NTAP

NetApp, Inc. (NTAP)

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NetApp (NTAP)

Q4 2011 Earnings Call

May 25, 2011 5:00 pm ET

Executives

Thomas Georgens - Chief Executive Officer, President, Principal Operating Officer and Director

Steve Gomo - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Tara Dhillon - Senior Director of Investor Relations

Analysts

Louis Miscioscia - Collins Stewart LLC

Brian Marshall - Gleacher & Company, Inc.

Brian Freed - Wunderlich Securities Inc.

Maynard Um - UBS Investment Bank

Keith Bachman - BMO Capital Markets U.S.

Deepak Sitaraman - Crédit Suisse AG

Benjamin Reitzes - Barclays Capital

Richard Gardner - Citigroup Inc

Amit Daryanani - RBC Capital Markets, LLC

Aaron Rakers - Stifel, Nicolaus & Co., Inc.

Jayson Noland - Robert W. Baird & Co. Incorporated

Glenn Hanus - Needham & Company, LLC

Paul Mansky - Canaccord Genuity

Brent Bracelin - Pacific Crest Securities, Inc.

Chris Whitmore - Deutsche Bank AG

Eric Martinuzzi - Craig-Hallum Capital Group LLC

Ittai Kidron - Oppenheimer & Co. Inc.

Katy Huberty - Morgan Stanley

Bill Shope - Goldman Sachs Group Inc.

Presentation

Operator

Welcome to the NetApp Fourth Quarter and Fiscal Year 2011 Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Tara Dhillon. Ms. Dhillon, you may begin.

Tara Dhillon

Good afternoon, everyone. Thank you for joining us. With me on today's call are our CEO, Tom Georgens; and our CFO, Steve Gomo. 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.

Concurrent with today's press release, a supplemental commentary we published contains many of the metrics we previously provided during our live call, as well as an analysis of the impact of the accounting change, in order to provide you with additional time for review of the data and allow us to focus on more strategic commentary and perspective from our CEO and CFO during this call.

As a reminder, during today's call we will make forward-looking statements and projections, including our financial outlook for Q1, our expectations regarding our future market share, the benefits of our recent product introductions, our recent acquisition of the Engenio external storage systems business and our partnerships and strategic alliances, all of which involve risk and uncertainty. Actual results may differ materially from our statements and projections. Factors that could cause actual results to differ from our projections are detailed 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 into today's discussion.

All numbers discussed today are GAAP under the newly adopted accounting standards 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.

To see the analysis of the impact of the accounting change on our FY '11 quarterly and annual results, please refer to Page 3 of our supplemental commentary and for a complete recast consolidated statement of operations, refer to Page 14 of the supplemental commentary or to the table on our website at investors.netapp.com.

I'll now turn the call over to Steve for his thoughts. Steve?

Steve Gomo

Thanks, Tara. Good afternoon, everyone. From a financial performance standpoint, Q4 put an exclamation point on a very strong FY '11. Despite being hampered by supply constraints through the first half of the quarter, NetApp finished Q4 with solid revenue growth, record earnings per share and new record free cash flow generation. As you can see from our financial statements, NetApp also adopted the required new accounting standards for revenue recognition this quarter and recast the previous 3 quarters' financial statements under the new standards. As a result, the numbers I will reference for all periods in FY '11 and going forward reflect this new accounting methodology.

The change in accounting treatment of revenue complicates the evaluation of our performance relative to the Q4 guidance we gave last quarter, which was for revenue to finish at $1.38 billion, plus or minus 2%. This guidance implies sequential revenue growth of 7% to 11%. With the adoption of the new accounting standards in Q4, the only apples-to-apples comparison we have to assess Q4's revenue performance is the actual 11% sequential revenue growth reported under the new methodology.

This sequential growth rate corresponds to the high end of our guidance range for revenue. With this new methodology, it's important to remember that revenue value is neither created nor destroyed. There is simply a modest impact from the timing of when certain revenue elements are recognized. Because there is 0 revenue impact over the total life of a multi-element arrangement, our business model remains unchanged. Finally, with the adoption of the new rules, our revenue recognition is now comparable to all major competitors who have adopted this convention about a year ago.

Turning now to our results. As I mentioned, total revenue grew 11% sequentially to $1.428 billion in Q4. More importantly, product revenue grew 14% sequentially to about $960 million, the second highest sequential growth rate in the past 5 years.

Non-GAAP gross margins declined modestly to 65.5%, in line with our expectations. Product margins also finished the quarter in line with what we were expecting. Non-GAAP operating expenses increased 14% sequentially, up more than forecasted in Q3 due primarily to higher commission expenses, reflecting the strength of our core business. We ended Q4 with 454 net new employees, which does not include the folks we welcomed from Engenio as the transaction closed post Q4.

As I highlighted earlier, the underlying business dynamics in Q4 were very strong. Our total units shipped were up 29% year-over-year despite material constraints through the middle of the quarter. The material constraints contributed to a back end loaded shipment profile which in turn, drove our accounts receivables days sales outstanding to 47 days. With the material supply constraints solved for Q1 FY '12, we are expecting a more linear shipment quarter and a reduction in DSO to the high 30s in Q1.

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