||||
| Cost of services | 9 | 9 | 8 | |||||||||
| Gross profit | 67 | 66 | 67 | |||||||||
| Operating expenses: | ||||||||||||
| Sales and marketing | 29 | 30 | 29 | |||||||||
| Research and development | 14 | 15 | 16 | |||||||||
| General and administrative | 4 | 4 | 5 | |||||||||
| Restructuring charges | 1 | 1 | — | |||||||||
| Acquisition-related expense | — | — | — | |||||||||
| Gain on sale or derecognition of assets | — | (3 | ) | (1 | ) | |||||||
| Total operating expenses | 48 | 48 | 49 | |||||||||
| Income from operations | 18 | 18 | 17 | |||||||||
| Other expense, net | (1 | ) | (1 | ) | — | |||||||
| Income before income taxes | 17 | 17 | 17 | |||||||||
| Provision for income taxes | 3 | 4 | 2 | |||||||||
| Net income | 15 | % | 13 | % | 15 | % |
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Net Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Net revenues | $ | 6,318 | $ | 5,744 | 10 | % | $ | 5,412 | 6 | % |
The increase in net revenues for fiscal 2022 compared to fiscal 2021 was due to an increase in both product revenues and services revenues, with revenues increasing despite the additional week in fiscal 2021. Product revenues and services revenues as a percentage of net revenues both remained relatively consistent in fiscal 2022 compared to fiscal 2021.
The increase in net revenues for fiscal 2021 compared to fiscal 2020 was primarily due to an increase in services revenues, which benefited from an additional week in the first quarter of fiscal 2021, while product revenues were relatively flat. Product revenues as a percentage of net revenues decreased by approximately three percentage points compared to fiscal 2020. Fluctuations in foreign currency exchange rates benefited net revenues by approximately one percentage point for fiscal 2021 compared to fiscal 2020.
Sales through our indirect channels represented 77%, 77% and 79% of net revenues in fiscal 2022, 2021 and 2020, respectively.
The following customers, each of which is a distributor, accounted for 10% or more of net revenues:
37
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Arrow Electronics, Inc. | 24 | % | 24 | % | 25 | % | ||||||
| Tech Data Corporation | 21 | % | 20 | % | 21 | % |
Product Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Product revenues | $ | 3,284 | $ | 2,991 | 10 | % | $ | 2,995 | — | % | |||||||||||
| Hardware (Non-GAAP) | 1,358 | 1,355 | — | % | 1,541 | (12 | )% | ||||||||||||||
| Software (Non-GAAP) | 1,926 | 1,636 | 18 | % | 1,454 | 13 | % |
Hybrid Cloud
Product revenues are derived through the sale of our Hybrid Cloud solutions and consist of sales of configured all-flash array and hybrid systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, NetApp HCI, StorageGrid, OEM products and add-on optional software.
In order to provide visibility into the value created by our software innovation and R&D investment, we disclose the software and hardware components of our product revenues. Software product revenues includes the OS software and optional add-on software solutions attached to our systems across our entire product set, while hardware product revenues include the non-software component of our systems across the entire set. Because our revenue recognition policy under GAAP defines a configured storage system, inclusive of the operating system software essential to its functionality, as a single performance obligation, the hardware and software components of our product revenues are considered non-GAAP measures. The hardware and software components of our product revenues are derived from an estimated fair value allocation of the transaction price of our contracts with customers, down to the level of the product hardware and software components. This allocation is primarily based on the contractual prices at which NetApp has historically billed customers for such respective components.
Total product revenues increased in fiscal 2022 compared to fiscal 2021, primarily driven by an increase in sales of all-flash array systems and, to a lesser extent, an increase in sales of StorageGrid, partially offset by a decrease in sales of NetApp HCI. Supply chain challenges related to the COVID-19 pandemic impeded our ability to fulfill certain customer orders in fiscal 2022, particularly in the fourth quarter.
Total product revenues were relatively flat in fiscal 2021 compared to fiscal 2020, suffering from less favorable macroeconomic conditions through most of fiscal 2021, in part due to the economic uncertainty caused by the COVID-19 pandemic, but then improving in the last quarter of fiscal 2021. Sales of all-flash array systems increased in fiscal 2021, though this increase was offset by a decline in sales of our other products. Fluctuations in foreign currency exchange rates benefited product revenues by approximately one percentage point for fiscal 2021 compared to fiscal 2020.
Revenues from the hardware component of product revenues represented 41%, 45% and 51% of product revenues in fiscal 2022, 2021 and 2020, respectively. The software component of product revenues represented 59%, 55% and 49% of product revenues in fiscal 2022, 2021 and 2020, respectively. The increase in the software component percentage of product revenues in both fiscal 2022 and fiscal 2021 is primarily due to a higher mix of all-flash array systems sales, which contain a higher proportion of software components than other Hybrid Cloud products.
Services Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Services revenues | $ | 3,034 | $ | 2,753 | 10 | % | $ | 2,417 | 14 | % | |||||||||||
| Support | 2,344 | 2,277 | 3 | % | 2,114 | 8 | % | ||||||||||||||
| Professional and other services | 294 | 277 | 6 | % | 241 | 15 | % | ||||||||||||||
| Public cloud | 396 | 199 | 99 | % | 62 | 221 | % |
Hybrid Cloud
Hybrid Cloud services revenues are derived from the sale of: (1) support, which includes both hardware and software support contracts (the latter of which entitle customers to receive unspecified product upgrades and enhancements, bug fixes and patch releases), and (2) professional and other services, which include customer education and training.
38
Support revenues increased in fiscal 2022 compared to fiscal 2021, despite an extra week in the first quarter of fiscal 2021 that contributed approximately $40 million of additional revenues in that period. The increase is primarily due to a higher mix of all-flash systems, which carry a higher support dollar content than our other products, in the current year. The increase in fiscal 2021 compared to fiscal 2020 was partially due to the additional week in that period. Both periods benefitted from a higher aggregate contract value of the installed base under support contracts.
Professional and other services revenues increased in fiscal 2022 compared to fiscal 2021 primarily due to an increase in demand from increased product sales. The increase in fiscal 2021 compared to fiscal 2020 was primarily due to the additional week in that period and general increase in customer demand for such services.
Public Cloud
Public Cloud revenues are derived from the sale of public cloud offerings primarily delivered as-a-service, which include cloud storage and data services, and cloud operations services.
Public Cloud revenues increased in fiscal 2022 and fiscal 2021 compared to the respective prior years primarily due to growing customer demand for NetApp's diversified cloud offerings, coupled with overall growth in the cloud market, and the acquisition of Spot, Inc. (Spot) late in the first quarter of fiscal 2021. Fiscal 2022 also benefitted from the acquisition of CloudCheckr early in the third quarter of that year.
Revenues by Geographic Area:
| Fiscal Year | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| United States, Canada and Latin America (Americas) | 55 | % | 54 | % | 53 | % | ||||||
| Europe, Middle East and Africa (EMEA) | 31 | % | 31 | % | 32 | % | ||||||
| Asia Pacific (APAC) | 14 | % | 15 | % | 15 | % |
Percentages may not add due to rounding
Americas revenues consist of sales to Americas commercial and United States (U.S.) public sector markets. Demand across geographies was relatively consistent across all periods presented.
Cost of Revenues
Our cost of revenues consists of:
(1) cost of product revenues, composed of (a) cost of Hybrid Cloud product revenues, which includes the costs of manufacturing and shipping our products, inventory write-downs, and warranty costs, and (b) unallocated cost of product revenues, which includes stock-based compensation and amortization of intangibles, and;
(2) cost of services revenues, composed of (a) cost of support revenues, which includes the costs of providing support activities for hardware and software support, global support partnership programs, and third party royalty costs, (b) cost of professional and other services revenues, (c) cost of public cloud revenues, constituting the cost of providing our Public Cloud offerings which includes depreciation and amortization expense and third party datacenter fees, and (d) unallocated cost of services revenues, which includes stock-based compensation and amortization of intangibles.
Cost of Product Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Cost of product revenues | $ | 1,554 | $ | 1,432 | 9 | % | $ | 1,368 | 5 | % | |||||||||||
| Hybrid Cloud | 1,541 | 1,402 | 10 | % | 1,326 | 6 | % | ||||||||||||||
| Unallocated | 13 | 30 | (57 | )% | 42 | (29 | )% |
Hybrid Cloud
39
Cost of Hybrid Cloud product revenues represented 47%, 47% and 44% of Hybrid Cloud product revenues in fiscal 2022, 2021 and 2020, respectively. Materials costs represented 93%, 91% and 89% of cost of Hybrid Cloud product revenues in fiscal 2022, 2021 and 2020, respectively.
Materials costs increased by approximately $156 million in fiscal 2022 compared to fiscal 2021 reflecting the increase in product revenues in the current year period, the mix of systems sold, and higher component and freight costs as a result of COVID-19 related supply chain challenges. Excess and obsolete inventory reserves were lower in fiscal 2022 compared to fiscal 2021.
Hybrid Cloud product gross margins remained relatively flat in fiscal 2022 compared to fiscal 2021 despite the increase in component and freight costs, which were offset primarily by a higher mix of all-flash array systems sales, which have higher margins than hybrid systems. We anticipate the increase in component and freight costs related to supply chain challenges will continue to impact gross margins into fiscal year 2023.
Materials costs increased by approximately $96 million in fiscal 2021 compared to fiscal 2020. The trend in product mix toward all-flash array systems, which have higher margins, but carry higher materials costs than hybrid systems, was the primary driver of these increases. Excess and obsolete inventory reserves and warranty expenses were lower in fiscal 2021 compared to fiscal 2020.
Hybrid Cloud product gross margins decreased by two percentage points in fiscal 2021 compared to fiscal 2020 primarily due to a decrease in the average selling prices of most of our products, partially offset by a higher mix of all-flash array product sales.
Unallocated
Unallocated cost of product revenues decreased in fiscal 2022 and in fiscal 2021 compared to the prior year of each respective period due to certain intangible assets becoming fully amortized in the second half of fiscal 2021.
Cost of Services Revenues (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Cost of services revenues | $ | 544 | $ | 497 | 9 | % | $ | 421 | 18 | % | |||||||||||
| Support | 184 | 201 | (8 | )% | 188 | 7 | % | ||||||||||||||
| Professional and other services | 205 | 206 | — | % | 188 | 10 | % | ||||||||||||||
| Public cloud | 118 | 65 | 82 | % | 35 | 86 | % | ||||||||||||||
| Unallocated | 37 | 25 | 48 | % | 10 | 150 | % |
Hybrid Cloud
Cost of Hybrid Cloud services revenues, which are composed of the costs of support and professional and other services, decreased in fiscal 2022 compared to fiscal 2021 and increased in fiscal 2021 compared to fiscal 2020. Cost of Hybrid Cloud services revenues represented 15%, 16% and 16% of Hybrid Cloud services revenues in fiscal 2022, 2021 and 2020, respectively.
Hybrid Cloud support gross margins increased by one percentage point in fiscal 2022 compared to fiscal 2021 due to growth in support revenues achieved with a consistent cost base. Hybrid Cloud support gross margins remained relatively flat in fiscal 2021 compared to fiscal 2020.
Hybrid Cloud professional services gross margins increased by five percentage points in fiscal 2022 compared to fiscal 2021 and increased four percentage points in fiscal 2021 compared to fiscal 2020. The increases in both periods are primarily due to the mix of services provided.
Public Cloud
Cost of Public Cloud revenues increased in fiscal 2022 and in fiscal 2021 compared to the respective prior years, reflecting the ongoing growth in Public Cloud revenues in each period. Public Cloud gross margins increased by three percentage points in fiscal 2022 compared to fiscal 2021 and twenty-four percentage points in fiscal 2021 compared to fiscal 2020, reflecting efficiencies from scaling our Public Cloud segment.
Unallocated
Unallocated cost of services revenues increased in fiscal 2022 and in fiscal 2021 compared to the respective prior years, due to our acquisitions of CloudCheckr in the third quarter of fiscal 2022 and Spot in the first quarter of fiscal 2021, which resulted in higher amortization expense from acquired intangible assets.
40
Operating Expenses
Sales and Marketing, Research and Development and General and Administrative Expenses
Sales and marketing, research and development, and general and administrative expenses for fiscal 2022 totaled $3,017 million, or 48% of net revenues, representing a decrease of two percentage points compared to fiscal 2021. Sales and marketing, research and development, and general and administrative expenses for fiscal 2021 totaled $2,882 million, or 50% of net revenues, remaining relatively flat in percentage points as compared to fiscal 2020.
Compensation costs represent the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation expense and employee incentive compensation plan costs.
Total compensation costs included in operating expenses increased by $74 million, or 4%, during fiscal 2022 compared to fiscal 2021, primarily due to higher salaries, benefits and stock-based compensation expenses, reflecting a 3% increase in average headcount. This increase was partially offset by lower incentive compensation expense. Total compensation costs for fiscal 2021 includes the impact of an additional week in the first quarter of fiscal 2021.
Total compensation costs included in operating expenses increased by $225 million, or 15% during fiscal 2021 compared to fiscal 2020, primarily reflecting higher incentive compensation expense, a 3% increase in average headcount and the impact of one additional week in the first quarter of fiscal 2021.
Sales and Marketing (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Sales and marketing expenses | $ | 1,857 | $ | 1,744 | 6 | % | $ | 1,585 | 10 | % |
Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, facilities and IT support costs, advertising and marketing promotional expense and travel and entertainment expense. The changes in sales and marketing expenses consisted of the following (in percentage points of the total change):
| Fiscal 2022 to Fiscal 2021 | Fiscal 2021 to Fiscal 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| Compensation costs | 4 | 9 | ||||||
| Commissions | 1 | 3 | ||||||
| Advertising and marketing promotional expense | — | 1 | ||||||
| Travel and entertainment | 1 | (4 | ) | |||||
| Other | — | 1 | ||||||
| Total change | 6 | 10 |
The increase in compensation costs in fiscal 2022 compared to fiscal 2021 reflected an increase in average headcount of approximately 5%, partially offset by the impact of one less week in fiscal 2022. The expansion of our sales and marketing teams are expected to support our ability to execute on key market opportunities.
The increase in commissions expense in fiscal 2022 primarily reflected the increase in the average headcount of our sales team compared to fiscal 2021, partially offset by slightly lower attainment against sales goals than in fiscal 2021.
Advertising and marketing promotional expense remained relatively flat in fiscal 2022 compared to fiscal 2021, and increased in fiscal 2021 compared to fiscal 2020 primarily due to higher spending levels on certain projects executed in fiscal 2021. Travel and entertainment expenses increased slightly in fiscal 2022 compared to fiscal 2021 as travel restrictions related to the COVID-19 pandemic eased.
The increase in compensation costs in fiscal 2021 compared to fiscal 2020 reflected an increase in average headcount of 7%, with this expansion of our sales and marketing teams supporting our ability to execute on key market opportunities. Compensation costs for fiscal 2021 also reflected the impact of one additional week in the first quarter.
The increase in commissions expense for fiscal 2021 is primarily due to higher performance against sales goals than in fiscal 2020. Travel and entertainment spend decreased significantly in fiscal 2021 compared to fiscal 2020 due to the COVID-19 pandemic.
41
Research and Development (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Research and development expenses | $ | 881 | $ | 881 | — | % | $ | 847 | 4 | % |
Research and development expenses consist primarily of compensation costs, facilities and IT support costs, depreciation, equipment and software related costs, prototypes, non-recurring engineering charges and other outside services costs. Changes in research and development expense consisted of the following (in percentage points of the total change):
| Fiscal 2022 to Fiscal 2021 | Fiscal 2021 to Fiscal 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| Compensation costs | (1 | ) | 7 | |||||
| Development projects and outside services | 1 | (1 | ) | |||||
| Facilities and IT support costs | — | (1 | ) | |||||
| Travel and entertainment | — | (1 | ) | |||||
| Total change | — | 4 |
The decrease in compensation costs for fiscal 2022 compared to fiscal 2021 was primarily due to lower incentive compensation expense, while average headcount was relatively consistent in each period. Compensation costs for fiscal 2022 also reflected the impact of one less week in fiscal 2022. The increase in development projects and outside services during fiscal 2022 compared to fiscal 2021 was primarily due to the higher spending on certain engineering projects.
The increase in compensation costs during fiscal 2021 compared to fiscal 2020 was primarily due to higher incentive compensation expense, while average headcount was relatively consistent in each period. Compensation costs for fiscal 2021 also reflected the impact of one additional week in the first quarter. The decrease in development projects and outside services was primarily due to the lower spending on certain engineering projects. The decrease in facilities and IT support costs was primarily due to cost containment efforts, and lower travel and entertainment expense was due to the impact of the COVID-19 pandemic.
General and Administrative (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| General and administrative expenses | $ | 279 | $ | 257 | 9 | % | $ | 263 | (2 | )% |
General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and facilities and IT support costs. Changes in general and administrative expense consisted of the following (in percentage points of the total change):
| Fiscal 2022 to Fiscal 2021 | Fiscal 2021 to Fiscal 2020 | |||||||
|---|---|---|---|---|---|---|---|---|
| Compensation costs | 4 | 9 | ||||||
| Professional and legal fees and outside services | 4 | (14 | ) | |||||
| Litigation settlement | — | 2 | ||||||
| Facilities and IT support costs | (1 | ) | 1 | |||||
| Other | 2 | — | ||||||
| Total change | 9 | (2 | ) |
The increase in compensation costs in fiscal 2022 compared to fiscal 2021 were primarily attributable to a 4% increase in average headcount and higher stock-based compensation expense, which was partially offset by lower incentive compensation expense and the impact of one less week in fiscal 2022. The increases in professional and legal fees and outside services expense in fiscal 2022 were primarily due to higher spending on business transformation projects and an increase in legal fees. During fiscal 2021, we incurred a litigation settlement charge of approximately $5 million that was included in general and administrative expenses in our consolidated statements of income. The decreases in facilities and IT support costs were primarily due to lower spending levels on IT projects.
The increase in compensation costs in fiscal 2021 compared to fiscal 2020 was primarily due to higher incentive compensation expense, while average headcount was relatively consistent in each period. The decrease in professional and legal fees and outside services expense in fiscal 2021 was primarily due to lower spending on business transformation projects in the current year. The increase in facilities and IT support costs was primarily due to higher spending levels on IT projects.
42
Restructuring Charges (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Restructuring charges | $ | 33 | $ | 42 | (21 | )% | $ | 21 | 100 | % |
In an effort to reduce our cost structure and redirect resources to our highest return activities, in fiscal years 2022, 2021 and 2020, we initiated a number of business realignment plans designed to streamline our business and focus on key strategic opportunities. These plans resulted in aggregate reductions of our global workforce of approximately 1% in fiscal 2022, 6% in fiscal 2021 and 2% in fiscal 2020, and aggregate charges of $33 million, $42 million and $21 million, respectively, consisting primarily of employee severance costs. The aggregate charges in fiscal 2022 also included legal and tax-related consulting fees associated with our plan to establish an international headquarters in Cork, Ireland. See Note 12 – Restructuring Charges of the Notes to Consolidated Financial Statements for more details regarding our restructuring plans.
Acquisition-related Expense (in millions, except percentages)
| Fiscal Year | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||
| Acquisition-related expense | $ | 13 | $ | 16 | (19 | )% | $ | — | NM |
NM - Not Meaningful
We incurred $13 million and $16 million of acquisition-related expenses in fiscal 2022 and fiscal 2021, respectively, primarily legal and consulting fees associated with our acquisition and subsequent integration of CloudCheckr and Spot, respectively.
Gain on Sale or Derecognition of Assets (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Gain on sale or derecognition of assets | $ | — | $ | (156 | ) | (100 | )% | $ | (38 | ) | 311 | % |
In April 2021, we sold certain land and buildings located in Sunnyvale, California with an aggregate net book value of $210 million and received cash proceeds of $365 million, resulting in a gain, net of direct selling cost, and adjusted for below-market rent, of $156 million.
In August 2019, we completed the sale of certain land located in Sunnyvale, California with a net book value of $53 million, and received cash proceeds of $96 million, resulting in a gain, net of direct selling costs, of $38 million.
Other Expense, Net (in millions, except percentages)
The components of other expense, net were as follows:
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Interest income | $ | 7 | $ | 9 | (22 | )% | $ | 48 | (81 | )% | |||||||||||
| Interest expense | (73 | ) | (74 | ) | (1 | )% | (55 | ) | 35 | % | |||||||||||
| Other, net | 4 | (4 | ) | (200 | )% | 6 | (167 | )% | |||||||||||||
| Total | $ | (62 | ) | $ | (69 | ) | NM | $ | (1 | ) | NM |
NM - Not Meaningful
Interest income decreased during fiscal 2022 and fiscal 2021 compared to the respective prior years due to both a reduction in the size of our investment portfolio and lower yields earned on the investments.
Interest expense remained flat in fiscal 2022 compared to fiscal 2021 as the aggregate principal amount of our outstanding Senior Notes remained consistent. Interest expense increased during fiscal 2021 compared to fiscal 2020, as we issued Senior Notes in aggregate principal amount of $2.0 billion in the first quarter of fiscal 2021. The impact from the issuance of these Senior Notes was partially offset by the extinguishment of our Senior Notes due June 2021 in the first quarter of fiscal 2021, and a lower average outstanding commercial paper balance during fiscal 2021.
The differences in other, net during fiscal 2022 as compared to fiscal 2021 are partially due to foreign exchange gains and losses year-over-year. In fiscal 2021, other, net includes a $6 million gain recognized on our sale of a minority equity interest in a privately held company for proceeds of approximately $8 million. This benefit was more than offset by a $14 million loss recognized from the extinguishment of our Senior Notes due June 2021 in the first quarter of fiscal 2021.
43
Provision for Income Taxes (in millions, except percentages):
| Fiscal Year | |||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | 2020 | % Change | |||||||||||||||||
| Provision for income taxes | $ | 158 | $ | 232 | (32 | )% | $ | 125 | 86 | % |
Our effective tax rate for fiscal 2022 was 14% compared to an effective tax rate of 24% for fiscal 2021. Our effective tax rate for fiscal 2022 was lower than the prior year primarily due to the inclusion of one-time benefits related to the prepayment of certain intercompany expenses. Additionally, the fiscal 2021 tax provision included the impact of taxes resulting from the integration of certain acquired companies. Our effective tax rate for fiscal 2020 included a benefit of $61 million related to the lapse of statute of limitations compared to a benefit of $6 million recognized in fiscal 2021.
Liquidity, Capital Resources and Cash Requirements
| (In millions, except percentages) | April 29, 2022 | April 30, 2021 | |||||
|---|---|---|---|---|---|---|---|
| Cash, cash equivalents and short-term investments | $ | 4,134 | $ | 4,596 | |||
| Principal amount of debt | $ | 2,650 | $ | 2,650 |
The following is a summary of our cash flow activities:
| Fiscal Year | |||||||
|---|---|---|---|---|---|---|---|
| (In millions) | 2022 | 2021 | |||||
| Net cash provided by operating activities | $ | 1,211 | $ | 1,333 | |||
| Net cash (used in) provided by investing activities | (561 | ) | 21 | ||||
| Net cash (used in) provided by financing activities | (1,017 | ) | 444 | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (49 | ) | 71 | ||||
| Net change in cash, cash equivalents and restricted cash | $ | (416 | ) | $ | 1,869 |
As of April 29, 2022, our cash, cash equivalents and short-term investments totaled $4.1 billion, reflecting a decrease of $462 million from April 30, 2021. During fiscal 2022, we generated $1.2 billion of cash from operating activities, offset by $600 million used to repurchase shares of our common stock, $446 million used for the payment of dividends, $226 million in purchases of property and equipment, and $380 million, net of cash acquired, used for the acquisition of three privately-held companies. Net working capital was $2.0 billion as of April 29, 2022, a reduction of $557 million when compared to April 30, 2021. The reduction in net working capital is partially due to the reclassification of $250 million principal amount of our senior notes from long-term to current liabilities in fiscal 2022.
Cash Flows from Operating Activities
During fiscal 2022, we generated cash from operating activities of $1.2 billion, reflecting net income of $937 million, adjusted by non-cash depreciation and amortization of $194 million and non-cash stock-based compensation expense of $245 million.
Significant changes in assets and liabilities during fiscal 2022 included the following:
•
Accounts receivable increased $313 million, primarily reflecting less favorable shipping linearity in the fourth quarter of fiscal 2022 compared to the fourth quarter of fiscal 2021.
•
Deferred revenue and financed unearned services increased by $384 million, due to an increase in the aggregate contract value under software and hardware support contracts, primarily reflecting a higher mix of all-flash systems which carry a higher support dollar content than our other products.
•
Accounts payable increased by $181 million, primarily due to higher inventory purchase levels in fiscal 2022, and the timing of inventory purchases during the fourth quarter of each year.
•
Accrued expenses decreased by $111 million, primarily reflecting a reduction of income tax liabilities, and a decrease in accruals for incentive compensation and commissions plans.
During fiscal 2021, we generated cash from operating activities of $1.3 billion, reflecting net income of $730 million, adjusted by adding non-cash depreciation and amortization expense of $207 million and non-cash stock-based compensation expense of $197 million and subtracting the gain on sale or derecognition of assets of $156 million.
44
Significant changes in assets and liabilities during fiscal 2021 included the following:
•
Deferred revenue and financed unearned services revenue increased $193 million, primarily due to an increase in deferred software and hardware support contracts associated with a growing installed base as well as growth in Public Cloud contracts.
•
Accrued expenses increased $134 million, primarily due to higher accruals for incentive compensation plans.
We expect that cash provided by operating activities may materially fluctuate in future periods due to a number of factors, including fluctuations in our operating results, shipping linearity, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, tax benefits or charges from stock-based compensation, and the timing and amount of compensation and other payments.
Cash Flows from Investing Activities
During fiscal 2022, we generated $45 million primarily from maturities of investments in available-for-sale securities, net of purchases, and paid $226 million for capital expenditures. We paid $380 million, net of cash acquired, for three privately-held companies.
During fiscal 2021, we generated $365 million from the sale of properties located in Sunnyvale, California and $160 million from maturities and sales of investments in available-for-sale debt securities, net of purchases. We paid $350 million, net of cash acquired, for two privately-held companies and $162 million for capital expenditures.
Cash Flows from Financing Activities
During fiscal 2022, cash flows used in financing activities totaled $1.0 billion and include $600 million for the repurchase of approximately seven million shares of common stock and $446 million for the payment of dividends.
During fiscal 2021, we received $2.0 billion from the issuance of Senior Notes, which was partially offset by the use of $513 million for the extinguishment of our Senior Notes due June 2021, $420 million for the net repayment of commercial paper notes with original maturities of three months or less, $427 million for the payment of dividends, and $125 million for the repurchase of two million shares of our common stock.
Key factors that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable, accounts payable and inventories, the timing and amount of stock repurchases and payment of cash dividends, the impact of foreign exchange rate changes, our ability to effectively integrate acquired products, businesses and technologies, and the timing of repayments of our debt. Based on past performance and our current business outlook, we believe that our sources of liquidity, including cash generated from operations, and our ability to access capital markets and committed credit lines will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months. However, in the event our liquidity is insufficient, we may be required to curtail spending and implement additional cost saving measures and restructuring actions or enter into new financing arrangements. We cannot be certain that we will continue to generate cash flows at or above current levels or that we will be able to obtain additional financing, if necessary, on satisfactory terms, if at all. For further discussion of factors that could affect our cash flows and liquidity requirements, including the impact of the COVID-19 pandemic, see Item 1A. Risk Factors.
Liquidity
Our principal sources of liquidity as of April 29, 2022 consisted of cash, cash equivalents and short-term investments, cash we expect to generate from operations, and our commercial paper program and related credit facility.
Cash, cash equivalents and short-term investments consisted of the following (in millions):
| April 29, 2022 | April 30, 2021 | ||||||
|---|---|---|---|---|---|---|---|
| Cash and cash equivalents | $ | 4,112 | $ | 4,529 | |||
| Short-term investments | 22 | 67 | |||||
| Total | $ | 4,134 | $ | 4,596 |
45
As of April 29, 2022 and April 30, 2021, $2.3 billion and $2.5 billion, respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based in U.S. dollar-denominated holdings, while $1.8 billion and $2.1 billion, respectively, were available in the U.S.
Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, fund research and development, meet capital expenditure needs, invest in critical or complementary technologies through asset purchases and/or business acquisitions, service interest and principal payments on our debt, fund our stock repurchase program, and pay dividends, as and if declared. In the ordinary course of business, we engage in periodic reviews of opportunities to invest in or acquire companies or units in companies to expand our total addressable market, leverage technological synergies and establish new streams of revenue, particularly in our Public Cloud Segment.
The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of April 29, 2022.
Our investment portfolio has been and will continue to be exposed to market risk due to trends in the credit and capital markets. We continue to closely monitor current economic and market events to minimize the market risk of our investment portfolio. We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. We utilize a variety of planning and financing strategies in an effort to ensure our worldwide cash is available when and where it is needed. We also have an automatic shelf registration statement on file with the Securities and Exchange Commission (SEC). We may in the future offer an additional unspecified amount of debt, equity and other securities.
Senior Notes
The following table summarizes the principal amount of our Senior Notes as of April 29, 2022 (in millions):
| 3.25% Senior Notes Due December 2022 | $ | 250 | |
|---|---|---|---|
| 3.30% Senior Notes Due September 2024 | 400 | ||
| 1.875% Senior Notes Due June 2025 | 750 | ||
| 2.375% Senior Notes Due June 2027 | 550 | ||
| 2.70% Senior Notes Due June 2030 | 700 | ||
| Total | $ | 2,650 |
Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 8 – Financing Arrangements of the Notes to Consolidated Financial Statements.
Commercial Paper Program and Credit Facility
We have a commercial paper program (the Program), under which we may issue unsecured commercial paper notes. Amounts available under the Program may be borrowed, repaid and re-borrowed, with the aggregate face or principal amount of the notes outstanding under the Program at any time not to exceed $1.0 billion. The maturities of the notes can vary, but may not exceed 397 days from the date of issue. The notes are sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The proceeds from the issuance of the notes are used for general corporate purposes. No commercial paper notes were outstanding as of April 29, 2022.
In connection with the Program, we have a senior unsecured credit agreement with a syndicated group of lenders. The credit agreement, which was amended on January 22, 2021, provides for a $1.0 billion revolving unsecured credit facility, with a sublimit of $50 million available for the issuance of letters of credit on our behalf. The credit facility matures on January 22, 2026, with an option for us to extend the maturity date for two additional 1-year periods, subject to certain conditions. The proceeds of the loans may be used by us for general corporate purposes and as liquidity support for our existing commercial paper program. As of April 29, 2022, we were compliant with all associated covenants in the agreement. No amounts were drawn against this credit facility during any of the periods presented.
46
Capital Expenditure Requirements
We expect to fund our capital expenditures, including our commitments related to facilities, equipment, operating leases and internal-use software development projects over the next few years through existing cash, cash equivalents, investments and cash generated from operations. The timing and amount of our capital requirements cannot be precisely determined and will depend on a number of factors, including future demand for products, changes in the network storage industry, hiring plans and our decisions related to the financing of our facilities and equipment requirements. We anticipate capital expenditures for fiscal 2023 to be between $250 million and $300 million.
Dividends and Stock Repurchase Program
On May 27, 2022, we declared a cash dividend of $0.50 per share of common stock, payable on July 27, 2022 to holders of record as of the close of business on July 8, 2022.
As of April 29, 2022, our Board of Directors had authorized the repurchase of up to $15.1 billion of our common stock under our stock repurchase program. Under this program, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, in privately negotiated transactions, through accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management. The stock repurchase program may be suspended or discontinued at any time. Since the May 13, 2003 inception of this program through April 29, 2022, we repurchased a total of 347 million shares of our common stock at an average price of $39.95 per share, for an aggregate purchase price of $13.9 billion. As of April 29, 2022, the remaining authorized amount for stock repurchases under this program was $1.3 billion.
Purchase Commitments
In the ordinary course of business, we make commitments to third-party contract manufacturers and component suppliers to manage manufacturer lead times and meet product forecasts, and to other parties, to purchase various key components used in the manufacture of our products. In addition, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not yet received goods or services. These off-balance sheet purchase commitments totaled $1.2 billion at April 29, 2022, of which $0.9 billion is due in fiscal 2023, with the remainder due thereafter.
Financing Guarantees
While most of our arrangements for sales include short-term payment terms, from time to time we provide long-term financing to creditworthy customers. We have generally sold receivables financed through these arrangements on a non-recourse basis to third party financing institutions within 10 days of the contracts’ dates of execution, and we classify the proceeds from these sales as cash flows from operating activities in our consolidated statements of cash flows. We account for the sales of these receivables as “true sales” as defined in the accounting standards on transfers of financial assets, as we are considered to have surrendered control of these financing receivables. We sold $59 million and $102 million of receivables during fiscal 2022 and 2021, respectively.
In addition, we enter into arrangements with leasing companies for the sale of our hardware systems products. These leasing companies, in turn, lease our products to end-users. The leasing companies generally have no recourse to us in the event of default by the end-user.
Some of the leasing arrangements described above have been financed on a recourse basis through third-party financing institutions. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. As of April 29, 2022 and April 30, 2021, the aggregate amount by which such contingencies exceeded the associated liabilities was not significant. To date, we have not experienced significant losses under our lease financing programs or other financing arrangements.
We have entered into service contracts with certain of our end-user customers that are supported by third-party financing arrangements. If a service contract is terminated as a result of our non-performance under the contract or our failure to comply with the terms of the financing arrangement, we could, under certain circumstances, be required to acquire certain assets related to the service contract or to pay the aggregate unpaid payments under such arrangements. As of April 29, 2022, we have not been required to make any payments under these arrangements, and we believe the likelihood of having to acquire a material amount of assets or make payments under these arrangements is remote. The portion of the financial arrangement that represents unearned services revenue is included in deferred revenue and financed unearned services revenue in our consolidated balance sheets.
47
Legal Contingencies
We are subject to various legal proceedings and claims which arise in the normal course of business. See further details on such matters in Note 17 – Commitments and Contingencies of the Notes to Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, including the ongoing COVID-19 pandemic, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.
The summary of significant accounting policies is included in Note 1 – Description of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. The accounting policies described below reflect the significant judgments, estimates and assumptions used in the preparation of the consolidated financial statements.
Revenue Recognition
Our contracts with customers often include the transfer of multiple products and services to the customer. In determining the amount and timing of revenue recognition, we assess which products and services are distinct performance obligations and allocate the transaction price, which may include fixed and/or variable amounts, among each performance obligation on a relative standalone selling price (SSP) basis. The following are the key estimates and assumptions and corresponding uncertainties included in this approach:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We evaluate whether products and services promised in our contracts with customers are distinct performance obligations that should be accounted for separately versus together. | | In certain contracts, the determination of our distinct performance obligations requires significant judgment. As our business and offerings to customers change over time, the products and services we determine to be distinct performance obligations may change. Such changes may adversely impact the amount of revenue and gross margin we report in a particular period. | |
| | In determining the transaction price of our contracts, we estimate variable consideration based on the expected value, primarily relying on our history. In certain situations, we may also use the most likely amount as the basis of our estimate. | | We may have insufficient relevant historical data or other information to arrive at an accurate estimate of variable consideration using either the “expected value” or “most likely amount” method. Additionally, changes in business practices, such as those related to sales returns or marketing programs, may introduce new forms of variable consideration, as well as more complexity and uncertainty in the estimation process. | |
| | In contracts with multiple performance obligations, we establish SSPs based on the price at which products and services are sold separately. If SSPs are not observable through past transactions, we estimate them by maximizing the use of observable inputs including pricing strategy, market data, internally-approved pricing guidelines related to the performance obligations and other observable inputs. | | As our business and offerings evolve over time, modifications to our pricing and discounting methodologies, changes in the scope and nature of product and service offerings and/or changes in customer segmentation may result in a lack of consistency, making it difficult to establish and/or maintain SSPs. Changes in SSPs could result in different and unanticipated allocations of revenue in contracts with multiple performance obligations. These factors, among others, may adversely impact the amount of revenue and gross margin we report in a particular period. |
48
Inventory Valuation and Purchase Order Accruals
Inventories consist primarily of purchased components and finished goods and are stated at the lower of cost or net realizable value, which approximates actual cost on a first-in, first-out basis. A provision is recorded when inventory is determined to be in excess of anticipated demand or obsolete in order to adjust inventory to its estimated realizable value. The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our inventories:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | We periodically perform an excess and obsolete analysis of our inventory. Inventories are written down based on excess and obsolete reserves determined primarily on assumptions about future demand forecasts and market conditions. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. | | Although we use our best estimates to forecast future product demand, any significant unanticipated changes in demand, which could be exacerbated by the effects of the COVID-19 pandemic, or obsolescence related to technological developments, new product introductions, customer requirements, competition or other factors could have a significant impact on the valuation of our inventory. If actual market conditions are less favorable than those projected, additional write-downs and other charges against earnings that adversely impact gross margins may be required. If actual market conditions are more favorable, we may realize higher gross profits in the period when the written-down inventory is sold.We are subject to a variety of environmental laws relating to the manufacture of our products. If there are changes to the current regulations, we may be required to make product design changes which may result in excess or obsolete inventory, which could adversely impact our operating results. | |
| | We make commitments to our third-party contract manufacturers and other suppliers to manage lead times and meet product forecasts and to other parties to purchase various key components used in the manufacture of our products. We establish accruals for estimated losses on non-cancelable purchase commitments when we believe it is probable that the components will not be utilized in future operations. | | If the actual materials demand is significantly lower than our forecast, we may be required to increase our recorded liabilities for estimated losses on non-cancelable purchase commitments, including incremental commitments made in response to recent developments in the broader technology supply chain, which would adversely impact our operating results. |
Goodwill and Purchased Intangible Assets
We allocate the purchase price of acquisitions to identifiable assets acquired and liabilities assumed at their acquisition date fair values based on established valuation techniques. Goodwill represents the residual value as of the acquisition date, which in most cases is measured as the excess of the purchase consideration transferred over the net of the acquisition date fair values of the assets acquired and liabilities assumed.
The carrying values of purchased intangible assets are reviewed whenever events and circumstances indicate that the net book value of an asset may not be recovered through expected future cash flows from its use and eventual disposition. We periodically review the estimated remaining useful lives of our intangible assets. This review may result in impairment charges or shortened useful lives, resulting in charges to our consolidated statements of income.
We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of one of our reporting units may exceed its fair value. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. During the first quarter of fiscal 2022, we allocated goodwill to our segments and reporting units using a relative fair value approach and as a result, we performed an interim quantitative goodwill impairment test and determined the fair value of each of our reporting units substantially exceeded its carrying amount, therefore, there was no impairment of goodwill. For our annual goodwill impairment test in the fourth quarter of fiscal 2022, we performed a qualitative test which did not result in any goodwill impairment charges. To date, the impacts of the COVID-19 pandemic have not significantly adversely affected the fair value of our reporting units.
49
The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of our goodwill and purchased intangible assets:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | The assessment of fair value for goodwill and purchased intangible assets is based on factors that market participants would use in an orderly transaction in accordance with the accounting guidance for the fair value measurement of nonfinancial assets.The valuation of purchased intangible assets is principally based on estimates of the future performance and cash flows expected to be generated by the acquired assets from the acquired business. | | While we employ experts to determine the acquisition date fair value of acquired intangibles, the fair values of assets acquired and liabilities assumed are based on significant management assumptions and estimates, which are inherently uncertain and highly subjective and as a result, actual results may differ from estimates. If different assumptions were to be used, it could materially impact the purchase price allocation. Volatile macroeconomic and market conditions caused by the COVID-19 pandemic have increased the level of uncertainty and subjectivity of certain management assumptions and estimates. | |
| | Evaluations of possible goodwill and purchased intangible asset impairment require us to make judgments and assumptions related to the allocation of our balance sheet and income statement amounts and estimate future cash flows and fair market values of our reporting units and assets. | | In response to changes in industry and market conditions, we could be required to strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill or purchased intangible assets. Assumptions and estimates about expected future cash flows and the fair values of our reporting units and purchased intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as the adverse impact of unanticipated changes in macroeconomic conditions, such as those related to the COVID-19 pandemic, and technological changes or new product introductions from competitors. They can also be affected by internal factors such as changes in business strategy or in forecasted product life cycles and roadmaps. Our ongoing consideration of these and other factors could result in future impairment charges or accelerated amortization expense, which could adversely affect our operating results. |
50
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets or liabilities are expected to be realized or settled. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The following are the key estimates and assumptions and corresponding uncertainties for our income taxes:
| Key Estimates and Assumptions | Key Uncertainties | |||
|---|---|---|---|---|
| | Our income tax provision is based on existing tax law and advanced pricing agreements or letter rulings we have with various tax authorities. | | Our provision for income taxes is subject to volatility and could be adversely impacted by future changes in existing tax laws, such as a change in tax rate, possible U.S. changes to the taxation of earnings of our foreign subsidiaries, and uncertainties as to future renewals of favorable tax agreements and rulings. | |
| | The determination of whether we should record or adjust a valuation allowance against our deferred tax assets is based on assumptions regarding our future profitability. | | Our future profits could differ from current expectations resulting in a change to our determination as to the amount of deferred tax assets that are more likely than not to be realized. We could adjust our valuation allowance with a corresponding impact to the tax provision in the period in which such determination is made. | |
| | The estimates for our uncertain tax positions are based primarily on company specific circumstances, applicable tax laws, tax opinions from outside firms and past results from examinations of our income tax returns. | | Significant judgment is required in evaluating our uncertain tax positions. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome or tax court rulings of these matters will not be different from that which is reflected in our historical tax provisions and accruals. |