Market Overview

NetApp Reports Second Quarter Fiscal Year 2018 Results

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Second Quarter Fiscal 2018 Highlights

  • Product revenue increased 14% year-over-year
  • All-flash array annualized net revenue run rate of $1.7 billion increased 58% year-over-year
  • GAAP EPS of $0.64 and non-GAAP EPS of $0.81 increased 68% and 35% year-over-year, respectively

SUNNYVALE, Calif., Nov. 15, 2017 (GLOBE NEWSWIRE) -- NetApp (NASDAQ:NTAP) today reported financial results for the second quarter fiscal year 2018, ended October 27, 2017.

"In the second quarter, NetApp again delivered strong operating results on the top and bottom lines. We also introduced a number of industry-leading innovations that position us for continued growth and expand our leadership position in the growth segments of the market," said George Kurian, chief executive officer. "Our strong performance was driven by excellent execution and reflects our customers' clear and growing preference for the value of our Data Fabric strategy. We are winning because we enable our customers' success through data."

Second Quarter Fiscal 2018 Financial Results

  • Net Revenues: $1.42 billion, increased 6% year-over-year from $1.34 billion in the second quarter of fiscal 2017
  • Net Income: GAAP net income of $175 million, compared to GAAP net income of $109 million in the second quarter of fiscal 2017; non-GAAP net income1 of $223 million, compared to non-GAAP net income of $169 million in the second quarter of fiscal 2017
  • Earnings per Share: GAAP earnings per share2 of $0.64, compared to GAAP earnings per share of $0.38 in the second quarter of fiscal 2017; non-GAAP earnings per share of $0.81, compared to non-GAAP earnings per share of $0.60 in the second quarter of fiscal 2017
  • Cash, Cash Equivalents and Investments: $6.0 billion at the end of the second quarter fiscal year 2018
  • Cash from Operations: $314 million, compared to $158 million in the second quarter of fiscal 2017
  • Share Repurchase and Dividend: Returned $204 million to shareholders through share repurchases and a cash dividend

Third Quarter Fiscal 2018 Financial Outlook
The Company provided the following financial guidance for the third quarter of fiscal year 2018: 

  • Net revenues are expected to be in the range of $1.425 billion to $1.575 billion
  GAAP Non-GAAP
  • Earnings per share is expected to be in the range of:
$1.18–$1.26* $0.86–$0.94

*GAAP earnings per share includes an expected $0.50 per share benefit, after tax, from gains on the sale of certain properties.

Dividend 

  • Next cash dividend of $0.20 per share to be paid on January 24, 2018, to shareholders of record as of the close of business on January 5, 2018

Second Quarter Fiscal 2018 Business Highlights

New Solutions Expand NetApp Impact in Flash, Next-Generation Data Center, and Cloud

  • NetApp™ EF570 all-flash system is the storage industry's price/performance leader as demonstrated by SPC-1 and SPC-2 benchmark tests.3

  • NetApp E5700 Series hybrid flash system accelerates performance and increases density with a hybrid flash system optimal for modern enterprise applications.

  • NetApp SANtricity™ Cloud Connector enables Data Fabric capabilities by providing cost-effective backup and recovery to the cloud from NetApp E-Series and EF-Series systems.

  • NetApp SANtricity 11.4 software now comes with security enhancements such as role-based access control and audit log, Active Directory support, and an external key manager.

  • NetApp Converged Infrastructure Solution for Data Analytics brings together the latest storage, networking, and server technologies to help simplify deployment of data analytics environments.

  • NetApp introduces new AI-enabled virtual support assistant, Elio, and Active IQ™ cloud-based analytics to help companies gain intelligent insights.

  • NetApp expands collaboration with Microsoft Azure to deliver the industry's first Azure enterprise NFS service.

  • NetApp SolidFire™ Element™ OS 10 supports data movement from Element OS systems to ONTAP™ systems across the Data Fabric and helps customers align IT service levels to business goals.

  • NetApp HCI, built on SolidFire Element OS, the world's first enterprise-scale hyper converged solution, became generally available in October 2017.

  • StorageGRID™ Webscale 11 simplifies the creation of next-generation data center cloud architecture by enabling easy implementation of hybrid cloud data pipelines with AWS.

  • NetApp ONTAP 9.3 software offers 40% increased performance over earlier versions, further optimizes deduplication, and enhances security and compliance.

  • OnCommand™ Insight updated with new cloud cost monitoring provides a complete picture of IT infrastructure.

    
NetApp Enables Customers to Improve Their Performance Through Cloud and Flash Services

  • NetApp SolidFire enables Ensono to deliver more value with fewer resources allowing their clients to focus on accelerating their businesses and leave the burden of managing IT to Ensono.

  • NetApp Data Fabric solutions allow Renown Health to reduce downtime and performance concerns, while enabling the integrated healthcare network to deliver leading-edge services and care to more patients.

  • CloudOps leverages NetApp SolidFire as the storage foundation for CloudMC, the IaaS platform that enables users such as cloud.ca to rapidly grow secure, successful cloud-based businesses.

  • Healthix enlists NetApp as a strategic partner to build a nondisruptive solution for sharing patient data among unrelated healthcare organizations, while remaining compliant with patient privacy laws and regulations.

Webcast and Conference Call Information
NetApp will host a conference call to discuss these results today at 2:30 p.m. Pacific Time. To access the live webcast of this event, visit the NetApp Investor Relations website at investors.netapp.com. In addition, this press release, historical supplemental data tables, and other information related to the call will be posted on the Investor Relations website. An audio replay will also be available on the website after 4:30 p.m. Pacific Time today.

About NetApp
NetApp is the data authority for hybrid cloud. We provide a full range of hybrid cloud data services that simplify management of applications and data across cloud and on-premises environments to accelerate digital transformation. Together with our partners, we empower global organizations to unleash the full potential of their data to expand customer touchpoints, foster greater innovation and optimize their operations. For more information, visit www.netapp.com. #DataDriven

"Safe Harbor" Statement Under U.S. Private Securities Litigation Reform Act of 1995
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, all of the statements made under the Third Quarter Fiscal Year 2018 Financial Outlook section, statements about our innovations positioning us for continued growth and expanding our leadership position in the growth segments of the market as well as statements about our customers' growing preference for the value of our Data Fabric strategy. All of these forward-looking statements involve risk and uncertainty. Actual results may differ materially from these statements for a variety of reasons, including, without limitation, general global political, macroeconomic and market conditions, changes in U.S. government spending, revenue seasonality and matters specific to our business, such as our ability to expand our total available market and grow our portfolio of products, customer demand for and acceptance of our products and services, our ability to successfully execute new business models, our ability to successfully execute on our Data Fabric strategy to generate profitable growth and stockholder return and our ability to manage our gross profit margins. These and other equally important factors are described in reports and documents we file from time to time with the Securities and Exchange Commission, including the factors described under the section titled "Risk Factors" in our most recently submitted reports on Form 10-Q and 10-K. We disclaim any obligation to update information contained in this press release whether as a result of new information, future events, or otherwise.

NetApp and the NetApp logo and the marks listed at http://www.netapp.com/TM are trademarks of NetApp, Inc. Other company and product names may be trademarks of their respective owners.

Footnotes
1Non-GAAP net income excludes, when applicable, (a) amortization of intangible assets, (b) stock-based compensation expenses, (c) acquisition-related expenses, (d) restructuring charges, (e) asset impairments, (f) gains/losses on the sale of properties, and (g) our GAAP tax provision, but includes a non-GAAP tax provision based upon our projected annual non-GAAP effective tax rate for the first three quarters of the fiscal year and an actual non-GAAP tax provision for the fourth quarter of the fiscal year. NetApp makes additional adjustments to the non-GAAP tax provision for certain tax matters as described below. A detailed reconciliation of our non-GAAP to GAAP results can be found at http://investors.netapp.com. NetApp's management uses these non-GAAP measures in making operating decisions because it believes the measurements provide meaningful supplemental information regarding NetApp's ongoing operational performance.
2GAAP earnings per share and non-GAAP earnings per share are calculated using the diluted number of shares for all periods presented.
3Storage Performance Council, NetApp EF570 SPC-1, September 18, 2017, and NetApp EF570 SPC-2, September 18, 2017. Full Disclosure Reports.

NetApp Usage of Non-GAAP Financial Information
To supplement NetApp's condensed consolidated financial statement information presented in accordance with generally accepted accounting principles in the United States (GAAP), NetApp provides investors with certain non-GAAP measures, including, but not limited to, historical non-GAAP operating results, non-GAAP net income, non-GAAP effective tax rate and free cash flow, and historical and projected non-GAAP earnings per diluted share.

NetApp believes that the presentation of non-GAAP net income, non-GAAP effective tax rates, and non-GAAP earnings per share data when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and results of operations. NetApp believes that the presentation of free cash flow, which it defines as the net cash provided by operating activities less cash used to acquire property and equipment, to be a liquidity measure that provides useful information to management and investors because it reflects cash that can be used to, among other things, invest in its business, make strategic acquisitions, repurchase common stock, and pay dividends on its common stock. As free cash flow is not a measure of liquidity calculated in accordance with GAAP, free cash flow should be considered in addition to, but not as a substitute for, the analysis provided in the statement of cash flows.

NetApp's management uses these non-GAAP measures in making operating decisions because it believes the measurements provide meaningful supplemental information regarding NetApp's ongoing operational performance. These non-GAAP financial measures are used to: (1) measure company performance against historical results, (2) facilitate comparisons to our competitors' operating results and (3) allow greater transparency with respect to information used by management in financial and operational decision making. 

NetApp excludes the following items from its non-GAAP measures when applicable:
A. Amortization of intangible assets. NetApp records amortization of intangible assets that were acquired in connection with its business combinations. The amortization of intangible assets varies depending on the level of acquisition activity. Management finds it useful to exclude these charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods and in measuring operational performance.
B. Stock-based compensation expenses. NetApp excludes stock-based compensation expenses from its non-GAAP measures primarily because they are non-cash expenses. While management views stock-based compensation as a key element of our employee retention and long-term incentives, we do not view it as an expense to be used in evaluating operational performance in any given period.
C. Acquisition-related expenses. NetApp excludes acquisition-related expenses, including (a) due diligence, legal and other one-time integration charges and (b) write down of assets acquired that NetApp does not intend to use in its ongoing business, from its non-GAAP measures, primarily because they are not related to our ongoing business or cost base and, therefore, cannot be relied upon for future planning and forecasting.
D. Restructuring charges. These charges consist of restructuring charges that are incurred based on the particular facts and circumstances of restructuring decisions, including employment and contractual settlement terms, and other related charges, and can vary in size and frequency. We therefore exclude them in our assessment of operational performance. 
E. Asset impairments. These are non-cash charges to write down assets when there is an indication that the asset has become impaired. Management finds it useful to exclude these non-cash charges due to the unpredictability of these events in its assessment of operational performance.
F. Gains/losses on the sale of properties. These are gains/losses from the sale of our properties. Management believes that these transactions do not reflect the results of our underlying, on-going business and, therefore, cannot be relied upon for future planning or forecasting.
G. Income tax adjustments. NetApp's non-GAAP tax provision is based upon a projected annual non-GAAP effective tax rate for the first three quarters of the fiscal year and an actual non-GAAP tax provision for the fourth quarter of the fiscal year. The non-GAAP tax provision also excludes, when applicable, (a) tax charges or benefits in the current period that relate to one or more prior fiscal periods that are a result of events such as changes in tax legislation, authoritative guidance, income tax audit settlements and/or court decisions, (b) tax charges or benefits that are attributable to unusual or non-recurring book and/or tax accounting method changes, (c) tax charges that are a result of a non-routine foreign cash repatriation, (d) tax charges or benefits that are a result of infrequent restructuring of the Company's tax structure, (e) tax charges or benefits that are a result of a change in valuation allowance, and (f) tax charges resulting from the integration of intellectual properties from acquisitions. Management believes that the use of non-GAAP tax provisions provides a more meaningful measure of the Company's operational performance.
       
These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with GAAP, and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. NetApp believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP measures. NetApp management compensates for these limitations by analyzing current and projected results on a GAAP basis as well as a non-GAAP basis. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with generally accepted accounting principles in the United States. The non-GAAP financial measures are meant to supplement, and be viewed in conjunction with, GAAP financial measures.



 
NETAPP, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(In millions)
(Unaudited)
    October 27,
2017
    April 28,
2017
 
                 
ASSETS                
                 
Current assets:                
Cash, cash equivalents and investments   $ 5,965     $ 4,921  
Accounts receivable     584       731  
Inventories     108       163  
Other current assets     363       383  
Total current assets     7,020       6,198  
                 
Property and equipment, net     795       799  
Goodwill and purchased intangible assets, net     1,859       1,815  
Other non-current assets     634       681  
Total assets   $ 10,308     $ 9,493  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
Current liabilities:                
Accounts payable   $ 379     $ 347  
Accrued expenses     722       782  
Commercial paper notes     718       500  
Current portion of long-term debt     750       749  
Short-term deferred revenue and financed unearned services revenue     1,645       1,744  
Total current liabilities     4,214       4,122  
Long-term debt     1,540       744  
Other long-term liabilities     255       249  
Long-term deferred revenue and financed unearned services revenue     1,522       1,598  
Total liabilities     7,531       6,713  
                 
Stockholders' equity     2,777       2,780  
Total liabilities and stockholders' equity   $ 10,308     $ 9,493  
 



 
NETAPP, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts) 
(Unaudited)
 
    Three Months Ended     Six Months Ended  
    October 27,
2017
    October 28,
2016
    October 27,
2017
    October 28,
2016
 
                                 
Revenues:                                
Product   $ 807     $ 710     $ 1,530     $ 1,370  
Software maintenance     240       242       474       483  
Hardware maintenance and other services     375       388       743       781  
Net revenues     1,422       1,340       2,747       2,634  
                                 
Cost of revenues:                                
Cost of product     399       376       770       735  
Cost of software maintenance     6       7       13       15  
Cost of hardware maintenance and other services     115       128       228       258  
Total cost of revenues     520       511       1,011       1,008  
Gross profit     902       829       1,736       1,626  
                                 
Operating expenses:                                
Sales and marketing     420       418       845       847  
Research and development     194       200       387       407  
General and administrative     69       69       137       137  
Total operating expenses     683       687       1,369       1,391  
                                 
Income from operations     219       142       367       235  
                                 
Other income (expense), net     6             11       (1 )
                                 
Income before income taxes     225       142       378       234  
                                 
Provision for income taxes     50       33       67       61  
                                 
Net income   $ 175     $ 109     $ 311     $ 173  
                                 
Net income per share:                                
Basic   $ 0.65     $ 0.39     $ 1.15     $ 0.62  
                                 
Diluted   $ 0.64     $ 0.38     $ 1.12     $ 0.61  
                                 
Shares used in net income per share calculations:                                
Basic     269       278       270       278  
                                 
Diluted     275       284       277       283  
                                 
Cash dividends declared per share   $ 0.200     $ 0.190     $ 0.400     $ 0.380  
 



 
NETAPP, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(In millions) 
(Unaudited)
 
    Three Months Ended     Six Months Ended  
    October 27,
2017
    October 28,
2016
    October 27,
2017
    October 28,
2016
 
Cash flows from operating activities:                                
Net income   $ 175     $ 109     $ 311     $ 173  
Adjustments to reconcile net income to net cash provided by operating activities:                                
Depreciation and amortization     51       57       102       117  
Stock-based compensation     39       51       87       103  
Other items, net     32       1       39       13  
Changes in assets and liabilities, net of acquisitions of businesses:                                
Accounts receivable     (69 )     (47 )     149       264  
Inventories     35       (16 )     55       1  
Accounts payable     92       17       34       (13 )
Accrued expenses     67       60       (68 )     (138 )
Deferred revenue and financed unearned services revenue     (76 )     (96 )     (183 )     (179 )
Changes in other operating assets and liabilities, net     (32 )     22       38       45  
Net cash provided by operating activities     314       158       564       386  
Cash flows from investing activities:                                
Redemptions (purchases) of investments, net     (64 )     (123 )     48       190  
Purchases of property and equipment     (29 )     (56 )     (65 )     (92 )
Acquisitions of businesses, net of cash acquired     (51 )           (75 )      
Other investing activities, net                 5       (1 )
Net cash provided by (used in) investing activities     (144 )     (179 )     (87 )     97  
Cash flows from financing activities:                                
Proceeds from issuance of common stock under employee stock award plans     9       19       57       61  
Payments for taxes related to net share settlement of stock awards     (3 )     (3 )     (60 )     (36 )
Repurchase of common stock     (150 )     (117 )     (300 )     (292 )
Proceeds from (repayments of) commercial paper notes, net     (176 )           218        
Issuance of long-term debt, net     795             795        
Repayment of short-term loan                       (850 )
Dividends paid     (54 )     (52 )     (108 )     (105 )
Other financing activities, net     (1 )     (1 )     (1 )     (3 )
Net cash provided by (used in) financing activities     420       (154 )     601       (1,225 )
                                 
Effect of exchange rate changes on cash and cash equivalents     (6 )     (6 )     13       (13 )
                                 
Net increase (decrease) in cash and cash equivalents     584       (181 )     1,091       (755 )
Cash and cash equivalents:                                
Beginning of period     2,951       2,294       2,444       2,868  
End of period   $ 3,535     $ 2,113     $ 3,535     $ 2,113  
 


   
NETAPP, INC.  
SUPPLEMENTAL DATA  
(In millions except net income per share, percentages, DSO, DIO, DPO, CCC and Inventory Turns)  
(Unaudited)  
                         
                         
    Q2 FY'18     Q1 FY'18     Q2 FY'17  
                         
Revenues                        
Product (1)   $ 807     $ 723     $ 710  
Strategic   $ 557     $ 500     $ 452  
Mature   $ 250     $ 223     $ 258  
Software Maintenance   $ 240     $ 234     $ 242  
Hardware Maintenance and Other Services   $ 375     $ 368     $ 388  
Hardware Maintenance Support Contracts   $ 306     $ 298     $ 316  
Professional and Other Services   $ 69     $ 70     $ 72  
Net Revenues   $ 1,422     $ 1,325     $ 1,340  
                         
                         
Geographic Mix                        
    % of Q2
FY'18
Revenue
    % of Q1
FY'18
Revenue
    % of Q2
FY'17
Revenue
 
Americas     56 %     55 %     57 %
Americas Commercial     40 %     42 %     42 %
U.S. Public Sector     16 %     13 %     16 %
EMEA     30 %     30 %     30 %
Asia Pacific     14 %     15 %     13 %
                         
                         
Pathways Mix                        
    % of Q2
FY'18
Revenue
    % of Q1
FY'18
Revenue
    % of Q2
FY'17
Revenue
 
Direct     22 %     20 %     22 %
Indirect     78 %     80 %     78 %
                         
                         
Non-GAAP Gross Margins                        
    Q2 FY'18     Q1 FY'18     Q2 FY'17  
Non-GAAP Gross Margin     64.3 %     63.8 %     62.7 %
Product     51.8 %     49.9 %     48.2 %
Software Maintenance     97.5 %     97.0 %     97.1 %
Hardware Maintenance and Other Services     69.9 %     70.1 %     67.8 %
                         
                         
Non-GAAP Income from Operations, Income before Income Taxes & Effective Tax Rate                        
    Q2 FY'18     Q1 FY'18     Q2 FY'17  
Non-GAAP Income from Operations   $ 272     $ 209     $ 204  
% of Net Revenues     19.1 %     15.8 %     15.2 %
Non-GAAP Income before Income Taxes   $ 278     $ 214     $ 204  
Non-GAAP Effective Tax Rate     19.4 %     19.4 %     17.3 %
                         
                         
                         
Non-GAAP Net Income                        
    Q2 FY'18     Q1 FY'18     Q2 FY'17  
Non-GAAP Net Income   $ 223     $ 173     $ 169  
Non-GAAP Weighted Average Common Shares Outstanding, Diluted     275       278       284  
Non-GAAP Income per Share, Diluted   $ 0.81     $ 0.62     $ 0.60  
                         
                         
Select Balance Sheet Items                        
    Q2 FY'18     Q1 FY'18     Q2 FY'17  
Deferred Revenue and Financed Unearned Services Revenue   $ 3,167     $ 3,251     $ 3,201  
DSO (days)     37       36       37  
DIO (days)     19       27       17  
DPO (days)     66       54       45  
CCC (days)     (10 )     9       9  
Inventory Turns     19       14       21  
                         
Days sales outstanding (DSO) is defined as accounts receivable divided by net revenues, multiplied by the number of days in the quarter.  
Days inventory outstanding (DIO) is defined as net inventories divided by cost of revenues, multiplied by the number of days in the quarter.  
Days payables outstanding (DPO) is defined as accounts payable divided by cost of revenues, multiplied by the number of days in the quarter.  
Cash conversion cycle (CCC) is defined as DSO plus DIO minus DPO.  
Inventory turns is defined as annualized cost of revenues divided by net inventories.  
   
                         
Select Cash Flow Statement Items                        
    Q2 FY'18     Q1 FY'18     Q2 FY'17  
Net Cash Provided by Operating Activities   $ 314     $ 250     $ 158  
Purchases of Property and Equipment   $ 29     $ 36     $ 56  
Free Cash Flow   $ 285     $ 214     $ 102  
Free Cash Flow as a % of Net Revenues     20.0 %     16.2 %     7.6 %
                         
Free cash flow is a non-GAAP measure and is defined as net cash provided by operating activities less purchases of property and equipment.  
                         
(1) Sales of certain products which should have been reported as strategic products were improperly reported as mature product revenues in Q2 FY'17. That period has been recast to reflect the appropriate classification.  
                         
Some items may not add or recalculate due to rounding.  
   


   
NETAPP, INC.  
RECONCILIATION OF NON-GAAP TO GAAP  
INCOME STATEMENT INFORMATION  
(In millions, except net income per share amounts)  
                         
    Q2'FY18     Q1'FY18     Q2'FY17  
                         
NET INCOME   $ 175     $ 136     $ 109  
Adjustments:                        
Amortization of intangible assets     14       13       11  
Stock-based compensation     39       48       51  
Income tax effect of non-GAAP adjustments     (5 )     (24 )     (2 )
NON-GAAP NET INCOME   $ 223     $ 173     $ 169  
                         
COST OF REVENUES   $ 520     $ 491     $ 511  
Adjustments:                        
Amortization of intangible assets     (9 )     (8 )     (7 )
Stock-based compensation     (3 )     (4 )     (4 )
NON-GAAP COST OF REVENUES   $ 508     $ 479     $ 500  
                         
COST OF PRODUCT REVENUES   $ 399     $ 371     $ 376  
Adjustments:                        
Amortization of intangible assets     (9 )     (8 )     (7 )
Stock-based compensation     (1 )     (1 )     (1 )
NON-GAAP COST OF PRODUCT REVENUES   $ 389     $ 362     $ 368  
                         
COST OF HARDWARE MAINTENANCE AND OTHER SERVICES REVENUES   $ 115     $ 113     $ 128  
Adjustment:                        
Stock-based compensation     (2 )     (3 )     (3 )
NON-GAAP COST OF HARDWARE MAINTENANCE AND OTHER SERVICES REVENUES   $ 113     $ 110     $ 125  
                         
GROSS PROFIT   $ 902     $ 834     $ 829  
Adjustments:                        
Amortization of intangible assets     9       8       7  
Stock-based compensation     3       4       4  
NON-GAAP GROSS PROFIT   $ 914     $ 846     $ 840  
 



   
NETAPP, INC.  
RECONCILIATION OF NON-GAAP TO GAAP  
INCOME STATEMENT INFORMATION  
(In millions, except net income per share amounts)  
                         
    Q2'FY18     Q1'FY18     Q2'FY17  
                         
SALES AND MARKETING EXPENSES   $ 420     $ 425     $ 418  
Adjustments:                        
Amortization of intangible assets     (5 )     (5 )     (4 )
Stock-based compensation     (16 )     (21 )     (21 )
NON-GAAP SALES AND MARKETING EXPENSES   $ 399     $ 399     $ 393  
                         
RESEARCH AND DEVELOPMENT EXPENSES   $ 194     $ 193     $ 200  
Adjustment:                        
Stock-based compensation     (12 )     (15 )     (17 )
NON-GAAP RESEARCH AND DEVELOPMENT EXPENSES   $ 182     $ 178     $ 183  
                         
GENERAL AND ADMINISTRATIVE EXPENSES   $ 69     $ 68     $ 69  
Adjustment:                        
Stock-based compensation     (8 )     (8 )     (9 )
NON-GAAP GENERAL AND ADMINISTRATIVE EXPENSES   $ 61     $ 60     $ 60  
                         
OPERATING EXPENSES   $ 683     $ 686     $ 687  
Adjustments:                        
Amortization of intangible assets     (5 )     (5 )     (4 )
Stock-based compensation     (36 )     (44 )     (47 )
NON-GAAP OPERATING EXPENSES   $ 642     $ 637     $ 636  
 


   
NETAPP, INC.  
RECONCILIATION OF NON-GAAP TO GAAP  
INCOME STATEMENT INFORMATION  
(In millions, except net income per share amounts)  
                         
    Q2'FY18     Q1'FY18     Q2'FY17  
                         
INCOME FROM OPERATIONS   $ 219     $ 148     $ 142  
Adjustments:                        
Amortization of intangible assets     14       13       11  
Stock-based compensation     39       48       51  
NON-GAAP INCOME FROM OPERATIONS   $ 272     $ 209     $ 204  
                         
INCOME BEFORE INCOME TAXES   $ 225     $ 153     $ 142  
Adjustments:                        
Amortization of intangible assets     14       13       11  
Stock-based compensation     39       48       51  
NON-GAAP INCOME BEFORE INCOME TAXES   $ 278     $ 214     $ 204  
                         
PROVISION FOR INCOME TAXES   $ 50     $ 17     $ 33  
Adjustment:                        
Income tax effect of non-GAAP adjustments     5       24       2  
NON-GAAP PROVISION FOR INCOME TAXES   $ 55     $ 41     $ 35  
                         
NET INCOME PER SHARE   $ 0.64     $ 0.49     $ 0.38  
Adjustments:                        
Amortization of intangible assets     0.05       0.05       0.04  
Stock-based compensation     0.14       0.17       0.18  
Income tax effect of non-GAAP adjustments     (0.02 )     (0.09 )     (0.01 )
NON-GAAP NET INCOME PER SHARE   $ 0.81     $ 0.62     $ 0.60  
 



   
RECONCILIATION OF NON-GAAP TO GAAP  
GROSS MARGIN  
($ in millions)  
       
    Q2'FY18     Q1'FY18     Q2'FY17  
                         
Gross margin-GAAP     63.4 %     62.9 %     61.9 %
Cost of revenues adjustments     0.8 %     0.9 %     0.8 %
Gross margin-Non-GAAP     64.3 %     63.8 %     62.7 %
                         
GAAP cost of revenues   $ 520     $ 491     $ 511  
Cost of revenues adjustments:                        
Amortization of intangible assets     (9 )     (8 )     (7 )
Stock-based compensation     (3 )     (4 )     (4 )
Non-GAAP cost of revenues   $ 508     $ 479     $ 500  
                         
Net revenues   $ 1,422     $ 1,325     $ 1,340  
                         



   
RECONCILIATION OF NON-GAAP TO GAAP  
PRODUCT GROSS MARGIN  
($ in millions)  
       
    Q2'FY18     Q1'FY18     Q2'FY17  
                         
Product gross margin-GAAP     50.6 %     48.7 %     47.0 %
Cost of product revenues adjustments     1.2 %     1.2 %     1.1 %
Product gross margin-Non-GAAP     51.8 %     49.9 %     48.2 %
                         
GAAP cost of product revenues   $ 399     $ 371     $ 376  
Cost of product revenues adjustments:                        
Amortization of intangible assets     (9 )     (8 )     (7 )
Stock-based compensation     (1 )     (1 )     (1 )
Non-GAAP cost of product revenues   $ 389     $ 362     $ 368  
                         
Product revenues   $ 807     $ 723     $ 710  
                         


   
RECONCILIATION OF NON-GAAP TO GAAP  
HARDWARE MAINTENANCE AND OTHER SERVICES GROSS MARGIN  
($ in millions)  
       
    Q2'FY18     Q1'FY18     Q2'FY17  
                         
Hardware maintenance and other services gross margin-GAAP     69.3 %     69.3 %     67.0 %
Cost of hardware maintenance and other services revenues adjustment     0.5 %     0.8 %     0.8 %
Hardware maintenance and other services gross margin-Non-GAAP     69.9 %     70.1 %     67.8 %
                         
GAAP cost of hardware maintenance and other services revenues   $ 115     $ 113     $ 128  
Cost of hardware maintenance and other services revenues adjustment:                        
Stock-based compensation     (2 )     (3 )     (3 )
Non-GAAP cost of hardware maintenance and other services revenues   $ 113     $ 110     $ 125  
                         
Hardware maintenance and other services revenues   $ 375     $ 368     $ 388  
                         



   
RECONCILIATION OF NON-GAAP TO GAAP  
EFFECTIVE TAX RATE  
       
    Q2'FY18     Q1'FY18     Q2'FY17  
                         
GAAP effective tax rate     22.2 %     11.1 %     23.2 %
Adjustment:                        
Tax effect of non-GAAP adjustments     (2.8 )%     8.3 %     (5.9 )%
Non-GAAP effective tax rate     19.4 %     19.4 %     17.3 %
                         



   
RECONCILIATION OF NET CASH PROVIDED BY OPERATING ACTIVITIES  
TO FREE CASH FLOW (NON-GAAP)  
(In millions)  
       
    Q2'FY18     Q1'FY18     Q2'FY17  
Net cash provided by operating activities   $ 314     $ 250     $ 158  
Purchases of property and equipment     (29 )     (36 )     (56 )
Free cash flow   $ 285     $ 214     $ 102  
                         
Some items may not add or recalculate due to rounding.                        
                         



   
NETAPP, INC.  
RECONCILIATION OF NON-GAAP GUIDANCE TO GAAP  
EXPRESSED AS EARNINGS PER SHARE  
THIRD QUARTER FISCAL 2018  
         
    Third Quarter  
    Fiscal 2018  
         
Non-GAAP Guidance - Net Income Per Share   $0.86 - $0.94  
         
Adjustments of Specific Items to Net Income        
Per Share for the Third Quarter Fiscal 2018:        
Amortization of intangible assets     (0.05 )
Stock-based compensation expense     (0.14 )
Gain on sale of properties     0.80  
Income tax effect of non-GAAP adjustments     (0.29 )
Total Adjustments     0.32  
         
GAAP Guidance - Net Income Per Share   $1.18 - $1.26  
       


Press Contact:

Madge Miller
NetApp
1 408 419 5263
madge.miller@netapp.com

Investor Contact:
Kris Newton
NetApp
1 408 822 3312
kris.newton@netapp.com

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