NTAP

NetApp, Inc. (NTAP)

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NetApp (NTAP)

Q1 2012 Earnings Call

August 17, 2011 5:00 pm ET

Executives

Steven Gomo - Chief Financial Officer, Principal Accounting Officer And Executive Vice President Of Finance

Tara Dhillon - Senior Director of Investor Relations

Thomas Georgens - Chief Executive Officer, President and Director

Analysts

Louis Miscioscia - Collins Stewart LLC

Shebly Seyrafi - FBN Securities, Inc.

Brian Marshall - Gleacher & Company, Inc.

Maynard Um - UBS Investment Bank

Brian Freed - Wunderlich Securities Inc.

Amit Daryanani - RBC Capital

Keith Bachman - BMO Capital Markets U.S.

Benjamin Reitzes - Barclays Capital

Deepak Sitaraman - Crédit Suisse AG

Richard Gardner - Citigroup Inc

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

Chris Whitmore - Deutsche Bank AG

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

Mark Moskowitz - JP Morgan Chase & Co

Katy Huberty - Morgan Stanley

Bill Shope - Goldman Sachs Group Inc.

Jason Maynard - Wells Fargo Securities, LLC

Jason Ader - William Blair & Company L.L.C.

Presentation

Operator

Welcome to the NetApp First Quarter Fiscal Year 2012 Conference Call. My name is Michelle, and I will 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 CEO, Tom Georgens; our CFO, Steve Gomo; and our Global Controller, 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 Q2 and future operating metrics, our expectations regarding our future market share, competitive position and new product innovations, the benefits we expect from our partnerships and strategic alliances, our plans for a stock repurchase program and our expectations regarding our recent acquisition of Engenio, all of which involve risk and uncertainty. Actual results may differ materially from statements and projections. Factors that could cause actual results to differ include, among others, customer demand for our products and services, our ability to compete effectively, general economic and market conditions, particularly U.S. budget and debt considerations and the continuing fiscal challenges in the Eurozone and other equally important factors that are detailed in our accompanying press release, which we have filed on an 8-K with the SEC, as well as 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 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, Steve will provide you 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 Steve for his thoughts. Steve?

Steven Gomo

Thank you, Tara. Good afternoon, everyone. NetApp achieved mixed results this quarter after getting off to an extremely strong start during the first 2 months. Unfortunately, business softened dramatically during the last few weeks of July under the weight of the debt ceiling crisis and macroeconomic uncertainty. Our growth rate in July ended up at about half of our growth rate in May. As a result, our revenue came in at the bottom end of our targeted range. However, non-GAAP EPS was at the midpoint of our target helped by stronger margins.

As I mentioned at our Analyst Day in June, moving forward, we will focus our color commentary on the performance of our total OEM revenues, our total NetApp branded revenues and our total consolidated revenues. In some markets, the distinctions between the branded E-Series and branded FAS may blur. And as a result, we'll be focusing on optimizing the total branded revenues. In the case of OEM revenue, a large account such as IBM may see a shift in the mix between our FAS offerings and E-Series OEM offerings, and some OEM customers may even in carry both product families in the future. Bottom line, we feel that understanding revenues from a branded, OEM and total perspective is the most useful way to assess our performance.

Our E-Series OEM revenue performance was a bright spot this quarter, coming in well above plan at $157 million in revenue with better than expected product cost performance. Our consolidated non-GAAP gross margins were also a bright spot coming in about 0.5 point higher than our expectations despite slightly softer revenue. Moreover, non-GAAP product margins were in line with the model we presented at our Analyst Day despite the larger than forecasted amount of E-Series OEM revenue in the mix. Remember, E-Series OEM revenue carries a significantly lower gross margin profile than our NetApp branded products.

The strength of our product margins is indicative of the strength of our competitive position. In addition, the improving product cost and the positive implications it has for the margin synergies we discussed at Analyst Day are beginning to make their way to the earnings statement.

Non-GAAP operating expenses declined more than we had forecast in Q1. Expenses benefited from better than anticipated operating efficiencies, as well as lower than anticipated costs in several areas of the Engenio integration. The combination of favorable gross margin performance and operating expense performance drove our operating margins slightly above our expectation.

Our balance sheet remains strong with approximately $4.7 billion in cash and short-term investments as the highlight. Our accounts receivable days sales outstanding decreased to 37 days from the 47 days reported in Q4 with 90% of the accounts receivable balance in the current category. The deferred revenue balance increased $68 million sequentially and grew 23% year-over-year. The effect of the Engenio acquisition is minor for most balance sheet categories, but the largest impact can be observed on goodwill and other intangibles net, and of course, our cash balance. As a reminder, we spent $480 million to acquire LSI's Engenio assets.

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