NetApp (NTAP)

Q4 2012 Earnings Call

May 23, 2012 5:30 pm ET

Executives

Shauna O’Boyle

Nicholas R. Noviello - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Thomas Georgens - Chief Executive officer, President and Director

Analysts

Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division

Kulbinder Garcha - Crédit Suisse AG, Research Division

Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division

Amit Daryanani - RBC Capital Markets, LLC, Research Division

Katy Huberty - Morgan Stanley, Research Division

Brian Marshall - Gleacher & Company, Inc., Research Division

Andrew J. Nowinski - Piper Jaffray Companies, Research Division

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Mark A Moskowitz - JP Morgan Chase & Co, Research Division

Brian Freed - Wunderlich Securities Inc., Research Division

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Brian John White - Topeka Capital Markets Inc., Research Division

Presentation

Operator

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Welcome to the NetApp Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. My name is Laurice, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Ms. Shauna O'Boyle. Ms. O'Boyle, you may begin.

Shauna O’Boyle

Good afternoon, everyone. Thank you for joining us. With me on today's call are our CEO, Tom Georgens; and our CFO, Nick Noviello. This call is being webcast live and will be available for replay on our website at netapp.com along with the earnings release, the supplemental commentary, our financial tables and the non-GAAP to GAAP reconciliation.

As a reminder, during today's call, we will make forward-looking statements and projections, including our financial outlook for Q1, future product offerings, expected benefits of partnerships, alliances and product introductions, our ability to procure sufficient inventories and our expectations regarding future competitive positions, all of which involve risk and uncertainty. Actual results may differ materially from our statements and projections for a variety of reasons, including general economic and market conditions, such as the macroeconomic environment and the flooding in Thailand, and matters specific to our business, such as customer demand for and acceptance of our products and services.

We describe these factors in our accompanying press release, which we have filed in an 8-K with the SEC as well as in our 10-K and 10-Q reports also on file with the SEC and available on our website, all of which are incorporated by reference in today's discussion.

All numbers discussed today are GAAP unless stated otherwise. To see the reconciling items between non-GAAP and GAAP, you may refer to the table in our press release, our supplemental commentary or on our website. In a moment, Nick will walk you through some additional color on our financial results, and then Tom will walk you through his perspective on the business this quarter.

I'll now turn the call over to Nick.

Nicholas R. Noviello

Thank you, Shauna. Good afternoon, everyone. I realize many of you just joined us from HP's call and wanted to thank HP for coordinating the timing with us today.

Q4 marks another quarter of solid financial performance by NetApp. Revenue of $1.7 billion was above the midpoint of our previous guidance, and non-GAAP EPS of $0.66 was just over the high end of our Q4 guidance. We closed our ninth consecutive quarter of over 20% year-over-year product revenue growth and, with full year revenues of $6.23 billion, a year of 22% total revenue growth. Our Americas, EMEA and Asia Pacific geographies all showed healthy revenue growth trends on a Q4 year-over-year and full year basis.

NetApp branded revenue grew 14% sequentially in Q4 and 9% for the full year, and revenue growth trends for both SEM and service revenue remained stable. Total OEM customer revenue declined 17% sequentially in the quarter, which corresponds to a seasonally slow first quarter for many of our OEM customers.

Full year E-Series revenue was just under $700 million, and coincident with our one-year anniversary of the E-Series transaction, we completed the last of the integration activities. Going forward, we expect to talk about E-Series revenue as part of total NetApp branded or total NetApp OEM revenue as appropriate.

So overall revenue performance was in line with our expectations despite the continued dynamics around hard disk drives. We exceeded both our gross and operating margin targets for Q4, achieving non-GAAP gross margin of 59.6% and non-GAAP operating margin of 17.9%.

For the full year, non-GAAP gross margins were just under 61% and non-GAAP operating margins were just under 18%, reflecting stronger margins in the first half of the fiscal year before the impact of the Thailand flooding on disk drive supply and costs.

In Q4, our non-GAAP operating expenses were 42% of revenue, reflecting lower levels of spending and hiring. While hiring was slow in Q4, net new headcount grew by almost 2,000 in fiscal 2012, an increase of 19% over last year end.

For Q1, we expect to closely monitor our operating expenses during our seasonally slow first quarter.

Our Q4 effective tax rate was 19%, reflecting some yearend onetime true-ups, which increased our full year effective tax rate to 17.9%, slightly higher than our forecast of 17.5%.

Non-GAAP EPS grew 14% sequentially and 12% year-over-year in Q4. And for the full year, non-GAAP EPS was $2.41, up 10% from fiscal year 2011.

Turning to the balance sheet. We closed the year with a record $5.4 billion of cash and investments. Our deferred revenue balance increased by $270 million, up 22% year-over-year, consistent with each of Q1, 2 and 3 of fiscal year 2012. Our ability to generate cash remains robust as we just closed our best-ever quarter in cash from operations.

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