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Q2 2013 Earnings Call
November 14, 2012 5:00 pm ET
Nicholas R. Noviello - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Thomas Georgens - Chief Executive Officer, President, Principal Operating Officer and Director
Shebly Seyrafi - FBN Securities, Inc., Research Division
Kulbinder Garcha - Crédit Suisse AG, Research Division
Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division
Andrew J. Nowinski - Piper Jaffray Companies, Research Division
Brian Marshall - ISI Group Inc., Research Division
Amit Daryanani - RBC Capital Markets, LLC, Research Division
Benjamin A. Reitzes - Barclays Capital, Research Division
Ananda Baruah - Brean Murray, Carret & Co., LLC, Research Division
Maynard Joseph Um - Wells Fargo Securities, LLC, Research Division
Bill C. Shope - Goldman Sachs Group Inc., Research Division
Scott D. Craig - BofA Merrill Lynch, Research Division
Kathryn L. Huberty - Morgan Stanley, Research Division
Jim Suva - Citigroup Inc, Research Division
Brian John White - Topeka Capital Markets Inc., Research Division
Brian G. Alexander - Raymond James & Associates, Inc., Research Division
Steven Milunovich - UBS Investment Bank, Research Division
Jayson Noland - Robert W. Baird & Co. Incorporated, Research Division
Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division
William H. Choi - Janney Montgomery Scott LLC, Research Division
Previous Statements by NTAP
» NetApp Management Discusses Q1 2013 Results - Earnings Call Transcript
» NetApp Management Discusses Q4 2012 Results - Earnings Call Transcript
» NetApp Management Discusses Q3 2012 Results - Earnings Call Transcript
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 Q3, the benefit to us and our customers of our products and services, our expectations regarding future customer demand for our products and services and the expected benefits of partnerships and alliances, 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 global macroeconomic environment and the continuing deliberations regarding future tax and fiscal policy in the U.S. and matters specific to the company's 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 on 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 otherwise stated. To see the reconciling items between the 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 for this quarter. I'll now turn the call over to Nick.
Nicholas R. Noviello
Thank you, Kris. Good afternoon, everyone. NetApp delivered financial results in line with our expectations for fiscal Q2. Revenue of $1.54 billion was roughly at the midpoint of our guidance range. We achieved gross margins of 60.6% and exceeded our prior guidance with operating margins of 14.4%. Non-GAAP EPS of $0.51 exceeded the high end of our guidance range, and we generated $269 million in free cash flow in the quarter, about 17% of revenue.
Revenue increased 7% sequentially and 2% from Q2 last year. Year-over-year growth was negatively impacted by 1.5 points from FX. Branded revenue was up 8% sequentially and 4% year-over-year despite the continued challenges in the macroeconomic environment.
OEM revenue was flat versus Q1 and down 9% versus Q2 last year, the result of a reduction in demand from OEM customers. Product revenue was up 11% sequentially and down 2% year-over-year. Both software entitlements and maintenance and service revenue were within expected ranges.
All geographies showed flat to modest year-over-year revenue growth with the exception of Asia Pacific, which was up 14%. On a constant-currency basis, EMEA revenue was up 7% year-over-year.
Versus Q1, we also saw flat to modest revenue growth across the geographies. In the Americas, we saw a 12% sequential increase, comprised largely of expected growth in the U.S. public sector and corresponding to the fiscal year end of the U.S. government.
Non-GAAP gross margins of 60.6% were slightly above the midpoint of our guidance range and benefited from the strength of our product gross margins. At their highest rate since Q2 last year, non-GAAP product gross margins of 53.6% were driven primarily by increased sales of more highly configured systems. Software entitlements and maintenance and service margins were within normal ranges.
Non-GAAP operating margins of 14.4% exceeded our guidance range and increased almost 2 points over the previous quarter. Non-GAAP operating expenses grew 3% sequentially and 9% year-over-year as a result of our typical annual employee merit increases, moderately higher headcount and targeted investments across the business. We expect to continue to be judicious in spending going forward, given the current business climate.
Our Q2 effective tax rate remained constant at 17.3% based on our geographic distribution of revenue and profits. Non-GAAP EPS of $0.51 exceeded our prior guidance range by $0.01.