e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
April 30, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to .
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Commission File Number 0-27130
Network Appliance,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0307520
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(State or other jurisdiction
of
incorporation or organization)
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(IRS Employer
Identification No.)
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495 East Java Drive,
Sunnyvale, California 94089
(Address of principal executive
offices, including zip code)
Registrants telephone number, including area code:
(408) 822-6000
Securities registered pursuant to Section 12(b) of the
Act:
None
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Title of Each Class
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Name of Exchange on Which
Registered
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none
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none
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.001 Par Value
(Title of Class)
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by a check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
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Large
accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting stock held by nonaffiliates
of the Registrant, as of October 28, 2005, the last day of
Registrants most recently completed second fiscal quarter,
was $6,336,402,987 (based on the closing price for shares of the
Registrants common stock as reported by the Nasdaq
National Market for the last business day prior to that date).
Shares of common stock held by each executive officer, director,
and holder of 5% or more of the outstanding common stock have
been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On June 23, 2006, 373,430,742 shares of the
Registrants common stock, $0.001 par value, were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information called for by Part III of this
Form 10-K
is hereby incorporated by reference from the definitive Proxy
Statement for our annual meeting of stockholders to be held on
August 31, 2006, which will be filed with the Securities
and Exchange Commission not later than 120 days after
April 30, 2006.
TABLE OF
CONTENTS
TRADEMARKS
©
2006 Network Appliance, Inc. All rights reserved. Specifications
subject to change without notice. NetApp, the Network Appliance
logo, DataFabric, Data ONTAP, FAServer, FilerView, NearStore,
NetCache, SecureShare, SnapDrive, SnapLock, SnapManager,
SnapMirror, SnapRestore, SnapVault, SyncMirror, and WAFL are
registered trademarks and Network Appliance, ApplianceWatch,
FlexClone, FlexShare, FlexVol, LockVault, RAID-DP, Snapshot, and
VFM are trademarks of Network Appliance, Inc. in the U.S. and
other countries. Decru is a registered trademark and Decru
DataFort is a trademark of Decru, a NetApp company. Sun is
a trademark of Sun Microsystems, Inc. Oracle is a registered
trademark of Oracle Corporation. Symantec is a registered
trademark and NetBackup is a trademark of Symantec Corporation
or its affiliates in the U.S. and other countries. Microsoft and
Windows are registered trademarks of Microsoft Corporation.
Linux is a registered trademark of Linus Torvalds. UNIX is a
registered trademark of The Open Group. All other brands or
products are trademarks or registered trademarks of their
respective holders and should be treated as such.
1
PART I
Item 1. Business
Forward
Looking Statements
With the exception of historical facts, the statements contained
in this Annual Report on
Form 10-K
are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and are subject to the
safe harbor provisions set forth in the Exchange Act.
Forward-looking statements usually contain the words
estimate, intend, plan,
predict, seek, may,
will, should, would,
anticipate, expect, believe,
or similar expressions and variations or negatives of these
words. In addition, any statements that refer to expectations,
projections or other characterizations of future events or
circumstances, including any underlying assumptions, are
forward-looking statements. All forward-looking statements,
including, but not limited to, (1) our belief that we are
fully compliant with all applicable environmental laws;
(2) our belief that we continue to maintain and enhance
technological advantage over our competitors; (3) our
intention to regularly introduce new products and product
enhancements; (4) the possibility that we may engage in
future acquisitions; (5) our intention to continue to
establish and maintain business relationships with technology
companies; (6) our belief that our strategic investments
are targeted at some of the strongest growth areas of the
storage market; (7) our anticipation that we will
experience further price decline per petabyte for our products;
(8) our expectation that our future gross margins will be
negatively affected by factors such as global service investment
cost; competition, indirect sales including OEM, high disk
content partially offset by new product introductions and
enhancements and product and add-on software mix; (9) our
expectation that we will ship our new high-end products, launch
our next-generation operating system with enhanced storage grid
functionality, and offer a comprehensive suite of data
protection solutions; (10) our plan to invest in the
people, processes, and systems necessary to best optimize our
revenue growth and long-term profitability; (11) our belief
that the current and future potential for encryption and data
protection technology will enable us to help our customers
manage their risk of data theft and corruption; (12) our
expectation that our data center penetration will win more
NearStore®
deployments; (13) our belief that our new NearStore Virtual
Tape Library solution will further expand our market
opportunity; (14) our expectation to continue to expand our
global services and support and that such investments will help
accelerate the adoption rate of our technology; (15) our
expectation that our investment in our services infrastructure
will increase commensurate with our revenue growth;
(16) our expectation that higher disk content associated
with high-end storage systems will negatively affect our gross
margins in the future, if not offset by software revenue and new
products; (17) our estimates regarding future amortization
of existing technology to cost of products revenues relating to
our acquisitions; (18) our expectation that service margins
will be in the mid 20% range for fiscal 2007; (19) our
estimates regarding future amortization of trademarks,
tradenames, customer contracts, and relationships relating to
our acquisitions; (20) our expectation that we will
continue to selectively add sales and professional services
capacity; (21) our expectation that we will increase sales
and marketing expenses commensurate with future revenue growth;
(22) our estimates regarding future capitalized patents
amortization expenses; (23) our belief that our future
performance will depend in large part on our ability to maintain
and enhance our current product line, develop new products,
maintain technological competitiveness, and meet an expanding
range of custo mer requirements; (24) our expectation that
we will continuously support current and future product
development and enhancement efforts and incur corresponding
charges; (25) our intention to continuously broaden our
existing product offerings and introduce new products;
(26) our belief that our research and development expenses
will increase in absolute dollars in fiscal 2007; (27) our
belief that our general and administrative expenses will
increase in absolute terms in fiscal 2007; (28) our
estimates regarding future amortization of covenants not to
compete relating to our acquisitions; (29) our expectation
that research and development costs to bring the products from
Decru to technological feasibility may not have a material
impact on our future results of operations or financial
conditions; (30) our expectation regarding estimated future
deferred stock compensation expenses; (31) our expectation
that interest income will increase in fiscal 2007; (32) our
expectation that cash provided by operating activities may
fluctuate in future periods as a result of a number of factors;
(33) the possibility we may receive less cash from stock
option exercises if stock option exercise patterns change;
(34) our expectations regarding our contractual cash
obligations and other commercial commitments at April 30,
2006, for the fiscal years 2007 through 2011 and thereafter;
(35) our expectation that we will complete construction on
our building under the BNP lease by approximately September 2007
and the estimates regarding
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future minimum lease payments under the lease term;
(36) our expectation that capital expenditures will
increase consistent with our business growth; (37) our
expectation that our existing facilities, and those currently
being developed, are adequate for our requirements for the next
two years and that additional space will be available as needed
and that our contractual commitments, including operating
leases, and any required capital expenditures over the next few
years will be funded through cash from operations and existing
cash and investments; (38) our expectation that we will
incur higher capital expenditures in the near future to expand
our operations; (39) the possibility that we may continue
to repurchase our common stock, which would reduce cash, cash
equivalents,
and/or
short-term investments available to fund future operations and
meet other liquidity requirements; (40) our belief that our
existing liquidity and capital resources will satisfy our
working capital needs, capital expenditures, stock repurchases,
contractual obligations, and other liquidity requirements
associated with our operations through at least the next
12 months; (41) our expectation that market interest
rate changes would not cause significant decline in our
investment value or significant increase in lease and debt
interest obligations; (42) our belief that the accounting
policies included herein are the policies that most frequently
require us to make estimates and judgments and are therefore
critical, are inherently uncertain as they are based
on managements current expectations and assumptions
concerning future events, and they are subject to numerous known
and unknown risks and uncertainties. Therefore, our actual
results may differ materially from the forward-looking
statements contained herein. Factors that could cause actual
results to differ materially from those described herein
include, but are not limited to: (1) the amount of orders
received in future periods; (2) our ability to ship our
products in a timely manner; (3) our ability to achieve
anticipated pricing, cost, and gross margins levels;
(4) our ability to successfully introduce new products;
(5) our ability to achieve and capitalize on changes in
market demand; (6) acceptance of, and demand for, our
products; (7) demand for our global service and support and
professional services; (8) our ability to identify and
respond to significant market trends and emerging standards;
(9) our ability to realize our financial objectives through
increased investment in people, process, and systems;
(10) our ability to maintain our supplier and contract
manufacturer relationships; (11) the ability of our
competitors to introduce new products that compete successfully
with our products; (12) our ability to expand direct and
indirect sales and global service and support; (13) the
general economic environment and the continued growth of the
storage markets; (14) our ability to sustain
and/or
improve our cash and overall financial position; and
(15) those factors discussed under Risk Factors
elsewhere in this Annual Report on
Form 10-K.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date
hereof and are based upon information available to us at this
time. These statements are not guarantees of future performance.
We disclaim any obligation to update information in any
forward-looking statement. Actual results could vary from our
forward looking statements due to foregoing factors as well as
other important factors, including those described in the Risk
Factors included on page 19.
Overview
Network Appliance, Inc. (NetApp or Network
Appliance), a Delaware corporation, is a leading supplier
of storage and data management solutions for enterprise
customers worldwide. The companys broad portfolio of
innovative hardware and software products, partnerships, and
services helps customers dramatically simplify the complexity of
storing and managing corporate data. Many of the worlds
largest and most demanding corporations and government agencies
rely on Network
Appliancetm
solutions for their storage and data management requirements.
NetApp was founded in 1992 around the idea of simplifying data
management. Our initial product, the worlds first network
storage appliance, was shipped in 1993. Now one of the Fortune
1000 and with over 4,900 employees, NetApp has thousands of
customers in 120 countries around the globe.
NetApp strives to provide customers the lowest total cost of
ownership (TCO) by offering innovative solutions
that simplify their environments. The company blends a
dedication to excellence with customer-focused innovation to
address the following customer priorities:
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Reducing cost and complexity: NetApp works to deliver the
lowest TCO for its customers on three fronts: 1) increasing
the efficiency of customer systems to deliver the highest
possible value, 2) simplifying the management requirements
to lower personnel costs, and 3) speeding recovery times to
significantly reduce the business costs associated with
unavailability of critical data.
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Minimizing risk: While helping to ensure the highest levels
of data availability, NetApp also offers solutions that minimize
the many business risks corporations face regarding their data,
including mistakes that corrupt or destroy data, network attack
and data theft, infrastructure damage from natural disasters,
and legal issues involving regulatory non-compliance.
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Controlling change: The scalability and flexibility
delivered by NetApp architectural simplicity uniquely allows
customers to quickly adapt and respond to all types of change.
From the challenges of adopting new technologies, to changes in
business direction, to competitive response, Network Appliance
helps customers stay in control by preserving flexibility.
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Customer
Challenges
Network Appliance enterprise data management solutions address
several major information technology (IT) challenges
that plague todays corporations.
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Explosive Data Growth. Managing the continued
growth in the volume of data is one of the great challenges
enterprises face today. By some estimates, the amount of data
corporations are required to keep doubles annually. Network
Appliance specializes in storage consolidation solutions that
allow customers to manage this explosive growth, while lowering
their costs. Pooled resources, which can be centrally managed
without disruption, free up valuable infrastructure and staff
resources, improving enterprise productivity, performance, and
profitability.
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Doing More with Less. Many of the costs that
drive up the total cost of data management are associated with
data center operations and include tasks such as data backup and
recovery, hardware and software maintenance, performance
management, and resource allocation. By providing solutions
based on a common architectural platform, along with the ability
to flexibly and dynamically reprovision storage resources in
real time, Network Appliance delivers solutions with unmatched
synergy and efficiency, meaning customers can do more while
buying less.
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Scaling the Infrastructure. As enterprises
grow, customers are challenged to quickly adapt their
infrastructure to meet the corporations needs. With its
compatible, scalable storage platform, Network Appliance
delivers systems that economically accommodate growth and
dramatically reduce the administrative overhead associated
with provisioning and configuration changes. Todays
corporations must also provide timely information to offices
around the globe.
NetApp®
solutions help enterprises quickly replicate and relay
information between many locations, fully protecting and
increasing data access throughout the organization.
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Round-the-Clock
Access. All companies need to avoid costly
downtime, be it for planned maintenance, a localized disruption,
or catastrophic disaster. In todays information-driven
world, every second of downtime is costly, and hours of downtime
can be catastrophic. Working in tandem with the existing network
infrastructure, NetApp storage appliances and data management
software enable customers to implement fast and robust
replication and recovery solutions within the bounds of their IT
budget.
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Regulatory Compliance. Regulatory compliance
is a growing concern for every industry on a global basis.
NetApp offers compliance and security solutions designed to
address such government and industry regulations, and to satisfy
the need for data permanence, security, and confidentiality
while at the same time reducing business risk. By utilizing open
industry-standard solutions and
best-in-class
partners, the NetApp regulatory compliance solutions improve
access to information in a transparent and seamless solution.
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Security of Corporate and Personal Data. With
increasing amounts of personal customer data, companies assume
great potential risk, to their customers, their business, and
their reputation. Network Appliance data encryption appliances
provide the highest level of security available and can be
seamlessly added to existing data infrastructures as required.
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Products
NetApp offers highly available, scalable, and cost-effective
storage consolidation solutions that incorporate the NetApp
unified storage platform and the feature-rich functionality of
data and resource management software to deliver storage that
helps improve enterprise productivity, performance, and
profitability, while providing investment protection and
enhanced asset utilization. NetApp enterprise-class storage
solutions are interoperable across all platforms and supported
by our service expertise.
Fabric-Attached
Storage (FAS) Family
The NetApp family of modular, scalable, highly available,
unified networked storage systems provides seamless access to a
full range of enterprise data for users on a variety of
platforms. The FAS6000, FAS900, FAS3000, and FAS200 series of
fabric-attached storage enterprise systems are designed to
consolidate
UNIX®,
Windows®,
network-attached storage (NAS), Fibre Channel
(FC), Internet Small Computer Systems Interface
(iSCSI), storage area networks (SAN),
and Web data in central locations running over the standard
connection types: Gigabit Ethernet (GbE), Fibre
Channel, and parallel SCSI (for backup). The NetApp design
optimizes and consolidates high-performance data access for
individuals in multiuser environments as well as for application
servers and server clusters with dedicated access. All FAS
systems run the highly efficient Data
ONTAP®
microkernel operating system.
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FAS6000 Series Enterprise Storage
Systems: The FAS6000 series is designed for the
largest enterprise applications as well as demanding technical
applications. The FAS6000 series offers the scalability of frame
array systems in a flexible modular storage architecture. The
FAS6000 systems are well suited for storage consolidation
supporting hundreds of applications because they are not only
highly scalable but also very flexible. Tiered storage can be
implemented in one system using cost-saving SATA (serial ATA)
disk drives and high-performance FC disk drives. The FAS6030 can
be configured with 840 disk drives totaling
420 terabytes (TB) of capacity. The FAS6070,
which scales to 504TB spread across 1,008 disk drives and
has 64 gigabytes (GB) per second of internal
data bandwidth, can handle the largest enterprise applications.
The FAS6000 systems are also capable of 4GB FC SAN
implementations.
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FAS900 Series Enterprise Storage
Systems: The FAS900 series provides performance,
scalability, and resiliency to address the challenging storage
needs of large corporate data centers and technical
applications. The high-end FAS980 system scales to 100TB and can
be deployed for performance-intensive applications such as
online reservation and ordering, seismic processing, and image
rendering. The FAS960 provides solutions for core business
applications such as CRM, ERP, and supply chain integration, as
well as large enterprise
e-mail and
database applications.
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NetApp FAS3000 Series Enterprise Storage
Systems: The FAS3000 series delivers exceptional
storage value for mid-tier Enterprise Data Centers and
medium-size businesses, including use for database applications,
e-mail, and
network storage shares. Its compact, modular design scales to
168TB. The FAS3050 system delivers the performance, flexibility,
and manageability essential for stable and productive IT
operations. The FAS3020 system is capable of providing superb
storage price/performance for smaller data centers, midsized
businesses, and large department deployments.
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FAS200 Series Enterprise Storage
Systems: The NetApp FAS200 series provides
economical enterprise-class storage for distributed enterprise
deployments and small to medium-sized businesses and
organizations. FAS200 systems have the same data access and data
protection capabilities as the FAS6000 and FAS3000 series, yet
are packaged to meet the needs of smaller installations by using
an innovative hardware design that shrinks our traditional
appliance head to a form factor that fits within a single
storage shelf. The FAS250 provides an affordable, entry-level
solution for small and medium size businesses. The FAS270 is a
midrange system that offers an entry-level Fibre Channel
SAN solution while providing strong price/performance for NAS
and iSCSI infrastructures. The FAS200 series is easily upgraded
to the larger FAS series with no need to migrate data or replace
disk storage.
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V-Series Family
NetApp V-Series is a network-based solution that consolidates
storage arrays from different suppliers enabling unified SAN and
file access to data stored in heterogeneous Fibre Channel SAN
storage arrays. Many enterprises have made significant
investments in multiple storage architectures to support a
variety of different application requirements. This approach
often results in inefficient, fractionalized islands of
underutilized storage that can be difficult to manage and costly
to scale. With V-Series customers can consolidate storage from
multiple vendors and achieve:
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Simplified storage provisioning and management
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Increased storage utilization through thin
provisioning
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Lowered storage management and operating costs
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Comprehensive
simple-to-use
data protection solutions
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Improved business practices and operational efficiency
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Transformation of heterogeneous storage systems into an
efficient storage pool
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V-Series Family include V3000, V6000, gF270, and gF980
models and supports storage arrays from IBM Corporation
(IBM), Hewlett-Packard (H-P), and
Hitachi Data Systems (HDS).
Data
ONTAP and Key Core Systems Software
NetApp FAS and V-Series storage solutions are all based on Data
ONTAP, a highly optimized, scalable, and flexible operating
system that uniquely supports a mix of SAN, NAS and IP SAN
(iSCSI) environments concurrently. Data ONTAP software
integrates seamlessly into UNIX, Windows, and Web environments.
The Data ONTAP operating system provides the foundation to build
storage infrastructure and an enterprise-wide data fabric for
mission-critical business applications, while lowering the TCO
and complexity typically associated with the management of
large-scale enterprise storage infrastructures.
Data ONTAP includes the patented NetApp
WAFL®
(Write Anywhere File Layout) file management system and the
resiliency offered by
RAID-DPtm
(RAID Double Parity), a unique double-parity software RAID
architecture. Data ONTAP supports all of the major
industry-standard protocols storage, as well as our
complete suite of data management, data replication, and data
protection software products.
The operating system also includes integrated secure access
capabilities and
FilerView®,
a Web-based element manager.
Snapshottm
technology, included as part of the base system, enables online
backups and provides rapid access to previous versions of data,
without requiring complete separate copies. Snapshot technology
also eliminates the need to recover data from a tape archive in
the event of a disaster or user error. In addition,
SecureShare®
is a multiprotocol lock management facility that is integrated
into the Data ONTAP microkernel. The cross-protocol locking
mechanism in SecureShare ensures heterogeneous data sharing
without compromising security, data integrity, or performance.
During fiscal year 2006, we also installed our new
high-performance operating system, Data ONTAP GX, at several
customer sites. Data ONTAP GX, a next generation version of our
operating system, leverages distributed systems technology
acquired through the purchase of Spinnaker Networks. With Data
ONTAP GX, multiple NetApp storage systems can be managed as a
single entity under a global namespace. This enables all members
of an application server cluster to access data stored across
all of the FAS systems by using a single access point,
eliminating the traditional complexities of mapping application
servers to storage systems. This scale-out architecture is
capable of achieving higher levels of aggregate system
performance, because data volumes can span multiple storage
nodes. Additionally, Data ONTAP GX provides the ability to
dynamically add storage resources and transparently redistribute
data without any disruption to client systems. The result is a
storage system that combines the advantages of management
simplicity with scalable performance and capacity.
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Data
Management Software
Network Appliance products are in use today in some of the
largest data centers in the world. These environments require
enterprise class management tools. NetApp provides key
management tools to increase productivity and simplify data
management. Such tools include
FlexVoltm,
FlexClonetm,
FlexSharetm,
and the Data Management Family.
FlexVol
FlexVol technology, included in the Data ONTAP operating system,
enables more efficient storage architectures with flexible
volumes that do not require repartitioning of physical storage
space. The FlexVol technology delivers storage virtualization
solutions that can lower overhead and capital expenses, reduce
disruption and risk, and provide the flexibility to adapt
quickly and easily to the dynamic needs of the enterprise.
FlexVol technology provisions storage resources automatically
and enables the creation of multiple flexible volumes on a large
pool of disks. This flexibility helps organizations maximize
storage utilization and efficiency, simplify operations, and
make changes quickly and seamlessly without downtime.
FlexClone
NetApp FlexClone technology enables true data cloning, or the
instant replication of data volumes and data sets without
requiring additional storage space at the time of creation. Each
cloned volume is a transparent, virtual copy that can be used
for essential enterprise operations, such as testing and bug
fixing, platform and upgrade checks, multiple simulations
against large data sets, remote office testing and staging, and
market-specific product variations. Only data that has changed
uses actual disk space. FlexClone provides substantial space
savings with minimal overhead. Customers can manage many more
data set variations in less time and with less risk to
production environments.
FlexShare
FlexShare, introduced in fiscal year 2006 and included in Data
ONTAP, directs the way storage system resources are used to
deliver an appropriate level of service for each application.
With FlexShare, you can host multiple workloads on a single
NetApp system and assign individual priorities to each.
FlexShare gives storage administrators the ability to leverage
existing infrastructure and increase processing utilization
without sacrificing the performance allocated to
business-critical tasks. Using FlexShare, administrators can
confidently consolidate disparate applications, prioritize
specific data sets, and dynamically adjust priorities if
business needs change.
Data
Management Family
Our Network Appliance Data Management Family of products
provides comprehensive storage and data management tools to
simplify IT administration and enhance productivity. NetApp has
four suites of products targeted to different IT administrative
roles:
Storage
Suite
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Operations Manager, also known as
DataFabric®
Manager (DFM), provides comprehensive storage and
infrastructure management for storage administrators.
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File Storage Resource Manager provides file-based storage
utilization reporting and analysis.
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SAN Manager enables visualization, efficient monitoring, and
management of Fibre Channel storage networks.
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Data
Suite
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Business Continuance Option provides complete data protection
management of Snapshot copies,
SnapVault®,
SnapMirror®,
and Open Systems SnapVault (OSSV).
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Data Migration Manager provides simple to use data migration
between Windows environments and NetApp storage systems.
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VFMtm
(Virtual File Manager) enables IT administrators to set up and
protect file data. It enables data protection at the virtual
namespace level with no need to worry about how the data is
spread out.
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Server
Suite
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SnapDrive®
products provide integrated data management for Windows and UNIX
environments. System administrators can provision storage faster
and manage all of the server volume manager and file system
dependencies.
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ApplianceWatchtm
products simplify management of NetApp systems within
third-party system management consoles such as
Tivoli, Openview, and
Microsoft®
Operations Manager (MOM).
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Application
Suite
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SnapManager®
products for SQL Server, SnapManager for
Oracle®,
and SnapManager for Exchange. Application administrators and
database administrators (DBAs) can manage their own
data with application-consistent Snapshot copies, data
protection and disaster recovery management, and application
cloning.
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Data
Protection Products
In recent years, enterprises have centralized terabytes of data
into networked storage environments to achieve lower costs,
higher utilization, and simplified management. On the other
hand, geopolitical events such as September 11, 2001;
natural disasters such as the Katrina Hurricane disaster;
government regulations such as Securities and Exchange
Commissions (SEC)
Rule 17a-4;
banking regulations such as Basel II; increased privacy
concerns such as laptop thefts with sensitive data; and industry
guidelines such as PCI (Payment Card Industry standard put forth
by Visa and MasterCard), have all put a spotlight on the need to
protect and retain data for both the public and private sectors.
Consolidation, coupled with a higher probability of disasters,
has created a heightened sensitivity to the impact of data loss
and its disruptive impact on the business. At the same time,
compliance and privacy concerns are requiring enterprises to
retain data for long periods of time, as well as secure data at
rest. Data protection and retention have become critical IT
priorities, requiring cost-effective storage solutions that can
help the enterprise protect itself from catastrophic business
disruption at an affordable cost. NetApp offers a comprehensive
set of hardware and software solutions, including the NearStore
SATA-based storage,
disk-to-disk
backup solutions, a family of replication and business
continuance solutions, compliance and security solutions, and
tools to manage this information ecosystem.
NearStore
The NetApp NearStore family of platforms represents SATA-based
storage platforms optimized for data protection and retention
applications. The NetApp NearStore system bridges the gap
between primary storage and offline storage by providing much
faster data access than offline storage at a cost much lower
than primary storage. This makes NearStore ideal for data
protection and retention applications such as
disk-to-disk
backup, business continuance, archival, compliant retention, and
digital content storage.
The NearStore family consists of the R200 platform, the
NearStore Virtual Tape Library (VTL) platforms, and
the FAS platforms with SATA drives and NearStore personality
licenses. The R200 is a
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SATA-only platform based on Data ONTAP and is available in
capacities up to 168TB. The NearStore VTL is a
disk-to-disk
backup appliance that appears like a tape library to a backup
software application but provides the superior speed and
reliability of disk technologies for any heterogeneous primary
storage environment. NetApp has also expanded the capabilities
of its entire FAS platform line for nearline uses through a
NearStore personality license that optimizes the system for data
protection and retention workloads.
Virtual
Tape Library
The NetApp NearStore VTL solution is a high-performance, easily
managed system that significantly improves backup service levels
and cost for traditional data center tape backup
infrastructures. NearStore VTL ranges in capacity from 4.5TB to
168TB and is based on NetApp system software optimized for the
rapid sequential data throughputs seen in data center backup
environments that use traditional backup applications such as
Symantec®
NetBackuptm
and Tivoli Storage Manager.
NearStore VTL delivers value to backup customers in two
fundamental ways: 1) it provides a far more reliable and
high-performance storage target to backup applications than that
provided by physical tape drives and libraries, thus enabling
more backups to be done in less time; and 2) when backup
data is moved directly from the NearStore VTL to physical tape
drives and libraries, the NearStore VTL streams the data at a
rate that provides for highly efficient utilization of
customers existing tape infrastructure. The net benefit to
the customer is that backup service levels improve substantially
and expenditure on tape infrastructure is slowed.
Key differentiators of the NearStore VTL versus other VTL
competition are its Continuous Self Tuning and Tape Smart Sizing
capabilities. Continuous Self Tuning enables the NearStore VTL
to deliver maximum performance with no manual tuning at all
capacities, something no other VTL can do. Tape Smart Sizing
enables physical tape utilization that is far more efficient
than is possible with other VTLs that directly create physical
tapes.
Data
Protection Software Products
Network Appliance offers comprehensive business continuance and
disk backup solutions for enterprise customer environments.
SyncMirror®,
MetroCluster, SnapMirror, and
SnapRestore®
products provide the most appropriate level of data availability
and cost of protection matched to the recovery point objectives
(RPOs) and recovery time objectives
(RTOs) of customer environments. SnapMirror supports
fully synchronous, near-synchronous, and asynchronous remote
replication for easy setup, management, and quick recovery.
SyncMirror, in conjunction with other NetApp technologies such
as RAID-DP, provides the highest level of local data
availability to allow NetApp storage systems to continue
delivering data after as many as five simultaneous physical disk
component failures. MetroCluster enables a highly available
campus or metropolitan business continuance solution, minimizing
downtime through auto-site failover. SnapRestore greatly
minimizes recovery time in the event of a data corruption or
loss by allowing rapid restoration of a volume from an earlier
point in time using Snapshot technology.
SnapVault, Open Systems SnapVault (OSSV), and
SnapVault for NetBackup products provide network and
storage-optimized
disk-to-disk
backup solutions. With the ability to transmit only the changes
from one backup to the next, and eliminate duplicates in
storage, NetApp
disk-to-disk
products offer very cost-effective solutions to help customers
with shrinking backup windows, rapid recovery objectives, and
remote office backup challenges. In conjunction with other
products such as FlexClone and
LockVaulttm,
customers can significantly enhance the value of their backup
investment by utilizing the backups for other uses such as test
and development, compliant retention, and business intelligence.
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Data
Retention and Archive Software Products
To meet growing regulatory compliance demands faced by most
enterprises, Network Appliance offers a comprehensive suite of
products to ensure data permanence, accessibility, and privacy
across the variety of different regulations such as
Sarbanes-Oxley Act, 21 CFR Part 11, SEC
Rule 17a-4,
and HIPAA. Immutable, cost-effective, resilient, and reliable
storage architectures can be created utilizing the
SnapLock®
products in conjunction with NetApp NearStore platforms. The
Information Server 1200 products provide advanced capabilities
for both the initial classification and subsequent
e-discovery
requirements. The Decru
DataForttm
product adds security and privacy by encrypting data, while
still allowing the capability to search the compliant data for
legal discovery purposes if the need arises.
A significant demand is being created for disk-based digital
content storage in applications such as medical images
(PACS), video surveillance, interactive voice
records, and Web multi-media content. The NetApp NearStore
storage platforms offer highly scalable, cost-effective
platforms for these applications. The NetApp platforms, based on
open standards-based protocols, are easily integrated into the
Embedded Solution Vendors (ESV) overall
solution for these applications. Search, indexing, and
classification capabilities of the Information Server 1200
product provide an easy way to access the relevant content in
these massive data repositories.
Decru
NetApp also focuses on storage security, and with the
acquisition of Decru, we have taken a leadership position in the
emerging storage security category. Decru DataFort storage
security appliances provide a unified platform for
enterprise-wide security, including heterogeneous NAS, DAS,
iSCSI, SAN, and tape environments. The
Decru®
platform combines wire-speed encryption, access controls,
authentication, and automated key management to provide strong
security for data at rest. Over the last twelve months, Decru
has secured design wins with many of the top global
corporations, including the financial services, media, software,
telecommunications, and pharmaceutical sectors, as well as
numerous government agencies worldwide. Flagship customers such
as Iron Mountain and the U.S. Marine Corps have highlighted
Decru leadership in technology, security, and deployment
capabilities.
Decru has announced strategic distribution agreements with EMC
Corporation (EMC) and Quantum Corporation, and works
closely with the major storage and networking firms, including
Brocade Communication Systems, Inc.; Cisco Systems, Inc.
(Cisco); H-P; IBM; McData Corporation; Oracle
Corporation (Oracle); Sun Microsystems, Inc.; and
Symantec Corporation (Symantec) to develop solutions
and test interoperability.
Content
Delivery
(NetCache®)
The NetCache suite of solutions is designed to manage, control,
and improve access to Web-based information. Built on an
extremely reliable and scalable platform, and working with a
range of software partners, NetCache provides solutions to large
enterprises to manage Internet Access and Security
(IAS), enabling IT managers to control who in their
user base is going where on the Internet, when, and what content
is being accessed. Furthermore, using compression, localized
caching, and other techniques, NetCache also optimizes the Wide
Area Network (WAN) to secure and accelerate delivery
of information. The same functionality for public Internet
access is used to control and improve access to internal Web
information, such as Web-based portals and business applications
such as Oracle and SAP, and streaming media.
On June 22, 2006, we entered into an Asset Purchase
Agreement with Blue Coat Systems, Inc. to sell certain assets of
the NetCache business. See Note 16 to the Consolidated
Financials Statements accompanying this Annual Report on
Form 10-K.
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Solutions-Based
Approach
Network Appliance turnkey solutions, which include hardware,
software, service, and financing components, enable our
customers to simplify their storage management, leverage their
existing infrastructure, and increase their return on
investment. The solutions include:
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Business Applications: Major corporations and
government agencies rely on NetApp solutions for storage and
data management of their mission-critical applications.
Thousands of organizations around the world choose NetApp
storage systems to support key databases and applications from
DB2, Microsoft, Oracle, SAP, and Sybase. Oracle, SAP, and SAS
all use NetApp extensively to develop the software that they
sell.
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Enterprise Data Center Infrastructure: With
its modular fabric-attached storage systems and Data ONTAP
operating system, NetApp ensures scalability and high
availability for the largest applications and consolidations.
NetApp provides solutions that simplify the myriad challenges of
data management within the Enterprise Data Center while enabling
information managers to dynamically position information assets
to best serve an organizations strategic goals. Innovative
NetApp solutions enable todays IT manager to architect and
deploy an integrated yet flexible information management
framework, providing immediate enterprise return on investment
(ROI) and the lowest TCO, according to a Mercer
Consulting Study, while protecting against future business- and
technology-related disruptions. The complete NetApp offering is
a reliable and proven data center solution in the industry.
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Data Protection: Geopolitical events and
natural disasters, coupled with the increasingly around the
clock operation of most enterprises, have made data protection a
critical storage infrastructure requirement. Network Appliance
offers comprehensive business continuance and disk backup
solutions for every requirement in any environment. NetApp disk
backup solutions can dramatically reduce the cost and complexity
of backup and recovery of data stored on any storage device in
data centers and remote offices. NetApp reduces the cost of
backup and recovery using de-duplication, incremental change
transmission, and compression technologies to dramatically
shrink backup windows and reduce secondary storage requirements.
Integration with leading software vendors such as Symantec helps
customers effectively manage the complexity of the backup
process. Our suite of highly available synchronous,
semi-synchronous, and asynchronous application-integrated
replication solutions helps our customers tailor the most
appropriate and cost-effective solution for their business
continuance requirements. The built-in simplicity and
cost-effectiveness of our solutions help customers implement a
comprehensive business continuance plan and recover rapidly from
downtime caused by user errors, system failures, operational
outages, natural disasters, or geopolitical risks.
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Data Retention and Archive: Growing regulatory
data retention requirements for compliance purposes, coupled
with an increasing usage of disk-based solutions for digital
content retention for data such as medical images, video
surveillance, and interactive voice records, are placing a
tremendous requirement on enterprises for storing large amounts
of data for increasingly longer time periods in a
cost-effective, scalable, and secure manner. Network Appliance
offers open standards-based solutions for long-term data
retention for regulatory compliance and digital content storage.
Our industry-leading, cost-effective storage platforms are based
on ATA disk technology, WORM (write once, read many) retention
solutions compliant with all regulations such as 21 CFR
Part 11, SEC
Rule 17a-4,
and HIPAA,
e-discovery
classification, indexing and search solutions, and a large
ecosystem of application partners based on open protocols and
standards-based Application Program Interfaces
(APIs). Our customers are able to architect a
cost-effective, scalable, unified storage infrastructure for all
their regulatory compliance and digital content retention needs.
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Technical Applications: Network Appliance is a
leading storage supplier for key technical applications in
energy exploration, semiconductors, software development, and
the aerospace, automotive, and entertainment industries. NetApp
storage systems provide fast and simultaneous data access for
Windows, UNIX, and
Linux®
operating systems, and unparalleled simplicity in storage
provisioning and scaling.
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NetApp has strong application-level solutions with key partners,
including Cadence Design Systems, Inc., Dassault Systemes, ESRI,
IBM Corp./Rational, Landmark Graphics, Synopsys, Inc., and UGS
Corp./PLM, assuring high performance, data availability, and
ease of use. The combination of solutions and partners
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enables customers in these industries to accelerate product
development and data analysis, facilitate collaboration, and
reduce operational costs.
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Enterprise File Services: Network Appliance
enables enterprises to effectively consolidate and simplify data
management of their business-critical applications in their
Windows and UNIX environments. Data ONTAP 7G provides a dynamic
virtualization engine, which allows storage to be easily
provisioned on the fly without significant administrative
intervention. With data management functions that are tailored
for individual application data sets, Data ONTAP provides IT
administrators with tools to easily accommodate rapidly
increasing enterprise storage demands. Optimized storage
utilization can be achieved using the Network Appliance
industry-leading multiprotocol capabilities.
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The net effects are lower storage management costs and
significant time savings, because storage is intelligently
configured and reconfigured non-disruptively, even during
production hours. Network Appliance Enterprise File Services
solutions free up valuable organizational infrastructure and
staff resources, increasing productivity, performance, and
profitability.
Total
Customer Experience
At Network Appliance, we believe in offering complete solutions
to help customers effectively streamline operations. We strive
to provide customers with the best experience in the industry
with every interaction they have with NetApp products, services,
and people. In addition to providing global service and support,
and offering flexible financing solutions, we strive to simplify
customer environments whenever possible by utilizing open
standards, driving industry collaboration, and partnering with
other industry leaders. Using the right combination of products,
technologies, and partners, NetApp helps solve customer business
challenges while maximizing their return on investment.
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Open standards and industry
collaboration. NetApp helps ensure rapid
application deployment and smooth integration into
customers existing infrastructures by utilizing and
supporting open standards. Network Appliance participates in and
leads many industry initiatives and organizations, such as the
Storage Networking Industry Association (SNIA), the
Enterprise Grid Alliance (EGA), the Aperi Open SRM
initiative, the Open Source Development Lab (OSDL),
and the Internet Engineering Task Force (IETF), that
have defined standards that are widely deployed today. Standards
that Network Appliance has helped advance include the Network
File System (NFS) protocol for file access in UNIX
and Linux environments; the Common Internet File System
(CIFS) protocol for file access in Windows
environments; the Network Data Management Protocol
(NDMP) for simplifying backup of networked storage;
the Internet Content Adaptation Protocol (ICAP) for
content adaptation in Web environments; the Direct Access File
System (DAFS) protocol for high-performance,
high-throughput access to data; and the Internet Small Computer
System Interface (iSCSI) protocol for building
block-based storage area networks using widely deployed Ethernet
infrastructures. NetApp also actively works with Microsoft on
advancing Microsoft standards including CIFS, Virtual Disk
Interface (VDI), and Virtual Disk Service
(VDS), and is a Microsoft Communication Protocol
Program licensee. We plan to continue to participate in driving
emerging standards.
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Business application integration and
partnerships. A goal of Network Appliance is to
deliver complete network storage solutions to customers. Our
partners are vital to our success in this area, and we have
significant partner relationships with database and business
application companies including Dassault Systèmes,
Documentum, FileNet, IBM, iLumin, Interwoven, Landmark Graphics,
Microsoft, Mobius, Oracle, SAP, SAS, Stellent, Sybase, UGS
Corp., and Zantaz. These application partnerships enhance our
ability to reduce implementation times, increase application
availability, and provide the highest level of solution support
to customers. Technology and infrastructure solution partners
enable seamless integration into customers existing
environments, resulting in lower costs and more rapid
deployment. Our infrastructure partner list includes ADIC,
Atempo, Bakbone, Brocade, Cisco Systems, CommVault, Computer
Associates, Decru, Egenera, Inc., FalconStor Software, Inc.,
Fujitsu Siemens Computers, H-P Openview and Storage Essentials,
HDS, IBM Tivoli, Intel, IronMountain, Juniper Networks, Legato,
McData, Novell/
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SuSE, Quantum/ATL, Red Hat, RLX Technologies, Secure Computing,
Spectra Logic, StorageTek, Symantec, Syncsort and TekTools.
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Global service and support. Network Appliance
customers demand high availability and reliability of their
storage infrastructure to ensure the successful, ongoing
operation of their businesses. NetApp Global Services
(NGS) is designed with this in mind. We provide
professional services, support solutions and customer education
and training to help customers solve business problems, save
money, leverage new opportunities, comply with regulations and
policies, and improve their overall operational results. We
utilize a global, integrated model to provide consistent service
and support during every phase of the customer engagement,
including: presales assessment and analysis, planning, design,
installation, implementation, integration, optimization and
ongoing support. Services and support often involve phased
rollouts, technology transitions and migrations, and other
long-term engagements. Network Appliance delivers a
comprehensive range of consulting services leveraging our
expertise in architecture and design, project management,
solution implementation and analysis, network integration,
training, best practices, standard operating procedures,
specialized deployment and ongoing optimization, as well as a
robust set of support services. All of our services and support
offerings serve to lower the cost and minimize the risk of
storing and managing data.
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NGS continues to expand and accelerate our professional service
and support offerings, including our worldwide delivery
capabilities, partner ecosystem, and customer footprint. In the
past year we have taken a number of steps to further build out
our service and support portfolio by adding new and enhanced
offerings to our customers. We have grown our global services
organization by expanding our storage service portfolios,
deepening and broadening our storage services partnerships,
innovating service delivery tools and technology, and continuing
to drive supportability in NGS products and services as well as
executing on new business and customer growth.
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Network Appliance Financial Solutions
(NAFS). NAFS, the customer finance
group for Network Appliance, offers a variety of standard and
tailored financial products to help our customers acquire NetApp
solutions. NAFS offers financial programs in the United States,
Canada, Europe, and Asia Pacific. Our financial product
offerings are designed to help enhance our customers ROI
and reduce their TCO by providing competitive rates; matching
budgetary or cash flow requirements by spreading the payments
out over time; providing technology refresh options within the
initial term; and financing the entire solution, including
hardware, software, and services.
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Markets
and Distribution Channels
Markets
NetApp markets products globally in over 120 counties. Our
diversified customer base represents a number of large segments
and vertical markets. We focus primarily on the enterprise data
management and storage solutions markets, offering an array of
products from our ultra high-end products designed for large
enterprise customers to our low-end products designed for
small-to-medium
sized businesses. We have also expanded into the virtual tape
library and data encryption markets, bring us into parts of the
data center we have not competed in before. With our next
generation operating system, Data ONTAP GX, we offer storage
grid architecture to high performance computing environments.
Distribution
NetApp employs a multichannel distribution strategy, selling
products and services to end users through a direct sales force,
value-added resellers, system integrators, OEMs, and
distributors. In North America, Europe and Australia, we employ
a mix of resellers and direct sales channels to sell to end
users. In Asia, Africa, and South America, our products are
primarily sold through resellers, which are supported by channel
sales representatives and technical support personnel. No single
customer or distributor accounted for 10% or more of net sales
in fiscal 2006, 2005, or 2004.
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The NetApp and IBM OEM (original equipment manufacturer)
agreement formed in fiscal year 2005 allows IBM to sell
IBM-branded solutions based on Network Appliance unified and
open network-attached storage and iSCSI/IP SAN solutions,
including NearStore and the NetApp V-Series systems, as well as
associated software offerings. The strategic storage
relationship expands IBMs portfolio of storage solutions,
which is one of the largest and most advanced sets of storage
and information management products in the industry.
NetApp
Global Services
NetApp Global Services brings a unique mix of data center
management and deep storage expertise combined with a strategic
business focus to give customers a full range of consulting,
design and implementation services to provide our customers with
comprehensive, enduring, storage solutions. From assessment,
planning and design to project management, implementation and
integration, our Professional Services group provides expertise
in several key areas to help customers more efficiently manage
their storage environments and the people and processes that
support them.
Our Global Support organization supports our hardware and
software offerings at worldwide customer sites 24 hours a
day, 365 days a year. NetApp Global Services offers NetApp
customers the following professional services and support
services:
SupportEdge offers unprecedented flexibility, allowing
enterprise customers the ability to create an integrated support
strategy that encompasses everything from corporate data centers
to remote offices. Outstanding support services are essential to
the success of enterprise IT operations. Potential problems must
be anticipated and prevented to ensure the highest possible data
availability and operational efficiency. Network Appliance
SupportEdge programs feature sophisticated monitoring and
diagnostic tools plus regular system availability audits of
installed equipment to help anticipate problems before they
affect availability.
ConsultingEdge services are designed to meet the complex
storage needs our customers experience as a result of rapid
growth or change in their organizational, end-customer, and
technological requirements. Business continuity, data security,
and improving the efficiency of access and management for
ever-expanding volumes of business-critical and mission-critical
data are requirements. New solutions must integrate seamlessly
with existing applications, servers, and storage to maximize
asset utilization and preserve existing investments.
Benefits from using NetApp Global Services include:
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Risk avoidance. Ensuring a seamless transition to new
technologies through world-class domain expertise coupled with
active project management and training
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Cost reduction. Extracting maximum value from existing IT
investments through better resource allocation and improved
day-to-day
storage management without sacrificing readiness for the future
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Improved performance. Enhanced storage service quality, resource
utilization, and ease of administration
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Accelerated
time-to-deployment.
Speeding up production implementation and deriving benefit from
IT investments more quickly and without adverse impact on an
organizations productivity
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Ensuring scalability and readiness for the future. Enabling
future growth by implementing best-practice policies and
processes, which can also improve performance while lowering TCO
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We intend to continue to enhance our service offerings in this
segment with additional capabilities by adding new resources and
expertise.
Manufacturing
Manufacturing operations, with insourced and outsourced
locations in Sunnyvale, San Jose, and Fremont, California;
Livingston, Scotland; Shanghai, China; and Schiphol Airport, The
Netherlands, include materials procurement, commodity
management, component engineering, test engineering,
manufacturing engineering, product assembly, product assurance,
quality control, final test, and global logistics. We rely on a
limited number of suppliers for materials, as well as several
key subcontractors for the production of certain subassemblies
and
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finished systems. We multisource wherever possible to mitigate
supply risk. Our strategy has been to develop close
relationships with our suppliers, exchanging critical
information and implementing joint quality programs. We also use
contract manufacturers for the production of major subassemblies
to improve our manufacturing redundancy.
See Risk Factors We rely on a limited
number of suppliers and Risk
Factors The loss of our contract
manufacturers. This manufacturing strategy minimizes
capital investment and overhead expenditures and creates
flexibility for rapid expansion. We were awarded the ISO 9001
certification on May 29, 1997, ISO 9001:2000 certification
on December 3, 2003, and continue to be ISO 9001:2000
certified. We were awarded ISO 14001:2004 certification on
January 6, 2006.
Research
and Development
Network Appliance finished fiscal year 2006 with its strongest
product portfolio to date and a broad set of software solutions
that satisfy the needs of our growing customer base. Continuing
with our strategy of a unified storage platform based on the
best price performance, we introduced the FAS3000 Family. The
FAS3020 and FAS3050 deliver outstanding power to the mid-range
server market. This product has achieved unprecedented volume
shipments during the fiscal year. Our FAS6070, on the high end,
began shipping in the fourth quarter of fiscal year 2006 and is
now delivering industry leading performance and positions us
well as we step further into the Enterprise Data Center. These
new platforms are also being manufactured with RoHS (Restriction
of Hazardous Substances) compliance.
Network Appliance has seen excellent growth in the SAN sector
during the year. We were one of the first storage management
providers to deliver a 4 gigabit per second capable Fibre
Channel product in 2006. Our ongoing investment in delivering
enterprise level capabilities through our Data ONTAP operating
system and our licensed data management products is driving our
growth and expanding our market share. New and unique
virtualization capabilities and data management tools, such as
our Operations Manager (also known as DFM), consistently place
us in the forefront of our industry in solving the complex
problems of the Enterprise Data Center.
Acquisitions from fiscal years 2004 and 2006 are now producing
results. The NearStore VTL was introduced in the fourth quarter
of fiscal year 2006, along with new industry leading storage
security appliances from Decru. In addition, next generation,
highly scalable systems based on technology acquired in the
Spinnaker Networks acquisition have been delivered to an initial
set of customers. We expect these products to help us continue
our leadership in storage innovation.
See Risk Factors If we are unable to
develop and introduce new products and respond to technological
change, or if our new products do not achieve market acceptance,
our operating results could be materially adversely
affected.
Segment
and Geographic Information
See Note 9 to the Consolidated Financials Statements
accompanying this Annual Report on
Form 10-K.
Customer
Base
Our diversified customer base spans a number of large segments
and vertical markets. Examples include:
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Animation and video post-production. Digital
artists create and maintain large libraries of models, textures
and scene generation instructions that are exploited by Linux
compute farms to create complex special effects for games,
movies, and advertisements. Increasing desire for more dazzling,
realistic effects places stringent performance and reliability
demands on shared storage systems at the core of the production
process. Our scalable storage configurations deliver the
performance, reliability and manageability that allow video and
movie production customers to meet ever-increasing demands for
more imaginative effects.
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Energy. Customers in the energy market have
traditionally deployed our products to support their upstream
exploration and production, and downstream refining and
distribution activities, where the simplicity of the appliance
architecture and the ability to support massive amounts of data
are critical.
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Our solutions help enable energy companies to meet their
workflow optimization objectives, improve quality, reduce cycle
times, and lower costs.
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Federal government. The United States federal
government is one of the largest IT consumers in the world, and
Network Appliance Federal Systems, Inc. provides solutions for
many data-intensive activities, including intelligence
gathering, analysis, and civilian and military operations.
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Financial services. New data-processing
methodologies, shorter time frames for settlement transactions,
and new demands for better knowledge management have required
financial services firms to improve their data storage
infrastructures. Network Appliance solutions for enterprise
storage enable these financial institutions to effectively
manage large amounts of data in a high-speed distributed
infrastructure, enabling customers to leverage their existing
technology investments and derive maximum value from their
time-sensitive information.
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High technology. Global technology
enterprises, including semiconductor, systems, and software
companies, are keenly focused on reducing infrastructure cost
and improving
time-to-market.
Network Appliance solutions enable high-technology firms to
achieve these goals by reducing TCO and providing highly
reliable systems and fast data access, which reduces the time
required for software builds and chip simulations.
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Internet. Internet-focused businesses place
considerable and often unpredictable demands on
transaction-intensive, database-driven environments such as
e-mail,
World Wide Web (WWW), and electronic commerce
(e-commerce).
In a marketplace where retaining customer loyalty is paramount,
Internet-focused businesses must have high performance and
readily available data to ensure that their customers do not
seek alternative providers. Scalable distributed architectures
based on Network Appliance products improve data availability,
scalability, and performance, while reducing the TCO.
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Life sciences and healthcare
services. Pharmaceutical, bioresearch, genomic
research, and clinical-care providers are focused on developing
vital new drugs, improving quality of patient care, and
increasing their returns on investment. Network Appliance
solutions enable fast access, integration, and sharing of
massive amounts of exponentially growing scientific and medical
imaging data; reduced
time-to-market;
and improvements in operational efficiency.
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Major manufacturing. Global manufacturing
companies face intense competitive pressure to develop
attractive new products, improve
time-to-market,
and optimize profitability. Network Appliance solutions enable
these companies to simplify the management overhead associated
with storing and protecting large amounts of ERP, engineering,
and manufacturing product data, while ensuring that information
can be easily and efficiently distributed to manufacturing and
distribution sites around the world.
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Telecommunications. Service providers in the
telecommunications industry are faced with deregulation,
globalization, increased competition, and often a substantial
debt burden. As a result, they must control infrastructure costs
while maintaining or improving services to existing customers
and at the same time identifying and developing compelling new
revenue streams in order to grow their business. Network
Appliance products and solutions allow these providers to
quickly and cost-effectively build the network storage
infrastructure and content delivery networks required by the
global telecommunications industry.
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Seasonality
Although operating results have not been materially and
adversely affected by seasonality in the past, because of the
significant seasonal effects experienced within the industry,
particularly in Europe, our future operating results could be
materially adversely affected by seasonality.
See Risk Factors Factors beyond our
control could cause our quarterly results to fluctuate and
Risk Factors Risks inherent in our
international operations could have a material adverse effect on
our operating results accompanying this Annual Report on
Form 10-K.
16
Backlog
Network Appliance manufactures products based on a combination
of specific order requirements and forecasts of our
customers demand. Orders are generally placed by customers
on an as-needed basis. Products are typically shipped within one
to four weeks following receipt of an order. In certain
circumstances, customers may cancel or reschedule orders without
penalty. For these reasons, orders may not
constitute a firm backlog and may not be a meaningful indicator
of revenues.
Competition
The storage and content delivery markets are intensely
competitive and are characterized by rapidly changing technology.
In the storage market, our primary and nearline storage system
products and our associated storage software portfolio compete
primarily with storage system products and data management
software from EMC, HDS, H-P, IBM, and Sun Microsystems. We also
see Dell, Inc. as an emerging competitor in the storage
marketplace, primarily due to a business partnership that has
been established between Dell and EMC, allowing Dell to resell
EMC storage hardware and software products. We have also
historically encountered less-frequent competition from
companies including Engenio Information Technologies, Inc.
(formerly the Storage Systems Group of LSI Logic Corp.), Dot
Hill Systems Corporation, and Xiotech Corporation. In the
nearline storage market, which includes the
disk-to-disk
backup and regulated data storage segments, our NearStore
appliances compete primarily against products from EMC and Sun
Microsystems, as a result of their acquisition of StorageTek
Technology Corporation. Our NearStore VTL appliances also
compete directly with traditional tape backup solutions in the
broader data backup/recovery space.
In the content delivery market, our NetCache appliances and
content delivery software compete against caching appliance and
content delivery software vendors including BlueCoat Systems
(formerly CacheFlow, Inc.) and Cisco Systems. Our NetCache
business is also subject to indirect competition from content
delivery service products such as those offered by Akamai
Technologies. On June 22, 2006, we entered into an Asset
Purchase Agreement with Blue Coat Systems, Inc. to sell certain
assets of the NetCache business. See Note 16 to the
Consolidated Financials Statements accompanying this Annual
Report on
Form 10-K.
Additionally, a number of new, privately held companies are
currently attempting to enter the storage systems and data
management software markets, the nearline and VTL storage
markets, and the caching and content delivery markets, some of
which may become significant competitors in the future. We
believe that the principal competitive factors affecting the
storage and content delivery markets include product benefits
such as response time, reliability, data availability,
scalability, ease of use, price, multiprotocol capabilities, and
customer service and support.
See Risk Factors An increase in
competition could materially adversely affect our operating
results and Risk Factors If we are
unable to develop and introduce new products and respond to
technological change, or if our new products do not achieve
market acceptance.
Proprietary
Rights
We currently rely on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, contractual
provisions, and patents to protect our proprietary rights. We
seek to protect our software, documentation, and other written
materials under trade secret, copyright, and patent laws, which
afford only limited protection. We have registered our Network
Appliance name and logo, Data ONTAP, DataFabric,
FAServer®,
FilerView, NearStore, NetApp, NetCache, SecureShare,
SnapManager, SnapMirror, SnapRestore, SnapLock, SnapVault, WAFL,
and others as trademarks in the United States. Other
U.S. trademarks and some of the other U.S. registered
trademarks are registered internationally as well. We will
continue to evaluate the registration of additional trademarks
as appropriate. We generally enter into confidentiality
agreements with our employees, resellers, and customers. We
currently have multiple U.S. and international patent
applications pending and multiple U.S. patents issued.
17
See Risk Factors If we are unable to
protect our intellectual property, we may be subject to
increased competition that could materially adversely affect our
operating results.
Environmental
Disclosure
Various federal state and local provisions regulate the use and
discharge of certain hazardous materials used in our
manufacturing. Failure to comply with environmental regulations
in the future could cause us to incur substantial costs or
subject us to business interruptions. We believe we are fully
compliant with all applicable environmental laws. See Risk
Factors Our business is subject to changing
laws and regulations, environmental legislation
accompanying this Annual Report on
Form 10-K.
Employees
As of April 30, 2006, we had 4,976 employees. Of the total,
1,927 were in sales and marketing, 1,246 in research and
development, 568 in finance and administration, and 1,235 in
manufacturing and customer service operations. Our future
performance depends in significant part on our key technical and
senior management personnel, none of whom are bound by an
employment agreement. We have never had a work stoppage and
consider relations with our employees to be good.
Executive
Officers
Our executive officers and their ages as of May 26, 2006,
are as follows:
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Name
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Age
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Position
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Daniel J. Warmenhoven
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55
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Chief Executive Officer and
Director
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Thomas F. Mendoza
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55
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President
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Steven J. Gomo
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54
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Executive Vice President, Finance
and Chief Financial Officer
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David Hitz
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43
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Founder and Executive Vice
President
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Robert E. Salmon
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45
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Executive Vice President, Field
Operations
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Daniel J. Warmenhoven joined the Company in October 1994
as president and chief executive officer and has been a member
of the Board of Directors since October 1994. In May 2000, he
resigned the role of president and currently serves as chief
executive officer and as a member of the Board of Directors of
Network Appliance, Inc. Prior to joining the Company,
Mr. Warmenhoven served in various capacities, including
president, chief executive officer, and chairman of the Board of
Directors of Network Equipment Technologies, Inc., a
telecommunications company, from November 1989 to January 1994.
Prior to Network Equipment Technologies, Mr. Warmenhoven
held executive and managerial positions at Hewlett-Packard from
1985 to 1989 and IBM Corporation from 1972 to 1985.
Mr. Warmenhoven is a Director of Stoke, Inc. and PowerFile,
Inc., both privately held companies. Mr. Warmenhoven holds
a B.S. degree in electrical engineering from Princeton
University.
Thomas F. Mendoza joined NetApp in 1994 and has served as
president since 2000. Mr. Mendoza has more than
31 years as a high-technology executive. He holds a BA
degree in economics from Notre Dame and is an alumnus of
Stanford Universitys Executive Business Program. In
September 2000, the University of Notre Dame renamed their
business school the Mendoza College of Business based upon an
endowment from Tom and his wife, Kathy.
Steven J. Gomo joined Network Appliance in August 2002 as
senior vice president of finance and chief financial officer. He
was appointed executive vice president of finance and chief
financial officer in October 2004. Prior to joining the Company,
he served as chief financial officer of Silicon Graphics, Inc.,
from February 1998 to August 2000, and most recently, chief
financial officer for Gemplus International S.A., headquartered
in Luxembourg from November 2000 to April 2002. Prior to
February 1998, he worked at Hewlett-Packard Company for
24 years in various positions, including financial
management, corporate finance, general management, and
manufacturing. Mr. Gomo currently serves on the board of
SanDisk Corporation. Mr. Gomo holds a masters degree
in business administration from Santa Clara University and
a BS degree in business administration from Oregon State
University.
18
David Hitz co-founded NetApp in 1992. As founder and
executive vice president, he is responsible for vision,
strategy, and direction for NetApp. Mr. Hitz served as
executive vice president, engineering from May 2000 to November
2004. Between 1992 and 2000, Mr. Hitz held executive
positions at NetApp, including vice president and senior vice
president, engineering. Prior to joining the Company in 1992,
Mr. Hitz was a senior engineer at Auspex Systems, Inc. and
held various engineering positions at MIPS Computer.
Mr. Hitz holds a BS degree in computer science and
electrical engineering from Princeton University.
Robert E. Salmon joined Network Appliance in January 1994
and was appointed executive vice president, field operations in
December 2005. Mr. Salmon has served as the Companys
executive vice president of worldwide sales since September
2004. From August 2003 to September 2004, Mr. Salmon served
as the Companys senior vice president of worldwide sales
and from May 2000 to August 2003, Mr. Salmon served as the
Companys vice president of North American sales.
Mr. Salmon joined the Company in 1994 after nearly ten
years with Sun Microsystems and Data General Corporation.
Mr. Salmon graduated from California State University,
Chico with a B.S. degree.
Additional
Information
Our Internet address is www.netapp.com. We make available
through our Internet Web site our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.
The SEC maintains an Internet site (www.sec.gov) that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. The public also may read and copy these filings at the
SECs Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. Information about this Public
Reference Room is available by calling (800) SEC 0330.
Item 1A. Risk
Factors
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we presently
deem less significant may also impair our business operations.
Please see page 2 of this Annual Report on
Form 10-K
for additional discussion of these forward-looking statements.
If any of the following risks actually occur, our business,
operating results, and financial condition could be materially
adversely affected.
Factors
beyond our control could cause our quarterly results to
fluctuate, which could adversely impact our common stock
price.
We believe that
period-to-period
comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indicators of future
performance. Many of the factors that could cause our quarterly
operating results to fluctuate significantly in the future are
beyond our control and include, but are not limited to, the
following:
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Changes in general economic conditions and specific economic
conditions in the computer, storage, and networking industries
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General decrease in global corporate spending on information
technology leading to a decline in demand for our products
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A shift in federal government spending patterns
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The possible effects of terrorist activity and international
conflicts, which could lead to business interruptions and
difficulty in forecasting
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The level of competition in our target product markets
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19
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Our reliance on a limited number of suppliers due to industry
consolidation, which could subject us to periodic
supply-and-demand,
price rigidity and quality issues with our components
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The size, timing, and cancellation of significant orders
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Product configuration and mix
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The extent to which our customers renew their service and
maintenance contracts with us
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Market acceptance of new products and product enhancements
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Announcements, introductions, and transitions of new products by
us or our competitors
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Deferrals of customer orders in anticipation of new products or
product enhancements introduced by us or our competitors
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Changes in pricing by us in response to competitive pricing
actions
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Our ability to develop, introduce, and market new products and
enhancements in a timely manner
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Supply constraints
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Technological changes in our target product markets
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The levels of expenditure on research and development and sales
and marketing programs
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Our ability to achieve targeted cost reductions
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Excess or inadequate facilities
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Disruptions resulting from new systems and processes as we
continue to enhance and adapt our system infrastructure to
accommodate future growth
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Future accounting pronouncements and changes in accounting
policies
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Seasonality
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In addition, sales for any future quarter may vary and
accordingly be different from what we forecast. We manufacture
products based on a combination of specific order requirements
and forecasts of our customer demands. Products are typically
shipped within one to four weeks following receipt of an order.
In certain circumstances, customers may cancel or reschedule
orders without penalty. Product sales are also difficult to
forecast because the storage and data management market is
rapidly evolving and our sales cycle varies substantially from
customer to customer.
We derive a majority of our revenue in any given quarter from
orders booked in the same quarter. Bookings typically follow
intra-quarter seasonality patterns weighted towards the back-end
of the quarter. If we do not achieve bookings in the latter part
of a quarter consistent with our quarterly financial targets,
our financial results will be adversely impacted.
Due to all of the foregoing factors, it is possible that in one
or more future quarters our results may fall below our forecasts
and the expectations of public market analysts and investors. In
such event, the trading price of our common stock would likely
decrease.
If we
are unable to develop and introduce new products and respond to
technological change, if our new products do not achieve market
acceptance, or if we fail to manage the transition between our
new and old products, our operating results could be materially
and adversely affected.
Our future growth depends upon the successful development and
introduction of new hardware and software products. Due to the
complexity of storage subsystems and storage security
appliances, and the difficulty in gauging the engineering effort
required to produce new products, such products are subject to
significant technical risks. However, our new products may not
achieve market acceptance. Additional product introductions in
future periods may also impact our sales of existing products.
In addition, our new products must respond to technological
changes and evolving industry standards. If we are unable, for
technological or other reasons, to develop and introduce new
20
products in a timely manner in response to changing market
conditions or customer requirements, or if such products do not
achieve market acceptance, our operating results could be
materially and adversely affected.
As new or enhanced products are introduced, we must successfully
manage the transition from older products in order to minimize
disruption in customers ordering patterns, avoid excessive
levels of older product inventories, and ensure that enough
supplies of new products can be delivered to meet
customers demands.
An
increase in competition could materially and adversely affect
our operating results.
The storage markets are intensely competitive and are
characterized by rapidly changing technology.
In the storage market, our primary and nearline storage system
products and our associated storage software portfolio compete
primarily with storage system products and data management
software from EMC, HDS, H-P, IBM, and Sun Microsystems. We also
see Dell, Inc. as an emerging competitor in the storage
marketplace, primarily due to a business partnership that has
been established between Dell and EMC, allowing Dell to resell
EMC storage hardware and software products. We have also
historically encountered less-frequent competition from
companies including Engenio Information Technologies, Inc.
(formerly the Storage Systems Group of LSI Logic Corp.), Dot
Hill Systems Corporation, and Xiotech Corporation. In the
secondary storage market, which includes the
disk-to-disk
backup, compliance and business continuity segments, our
solutions compete primarily against products from EMC and Sun
Microsystems, as a result of their acquisition of StorageTek
Technology Corporation. Our NearStore VTL appliances also
compete directly with traditional tape backup solutions in the
broader data backup/recovery space.
In the content delivery market, our NetCache appliances and
content delivery software compete against caching appliance and
content delivery software vendors including BlueCoat Systems
(formerly CacheFlow, Inc.) and Cisco Systems. On June 22,
2006, we entered into an Asset Purchase Agreement with Blue Coat
Systems, Inc. to sell certain assets of the NetCache business.
See Note 16 to the Consolidated Financials Statements
accompanying this Annual Report on
Form 10-K.
Our NetCache business is also subject to indirect competition
from content delivery service products such as those offered by
Akamai Technologies.
Additionally, a number of new, privately held companies are
currently attempting to enter the storage systems and data
management software markets, the nearline and VTL storage
markets, some of which may become significant competitors in the
future.
We believe that the principal competitive factors affecting the
storage markets include product benefits such as response time,
reliability, data availability, scalability, ease of use, price,
multiprotocol capabilities, and global service and support. We
must continue to maintain and enhance this technological
advantage over our competitors. If those competitors with
greater financial, marketing, service, support, technical, and
other resources were able to offer products that matched or
surpassed the technological capabilities of our products, these
competitors would, by virtue of their greater resources, gain a
competitive advantage over us that could lead to greater sales
for these competitors at the expense of our own market share,
which would have a material adverse affect on our business,
financial condition, and results of operations.
Increased competition could also result in price reductions,
reduced gross margins, and loss of market share, any of which
could materially and adversely affect our operating results. Our
competitors may be able to respond more quickly than we can to
new or emerging technologies and changes in customer
requirements or devote greater resources to the development,
promotion, sale, and support of their products. In addition,
current and potential competitors have established or may
establish cooperative relationships among themselves or with
third parties. Accordingly, it is possible that new competitors
or alliances among competitors may emerge and rapidly acquire
significant market share. We cannot assure you that we will be
able to compete successfully against current or future
competitors. Competitive pressures we face could materially and
adversely affect our operating results.
21
We
rely on a limited number of suppliers, and any disruption or
termination of these supply arrangements could delay shipment of
our products and could materially and adversely affect our
operating results.
We rely on a limited number of suppliers of several key
components utilized in the assembly of our products. We purchase
our disk drives through several suppliers. We purchase computer
boards and microprocessors from a limited number of suppliers.
Our reliance on a limited number of suppliers involves several
risks, including:
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A potential inability to obtain an adequate supply of required
components because we do not have long-term supply commitments
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Supplier capacity constraints
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Price increases
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Timely delivery
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Component quality
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Component quality is particularly significant with respect to
our suppliers of disk drives. In order to meet product
performance requirements, we must obtain disk drives of
extremely high quality and capacity. In addition, there are
periodic
supply-and-demand
issues for disk drives, microprocessors, and semiconductor
memory components, which could result in component shortages,
selective supply allocations, and increased prices of such
components. We cannot assure you that we will be able to obtain
our full requirements of such components in the future or that
prices of such components will not increase. In addition,
problems with respect to yield and quality of such components
and timeliness of deliveries could occur. Disruption or
termination of the supply of these components could delay
shipments of our products and could materially and adversely
affect our operating results. Such delays could also damage
relationships with current, prospective customers and suppliers.
In addition, we license certain technology and software from
third parties that is incorporated into our products. If we are
unable to obtain or license the technology and software on a
timely basis, we will not be able to deliver products to our
customers in a timely manner.
The
loss of any contract manufacturers or the failure to accurately
forecast demand for our products or successfully manage our
relationships with our contract manufacturers could negatively
impact our ability to manufacture and sell our
products.
We currently rely on several contract manufacturers to
manufacture most of our products. Our reliance on our
third-party contract manufacturers reduces our control over the
manufacturing process, exposing us to risks, including reduced
control over quality assurance, production costs, and product
supply. If we should fail to effectively manage our
relationships with our contract manufacturers, or if our
contract manufacturers experience delays, disruptions, capacity
constraints, or quality control problems in their manufacturing
operations, our ability to ship products to our customers could
be impaired and our competitive position and reputation could be
harmed. Qualifying a new contract manufacturer and commencing
volume production are expensive and time-consuming. If we are
required to change contract manufacturers or assume internal
manufacturing operations, we may lose revenue and damage our
customer relationships. If we inaccurately forecast demand for
our products, we may have excess or inadequate inventory or
incur cancellation charges or penalties, which could adversely
impact our operating results. As of April 30, 2006, we have
no purchase commitment under these agreements.
We intend to regularly introduce new products and product
enhancements, which will require us to rapidly achieve volume
production by coordinating with our contract manufacturers and
suppliers. We may need to increase our material purchases,
contract manufacturing capacity, and internal test and quality
functions to meet anticipated demand. The inability of our
contract manufacturers to provide us with adequate supplies of
high-quality products, or the inability to obtain raw materials,
could cause a delay in our ability to fulfill orders.
22
Our
future financial performance depends on growth in the storage,
and data management markets. If these markets do not continue to
grow at the rates at which we forecast growth, our operating
results will be materially and adversely impacted.
All of our products address the storage and data management
markets. Accordingly, our future financial performance will
depend in large part on continued growth in the storage and data
management markets and on our ability to adapt to emerging
standards in these markets. We cannot assure you that the
markets for storage and data management will continue to grow or
that emerging standards in these markets will not adversely
affect the growth of UNIX, Windows, and the World Wide Web
server markets upon which we depend.
For example, we provide our open access data retention solutions
to customers within the financial services, healthcare,
pharmaceuticals, and government market segments, industries that
are subject to various evolving governmental regulations with
respect to data access, reliability, and permanence (such as
Rule 17(a)(4) of the Securities Exchange Act of 1934, as
amended) in the United States and in the other countries in
which we operate. If our products do not meet, and continue to
comply with, these evolving governmental regulations in this
regard, customers in these market and geographical segments will
not purchase our products, and, therefore, we will not be able
to expand our product offerings in these market and geographical
segments at the rates for which we have forecast.
In addition, our business also depends on general economic and
business conditions. A reduction in demand for storage and data
management caused by weakening economic conditions and decreases
in corporate spending will result in decreased revenues and
lower revenue growth rates. The network storage market growth
declined significantly beginning in the third quarter of fiscal
2001 through fiscal 2003, causing both our revenues and
operating results to decline. If the storage and data management
markets grow more slowly than anticipated or if emerging
standards other than those adopted by us become increasingly
accepted by these markets, our operating results could be
materially and adversely affected.
Our
gross margins may vary based on the configuration of our product
and service solutions, and such variation may make it more
difficult to forecast our earnings.
We derive a significant portion of our sales from the resale of
disk drives as components of our storage systems, and the resale
market for hard disk drives is highly competitive and subject to
intense pricing pressures. Our sales of disk drives generate
lower gross margin percentages than those of our storage
systems. As a result, as we sell more highly configured systems
with greater disk drive content, overall gross margin
percentages may be negatively affected.
Our gross margins have been and may continue to be affected by a
variety of other factors, including:
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Demand for storage and data management products
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Discount levels and price competition
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Direct versus indirect and OEM sales
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Product and add-on software mix
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The mix of services as a percentage of revenue
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The mix and average selling prices of products
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The mix of disk content
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New product introductions and enhancements
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23
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Excess inventory purchase commitments as a result of changes in
demand forecasts and possible product and software defects as we
transition our products
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The cost of components, manufacturing labor, and quality
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Changes in service gross margins may result from various factors
such as continued investments in our customer support
infrastructure, changes in the mix between technical support
services and professional services, as well as the timing of
technical support service contract initiations and renewals.
Our
effective tax rate may increase or fluctuate, which could
increase our income tax expense and reduce our net
income.
Our effective tax rate could be adversely affected by several
factors, many of which are outside of our control, including:
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Earnings being lower than anticipated in countries where we are
taxed at lower rates as compared to the United States statutory
tax rate
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Material differences between forecasted and actual tax rates as
a result of a shift in the mix of pre-tax profits and losses by
tax jurisdiction, our ability to use tax credits, or effective
tax rates by tax jurisdiction different than our estimates
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Changing tax laws, accounting standards, including
SFAS No. 123R, regulations, and interpretations in
multiple tax jurisdictions in which we operate as well as the
requirements of certain tax rulings
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An increase in expenses not deductible for tax purposes,
including certain stock compensation, write-offs of acquired
in-process research and development and impairment of goodwill
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The tax effects of purchase accounting for acquisitions and
restructuring charges that may cause fluctuations between
reporting periods
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Changes in the valuation of our deferred tax assets and
liabilities
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Changes in tax laws or the interpretation of such tax laws
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Tax assessments, or any related tax interest or penalties, could
significantly affect our income tax expense for the period in
which the settlements take place
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A change in our decision to indefinitely reinvest foreign
earnings
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The price of our common stock could decline to the extent that
our financial results are materially affected by an adverse
change in our effective tax rate. We have been notified of
examinations in the U.S. and several foreign tax jurisdictions.
The rights to some of our intellectual property (IP)
is owned by certain of our foreign subsidiaries, and payments
are made between U.S. and foreign tax jurisdictions relating to
the use of this IP. Recently, some other companies have had
their foreign IP arrangements challenged as part of an
examination. Our management does not believe, based upon
information currently known to us that the final resolution of
any of our audits will have a material adverse effect upon our
consolidated financial position and the results of operations
and cash flows. If the ultimate determination of our taxes owed
in any of these tax jurisdictions is for an amount in excess of
the tax provision we have recorded or reserved for, our
operating results, cash flows, and financial condition could be
adversely affected.
We may
incur problems with current or future acquisitions and equity
investments, and these investments may not achieve our
objectives.
As part of our strategy, we are continuously evaluating
opportunities to buy other businesses or technologies that would
complement our current products, expand the breadth of our
markets, or enhance our technical capabilities. We may engage in
future acquisitions that dilute our stockholders
investments and cause us to use cash, to incur debt, or to
assume contingent liabilities.
24
Acquisitions of companies entail numerous risks, and we may not
be able to successfully integrate acquired operations and
products or realize anticipated synergies, economies of scale,
or other value. Integration risks and issues may include, but
not limited to, key personnel retention and assimilation,
management distraction, technical development, and unexpected
costs and liabilities, including goodwill impairment charges. In
addition, we may be unable to recover strategic investments in
development stage entities. Any such problems could have a
material adverse effect on our business, financial condition,
and results of operation.
From time to time, we also make equity investments for the
promotion of business and strategic objectives. We have already
made strategic investments in a number of storage and data
management-related technology companies. Equity investments may
result in the loss of investment capital. The market price and
valuation of our equity investments in these companies may
fluctuate due to market conditions and other circumstances over
which we have little or no control. To the extent that the fair
value of these securities is less than our cost over an extended
period of time, our results of operations and financial position
could be negatively impacted.
We
cannot assure you that our OEM relationship with IBM will
generate significant revenue.
In April 2005, we announced a strategic partner relationship
with IBM. As part of the relationship, we entered into an
original equipment manufacturing (OEM) agreement that enables
IBM to sell IBM branded solutions based on Network Appliance
unified and open network attached storage (NAS) and iSCSI/IP SAN
solutions, including NearStore and the NetApp
V-Series Systems, as well as associated software offerings.
While this agreement is an element of our strategy to expand our
reach into more customers and countries, we do not have an
exclusive relationship with IBM and there is no minimum
commitment for any given period of time, and therefore, we
cannot assure you that this relationship will contribute any
revenue in future years. In addition, we have no control over
the products IBM selects to sell, their release schedule and
timing of those products, nor do we control their pricing.
Revenues from the IBM relationship were not significant during
fiscal 2006 and accounted for approximately 1.0% of our total
consolidated revenue. In the event that sales through IBM were
to gain significant traction, we may experience distribution
channel conflicts between our direct sales force and IBM, or
among our channel partners. If we fail to minimize channel
conflicts, our operating results and financial condition could
be harmed. In addition, since this agreement is relatively new,
we do not have a history upon which to base our analysis of its
future success.
Currently we do not, and cannot assure you that this OEM
relationship will generate significant revenue or that this
strategic partnership will continue to be in effect for any
specific period of time.
If we
are unable to maintain our existing relationships and develop
new relationships with major strategic partners, our revenue may
be impacted negatively.
An element of our strategy to increase revenue is to
strategically partner with major third-party software and
hardware vendors that integrate our products into their products
and also comarket our products with these vendors. We have
significant partner relationships with database, business
application and backup management companies including Microsoft,
Oracle, SAP and Symantec. A number of these strategic partners
are industry leaders that offer us expanded access to segments
of the storage market. There is intense competition for
attractive strategic partners, and even if we can establish
strategic relationships with these partners, we cannot assure
you that these partnerships will generate significant revenue or
that the partnerships will continue to be in effect for any
specific period of time.
We intend to continue to establish and maintain business
relationships with technology companies to accelerate the
development and marketing of our storage solutions. To the
extent we are unsuccessful in developing new relationships and
maintaining our existing relationships, our future revenue and
operating results could be impacted negatively. In addition, the
loss of a strategic partner could have a material adverse effect
on the progress of our new products under development with that
partner.
25
We are
expanding our indirect channel, we cannot assure you that we are
able to maintain existing resellers, attract new resellers, and
that channel conflicts will not materially adversely affect our
channel relationships. In addition, we do not have exclusive
relationships with our resellers and accordingly there is a risk
that those resellers may give higher priority to products of
other suppliers, which could materially adversely affect our
operating results.
We market and sell our storage solutions directly through our
worldwide sales force and indirectly through channels such as
value-added resellers, or VARs, systems integrators,
distributors, OEMs and strategic business partners and derive a
significant portion of our revenue from these indirect channel
partners. In fiscal 2006, Fujitsu Siemens and our two-tier
distribution partners, Arrow and Avnet, accounted for 4.2% and
10.6%, respectively, of our consolidated revenue.
However, in order for us to maintain our current revenue sources
and grow our revenue as we have forecasted, we must effectively
manage our relationships with these indirect channel partners.
To do so, we must attract and retain a sufficient number of
qualified channel partners to successfully market our products.
However, because we also sell our products directly to customers
through our sales force, on occasion we compete with our
indirect channels for sales of our products to our end
customers, competition that could result in conflicts with these
indirect channel partners and make it harder for us to attract
and retain these indirect channel partners. At the same time,
our indirect channel partners may offer products that are
competitive to ours. In addition, because our reseller partners
generally offer products from several different companies,
including products of our competitors, these resellers may give
higher priority to the marketing, sales, and support of our
competitors products than ours. If we fail to manage
effectively our relationships with these indirect channel
partners to minimize channel conflict and continue to evaluate
and meet our indirect sales partners needs with respect to
our products, we will not be able to maintain or increase our
revenue as we have forecasted, which would have a materially
adverse affect on our business, financial condition, and results
of operations. Additionally, if we do not manage distribution of
our products and services and support effectively, or if our
resellers financial conditions or operations weaken, our
revenues and gross margins could be adversely affected.
Risks
inherent in our international operations could have a material
adverse effect on our operating results.
We conduct business internationally. For the year ended
April 30, 2006, 45.7% of our total revenues were from
international customers (including U.S. exports).
Accordingly, our future operating results could be materially
and adversely affected by a variety of factors, some of which
are beyond our control, including regulatory, political, or
economic conditions in a specific country or region, trade
protection measures and other regulatory requirements,
government spending patterns, and acts of terrorism and
international conflicts.
Our international sales are denominated in U.S. dollars and
in foreign currencies. An increase in the value of the
U.S. dollar relative to foreign currencies could make our
products more expensive and, therefore, potentially less
competitive in foreign markets. For international sales and
expenditures denominated in foreign currencies, we are subject
to risks associated with currency fluctuations. We utilize
forward and option contracts to hedge our foreign currency
exposure associated with certain assets and liabilities as well
as anticipated foreign currency cash flows. All balance sheet
hedges are marked to market through earnings every quarter,
while gains and losses on cash flow hedges are recorded in other
comprehensive income. These hedges attempt to reduce, but do not
always entirely eliminate, the impact of currency exchange
movements. Factors that could have an impact on the
effectiveness of our hedging program include the accuracy of
forecasts and the volatility of foreign currency markets. There
can be no assurance that such hedging strategies will be
successful and that currency exchange rate fluctuations will not
have a material adverse effect on our operating results.
Additional risks inherent in our international business
activities generally include, among others, longer accounts
receivable payment cycles and difficulties in managing
international operations. Such factors could materially and
adversely affect our future international sales and,
consequently, our operating results.
We receive significant tax benefits from sales to our
non-U.S. customers.
These benefits are contingent upon existing tax regulations in
the U.S. and in the countries in which our international
operations are located. Future changes in domestic or
international tax regulations could adversely affect our ability
to continue to realize these tax benefits. Our effective tax
rate could also be adversely affected by different and evolving
interpretations of existing
26
law or regulations. Potentially adverse tax consequences could
negatively impact the operating and financial results from
international operations. International operations currently
benefit from a tax ruling concluded in the Netherlands.
Although operating results have not been materially and
adversely affected by seasonality in the past, because of the
significant seasonal effects experienced within the industry,
particularly in Europe, our future operating results could be
materially and adversely affected by seasonality.
We cannot assure you that we will be able to maintain or
increase international market demand for our products.
If we
fail to manage our expanding business effectively, our operating
results could be materially and adversely
affected.
We experienced growth in fiscal 2006, 2005 and 2004. Our future
operating results depend to a large extent on managements
ability to successfully manage expansion and growth, including
but not limited to, expanding international operations,
forecasting revenues, addressing new markets, controlling
expenses, implementing and enhancing infrastructure, systems and
processes, and managing our assets.
The growth in our business requires that we invest in people,
processes and systems to best optimize our revenue growth and
long term profitability. However, growth in our sales or
continued expansion in the scope of our operations could strain
our current management, financial, manufacturing and other
systems, and may require us to implement and improve those
systems. If we experience any problems with any improvement or
expansion of these systems, procedures or controls, or if these
systems, procedures or controls are not designed, implemented or
improved in a cost-effective and timely manner, our operations
may be materially and adversely affected. In addition, any
failure to implement, improve and expand such systems,
procedures, and controls in a timely and efficient manner could
harm our growth strategy and materially and adversely affect our
financial condition and ability to achieve our business
objectives.
In addition, an unexpected decline in the growth rate of
revenues without a corresponding and timely reduction in expense
growth or a failure to manage other aspects of growth could
materially and adversely affect our operating results.
A
significant percentage of our expenses are fixed, which could
materially and adversely affect our net income.
Our expense levels are based in part on our expectations as to
future sales, and a significant percentage of our expenses are
fixed. As a result, if sales levels are below expectations or
previously higher levels, net income will be disproportionately
affected in a material and adverse manner.
The
market price for our common stock has fluctuated significantly
in the past and will likely continue to do so in the
future.
The market price for our common stock has experienced
substantial volatility in the past, and several factors could
cause the price to fluctuate substantially in the future. These
factors include but are not limited to:
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Fluctuations in our operating results
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Fluctuations in the valuation of companies perceived by
investors to be comparable to us
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Economic developments in the storage and data management market
as a whole
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International conflicts and acts of terrorism
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A shortfall in revenues or earnings compared to securities
analysts expectations
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Changes in analysts recommendations or projections
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Announcements of new products, applications, or product
enhancements by us or our competitors
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27
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Changes in our relationships with our suppliers, customers, and
channel and strategic partners
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General market conditions
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In addition, the stock market has experienced volatility that
has particularly affected the market prices of equity securities
of many technology companies. Additionally, certain
macroeconomic factors such as changes in interest rates, the
market climate for the technology sector, and levels of
corporate spending on information technology could also have an
impact on the trading price of our stock. As a result, the
market price of our common stock may fluctuate significantly in
the future, and any broad market decline, as well as our own
operating results, may materially and adversely affect the
market price of our common stock.
We
depend on the ability of our personnel, raw materials, equipment
and products to move reasonably unimpeded around the world. Our
business could be materially and adversely affected as a result
of a natural disaster, terrorist acts, or other catastrophic
events.
Any political, military, world health (e.g., SARS, Avian Flu) or
other issue which hinders this movement or restricts the import
or export of materials could lead to significant business
disruptions. Furthermore, any strike, economic failure, or other
material disruption cased by fire, floods, hurricanes, power
loss, power shortages, telecommunications failures, break-ins,
and similar events could also adversely affect our ability to
conduct business. If such disruptions result in cancellations of
customer orders or contribute to a general decrease in economic
activity or corporate spending on information technology, or
directly impact our marketing, manufacturing, financial and
logistics functions, our results of operations and financial
condition could be materially adversely affected. In addition,
our headquarters are located in Northern California, an area
susceptible to earthquakes. If any significant disaster were to
occur, our ability to operate our business could be impaired.
We
depend on attracting and retaining qualified technical and sales
personnel. If we are unable to attract and retain such
personnel, our operating results could be materially and
adversely impacted.
Our continued success depends, in part, on our ability to
identify, attract, motivate, and retain qualified technical and
sales personnel. Because our future success is dependent on our
ability to continue to enhance and introduce new products, we
are particularly dependent on our ability to identify, attract,
motivate, and retain qualified engineers with the requisite
education, backgrounds, and industry experience. Competition for
qualified engineers, particularly in Silicon Valley, can be
intense. The loss of the services of a significant number of our
engineers or salespeople could be disruptive to our development
efforts or business relationships and could materially and
adversely affect our operating results.
Undetected
software, hardware errors, or failures found in new products may
result in loss of or delay in market acceptance of our products,
which could increase our costs and reduce our
revenues.
Our products may contain undetected software, hardware errors,
or failures when first introduced or as new versions are
released. Despite testing by us and by current and potential
customers, errors may not be found in new products until after
commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could materially and adversely
affect our operating results.
If we
are unable to protect our intellectual property, we may be
subject to increased competition that could materially and
adversely affect our operating results.
Our success depends significantly upon our proprietary
technology. We rely on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, contractual
provisions, and patents to protect our proprietary rights. We
seek to protect our software, documentation, and other written
materials under trade secret, copyright, and patent laws, which
afford only limited protection. Some U.S. trademarks and
some
U.S.-registered
trademarks are registered internationally as well. We will
continue to evaluate the registration of additional trademarks
as appropriate. We generally enter into confidentiality
agreements with our employees and with our resellers, strategic
partners, and customers. We currently have multiple U.S. and
international patent applications pending and multiple
U.S. patents issued. The pending applications may not be
approved, and if patents are issued, such patents may be
challenged. If such challenges are brought, the patents may be
invalidated. We cannot assure
28
you that we will develop proprietary products or technologies
that are patentable, that any issued patent will provide us with
any competitive advantages or will not be challenged by third
parties, or that the patents of others will not materially and
adversely affect our ability to do business.
Litigation may be necessary to protect our proprietary
technology. Any such litigation may be time-consuming and
costly. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
In addition, the laws of some foreign countries do not protect
proprietary rights to as great an extent as do the laws of the
United States. We cannot assure you that our means of protecting
our proprietary rights will be adequate or that our competitors
will not independently develop similar technology, duplicate our
products, or design around patents issued to us or other
intellectual property rights of ours.
We are subject to intellectual property infringement claims. We
may, from time to time, receive claims that we are infringing
third parties intellectual property rights. Third parties
may in the future claim infringement by us with respect to
current or future products, patents, trademarks, or other
proprietary rights. We expect that companies in the appliance
market will increasingly be subject to infringement claims as
the number of products and competitors in our industry segment
grows and the functionality of products in different industry
segments overlaps. Any such claims could be time-consuming,
result in costly litigation, cause product shipment delays,
require us to redesign our products, or require us to enter into
royalty or licensing agreements, any of which could materially
and adversely affect our operating results. Such royalty or
licensing agreements, if required, may not be available on terms
acceptable to us or at all.
Our
business is subject to increasingly complex corporate
governance, public disclosure, accounting, and tax requirements
and environmental legislation that have increased both our costs
and the risk of noncompliance.
Because our common stock is publicly traded, we are subject to
certain rules and regulations of federal, state, and financial
market exchange entities charged with the protection of
investors and the oversight of companies whose securities are
publicly traded. These entities, including the Public Company
Accounting Oversight Board, the SEC, and NASDAQ, have
implemented new requirements and regulations and continue
developing additional regulations and requirements in response
to recent corporate scandals and laws enacted by Congress, most
notably the Sarbanes-Oxley Act of 2002. Our efforts to comply
with these new regulations have resulted in, and are likely to
continue resulting in, increased general and administrative
expenses and diversion of management time and attention from
revenue-generating activities to compliance activities.
We have recently completed our evaluation of our internal
controls over financial reporting as required by
Section 404 of the Sarbanes-Oxley Act of 2002. Although our
assessment, testing, and evaluation resulted in our conclusion
that as of April 30, 2006, our internal controls over
financial reporting were effective, we cannot predict the
outcome of our testing in future periods. If our internal
controls are ineffective in future periods, our business and
reputation could be harmed. We may incur additional expenses and
commitment of managements time in connection with further
evaluations, either of which could materially increase our
operating expenses and accordingly reduce our net income.
The impact of option expensing under SFAS No. 123R
will result in lower reported earnings per share, which could
negatively impact our future stock price. This could also impact
our ability to use or our future practice of utilizing,
broad-based employee stock plans to attract, reward, and retain
employees, which could also adversely impact our operations. In
addition, the option pricing models used to estimate the fair
value of employee stock options are based on highly subjective
inputs and assumptions. If another party asserts that the fair
value of our employee stock options is misstated, securities
class action litigation could be brought against us, or the
market price of our common stock could decline, or both could
occur. As a result, we could incur significant losses, and our
operating results may be below our expectations and those of
investors and stock market analysts.
We also face increasing complexity in our product design and
procurement operations as we adjust to new and upcoming
requirements relating to the materials composition of many of
our products. The European Union (EU) has adopted
two directives to facilitate the recycling of electrical and
electronic equipment sold in the EU. One of these is the
Restriction on the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment
29
(RoHS) directive. The RoHS directive restricts the
use of lead, mercury, and certain other substances in electrical
and electronic products placed on the market in the European
Union after July 1, 2006.
In connection with our compliance with such environmental laws
and regulations, we could incur substantial costs (including
excess component inventory) and be subject to disruptions to our
operations and logistics. In addition, we will need to ensure
that we can manufacture compliant products, and that we can be
assured a supply of compliant components from suppliers. Similar
laws and regulations have been or may be enacted in other
regions, including in the United States, China, and Japan. Other
environmental regulations may require us to reengineer our
products to utilize components that are more environmentally
compatible, and such reengineering and component substitution
may result in additional costs to us. Although we do not
anticipate any material adverse effects based on the nature of
our operations and the effect of such laws, there is no
assurance that such existing laws or future laws will not have a
material adverse effect on our business.
The
U.S. government has contributed to our revenue growth and
become an important customer for us. However, government demand
is unpredictable, and there is no guarantee of future revenue
growth from the U.S. government.
The U.S. government has become an important customer for
the storage market and for us. Government agencies are subject
to budgetary processes and expenditure constraints that could
lead to delays or decreased capital expenditures in IT spending
on infrastructures. If the government or individual agencies
within the government reduce or shift their capital spending
pattern, our financial results may be harmed. We cannot assure
you that revenue from the U.S. government will continue to
grow in the future.
Item 1B. Unresolved
Staff Comments
There are currently no unresolved issues with respect to any
Commission staffs written comments that were received at
least 180 days before the end of the Companys fiscal
year to which this report relates and that relate to the
Companys periodic or current reports under the Act.
On April 28, 2006, the Company received a comment letter
from the staff of the Commission relating to a routine review of
the Companys periodic and current reports under the Act.
The Company is currently in the process of working to resolve
these comments with the staff.
Item 2. Properties
Our headquarters site for corporate general administration,
sales and marketing, research and development, global services,
and manufacturing operations is located in Sunnyvale,
California. We own and occupy approximately 800,000 square
feet of space in buildings at our Sunnyvale headquarters.
We have commitments related to a lease arrangement with BNP
Paribas LLC (BNP) for approximately
190,000 square feet of office space to be located on land
currently owned by us in Sunnyvale, California (as further
described below under Contractual Cash Obligations and
Other Commercial Commitments). We expect to pay lease
payments on the completed buildings from BNP on September 2007
for a term of five years. We have the option to renew the lease
for two consecutive five-year periods upon approval by BNP.
We lease other sales offices and research and development
facilities throughout the United States and internationally. We
expect that our existing facilities and those being developed in
Sunnyvale, California; RTP, North Carolina; and worldwide are
adequate for our requirements over at least the next two years
and that additional space will be available as needed.
See additional discussion regarding properties in
Note 4 under Item 8. Financial Statements and
Supplementary Data Notes to Consolidated
Financial Statements and Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital
Resources.
30
Item 3. Legal
Proceedings
We are subject to legal proceedings, claims, and litigation
arising in the ordinary course of business. We defend ourselves
vigorously against any such claims. While the outcome of these
matters is currently not determinable, management does not
expect that the ultimate costs to resolve these matters will
have a material adverse effect on our consolidated financial
position, results of operations, or cash flows.
Item 4. Submissions
of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this Annual
Report on
Form 10-K.
31
PART II
Item 5. Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Our common stock commenced trading on the Nasdaq National Market
on November 21, 1995, and is traded under the symbol
NTAP. As of April 30, 2006 there were 1,384
holders of record of the common stock. The closing price for our
common stock on July 10, 2006 was $31.47. The following
table sets forth for the periods indicated the high and low
closing sale prices for our common stock as reported on the
Nasdaq National Market.
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Fiscal 2006
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Fiscal 2005
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High
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Low
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High
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Low
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First Quarter
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$
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30.47
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$
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25.51
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$
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21.53
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$
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17.05
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Second Quarter
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27.12
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22.77
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24.83
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16.57
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Third Quarter
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32.67
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26.92
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34.64
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24.98
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Fourth Quarter
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37.79
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30.81
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34.36
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25.91
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We believe that a number of factors may cause the market price
of our common stock to fluctuate significantly. See
Item 1. Business Risk Factors.
Dividend
Policy
We have never paid cash dividends on our capital stock. We
currently anticipate retaining all available funds, if any, to
finance internal growth and product development as well as other
possible management initiatives, including stock repurchases and
acquisitions. Payment of dividends in the future will depend
upon our earnings and financial condition and such other factors
as the directors may consider or deem appropriate at the time.
Information regarding securities authorized for issuance under
equity compensation plans is incorporated by reference from our
Proxy Statement for the 2006 Annual Meeting of Stockholders.
Unregistered
Securities Sold in Fiscal 2006
On August 26, 2005, we acquired Decru, Inc.
(Decru) which resulted in the issuance of
8.3 million shares of our common stock with a fair
value of $191.9 millions, 1.9 million shares of stock
options and restricted stock with a fair value of
$36.1 million and the payment of $54.5 million in
cash, and $0.7 million acquisition-related transaction
costs, for a total purchase price of $283.2 million.
We relied on an exemption from registration pursuant to
Section 3(a)10 of the Securities Act and the related
fairness hearing relating to our issuance of unregistered
securities in connection with the Decru merger. On
September 2, 2005, a
Form S-8
registration statement was filed with the SEC to register the
assumed options of the Decru, Inc. 2001 Equity Incentive Plan.
See Note 7 for securities authorized for issuance under our
Equity Compensation Plans.
32
Issuer
Purchases of Equity Securities
The table below sets forth activity in the fourth quarter of
fiscal 2006:
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Total Number of
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Shares Purchased as
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Approximate Dollar Value
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Average
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Part of the
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of Shares That May yet be
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Shares
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Price Paid
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Repurchase
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Purchased under the
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Period
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Purchased
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per Share
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Program(1)
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Repurchase Program(2)
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January 28,
2006 February 24, 2006
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$
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29,177,787
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$
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504,416,692
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February 25,
2006 March 24, 2006
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1,284,400
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$
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34.90
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30,462,187
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$
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459,590,424
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March 25,
2006 April 30, 2006
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1,534,172
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$
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35.16
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31,996,359
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$
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405,655,787
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Total
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2,818,572
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$
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35.04
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31,996,359
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$
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405,655,787
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(1) |
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This amount represented total number of shares purchased under
our publicly announced repurchase programs since inception. |
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(2) |
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Through April 30, 2006, the Board of Directors had
authorized the repurchase of up to $650,000,000 in shares of our
outstanding common stock. At April 30, 2006, $405,655,787
remained available for future repurchases. The stock repurchase
program may be suspended or discontinued at any time. |
Item 6. Selected
Financial Data
The data set forth below are qualified in their entirety by
reference to, and should be read in conjunction with,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements and related notes thereto included in this
Annual Report on
Form 10-K.
Five
fiscal years ended April 30, 2006
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2006
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2005
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2004
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2003
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2002
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(In thousands, except per-share
amounts)
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Total Revenues
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$
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2,066,456
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$
|
1,598,131
|
|
|
$
|
1,170,310
|
|
|
$
|
892,068
|
|
|
$
|
798,369
|
|
Income (Loss) from Operations
|
|
|
308,291
|
|
|
|
253,187
|
|
|
|
158,463
|
|
|
|
87,606
|
|
|
|
(1,062
|
)
|
Net Income(1)
|
|
|
266,452
|
|
|
|
225,754
|
|
|
|
152,087
|
|
|
|
76,472
|
|
|
|
3,033
|
|
Net Income per Share, Basic
|
|
|
0.72
|
|
|
|
0.63
|
|
|
|
0.44
|
|
|
|
0.23
|
|
|
|
0.01
|
|
Net Income per Share, Diluted
|
|
|
0.69
|
|
|
|
0.59
|
|
|
|
0.42
|
|
|
|
0.22
|
|
|
|
0.01
|
|
Cash, Cash Equivalents and
Short-Term Investments
|
|
|
1,322,892
|
|
|
|
1,169,965
|
|
|
|
807,965
|
|
|
|
618,838
|
|
|
|
454,127
|
|
Total Assets
|
|
|
3,260,965
|
|
|
|
2,372,647
|
|
|
|
1,877,266
|
|
|
|
1,319,173
|
|
|
|
1,108,806
|
|
Short-Term Debt
|
|
|
133,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Deferred Revenue
|
|
|
282,149
|
|
|
|
187,180
|
|
|
|
112,337
|
|
|
|
63,698
|
|
|
|
31,036
|
|
Long-Term Debt and Other
|
|
|
138,200
|
|
|
|
4,474
|
|
|
|
4,858
|
|
|
|
3,102
|
|
|
|
3,734
|
|
Total Stockholders Equity
|
|
|
1,923,453
|
|
|
|
1,660,804
|
|
|
|
1,415,848
|
|
|
|
987,357
|
|
|
|
858,476
|
|
|
|
|
(1) |
|
Net income for fiscal 2006 included an American Jobs Creation
Act income tax expense of $22.5 million or approximately
$0.06 per share. Net income for fiscal 2004 included an
income tax benefit of $16.8 million or approximately
$0.05 per share associated with a favorable foreign tax
ruling. Net income for fiscal 2002 includes restructuring
charges of $7.4 million (net of taxes of $4.8 million)
and impairment loss on investments of $7.8 million (net of
taxes of $5.2 million). |
33
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of our financial condition and results
of operations should be read together with the financial
statements and the related notes set forth under
Item 8. Financial Statements and Supplementary
Data. The following discussion also contains trend
information and other forward looking statements that involve a
number of risks and uncertainties. The Risk Factors set forth in
Item 1. Business are hereby incorporated into
the discussion by reference.
Overview
Enterprises are generating vast quantities of data. The rapidly
growing amount of data a company generates and the requirements
to retain data for longer periods of time are driving an
increasing demand for storage and data management solutions.
There is an increase in demand for online access to historical
information for business or regulatory requirements. The growth
in storage capacity requirements further increases the
complexity of data management. Managing the continued growth in
the volume of data and the on-demand information access continue
to challenge our enterprise customers. Companies are looking for
solutions to help simplify data storage, IT administration and
reduce total costs of ownership. Companies are migrating toward
modular, unified storage systems away from large, fixed,
expensive, frame-class arrays and inefficient direct-attached
storage. There is a growing trend toward consolidating storage
and serving a variety of applications from a unified storage
pool.
In recent years, enterprises have centralized terabytes of data
into networked storage environments to achieve lower costs,
higher utilization, and simplified management. On the other
hand, geopolitical events such as September 11, 2001;
natural disasters such as the Katrina Hurricane disaster;
government regulations such as Securities and Exchange
Commissions (SEC)
Rule 17a-4;
banking regulations such as Basel II; increased privacy
concerns such as laptop thefts with sensitive data; and industry
guidelines such as PCI (Payment Card Industry standard put forth
by Visa and MasterCard), have all put a spotlight on the need to
protect and retain data for both the public and private sector.
Consolidation, coupled with a higher probability of disasters,
has created a heightened sensitivity to the impact of data loss
and its disruptive impact on the business. At the same time,
compliance and privacy concerns are requiring enterprises to
retain data for long periods of time, as well as secure data at
rest. Data protection and retention have become a critical IT
priorities, requiring cost-effective storage solutions that can
help the enterprise protect itself from catastrophic business
disruption at an affordable cost.
We believe that our strategic investments are targeted at some
of the strongest growth areas of the storage market, such as
modular storage, data protection, data retention, data security,
iSCSI, and grid computing. However, if any storage market trends
and emerging standards on which we are basing our assumptions do
not materialize as anticipated, our business could be materially
adversely affected. The fiscal 2006 revenue growth and increased
gross margins have occurred while the market for our storage
products and solutions has grown more competitive with downward
pricing pressures that could negatively impact our future
revenue growth rate and our future gross margins. At the same
time, we anticipate and continue to experience further price
decline per petabyte for our products which may have an adverse
impact on our future gross margins if not offset by favorable
software mix and higher average selling prices associated with
new products. We expect our future gross margins to be
negatively affected by factors such as global service investment
cost; competition, indirect sales including OEM, high disk
content partially offset by new product introductions and
enhancements and product and add-on software mix.
Continued revenue growth is dependent on the introduction and
market acceptance of our new products. In fiscal 2007, we expect
to ship our new high-end products, launch our next-generation
operating system with enhanced storage grid functionality and
offer a comprehensive suite of data protection solutions. If we
fail to timely deliver new products or successfully integrate
acquired technology into our existing architecture, or if our
new products do not achieve market acceptance or if there is no
or reduced demand for these or our current products, we may
experience a decline in revenue. Additionally, we plan to invest
in the people, processes, and systems necessary to best optimize
our revenue growth and long-term profitability. However, we
cannot assure you that such investments will achieve our
financial objectives.
34
Fiscal
2006 Highlights
In fiscal 2006, we continued to enhance our enterprise
solutions, broaden our customer portfolio, extend our
channel/partner opportunities, build additional infrastructure
to manage our growth and broaden our total addressable market.
During the second quarter of fiscal 2006, we acquired Decru,
Inc. that develops and sells encryption software and appliances
which offers data protection solutions for enterprises and
governments, including regulatory compliance, privacy, secure
consolidation, and outsourcing. We believe that the current and
future potential for this technology will enable us to help our
customers manage their risk of data theft and corruption with
data encryption and authentication products. Some of the key
fiscal 2006 highlights included:
Penetrated in enterprise data centers and expanded our
breadth of
disk-to-disk
backup and security solutions. We achieved
revenue growth and profitability in fiscal 2006 driven primarily
by our new FAS3000 midrange product line. For the first time,
customers can choose to purchase Fibre Channel
and/or
lower-cost ATA drives, on the same system. Combined with our
patented RAID-DP protection and our FlexVol and FlexClone
technologies, the FAS3000 allows more cost-effective
ATA drives to be used safely in primary storage
applications, which offers the best price-performance value to
our customers. We expect our data center penetration will win
more NearStore deployments as customers choose NetApp data
production solutions to back up their mission critical systems.
During fiscal 2006, we introduced an array of products,
technologies, and services that highlight the broad range of
NetApp
disk-to-disk
backup and security solutions which simplify data backup
procedures, improve recoverability, and lower backup
infrastructure expenses. We believe that our new NearStore
Virtual Tape Library solution will further expand our market
opportunity as we can now provide
disk-to-disk
backup solutions for all open systems enterprise primary storage.
Extended our channel/partner opportunities. We
continued to make progress in penetrating and expanding our
business in enterprise data centers with mission critical
partners. Our fiscal 2006 channel mix demonstrated increased
expansion through our partner programs, with approximately 55.5%
of our business coming through indirect channels and the
remaining 44.5% coming through direct sales. The majority of our
block-based storage business and the U.S. Federal business
came from indirect channels. Higher growth rates in our indirect
channels demonstrated our increasing leverage, giving us broader
market reach and increasing enterprise penetration.
Expanded our global services and support. It
is an element of our strategy to expand and offer a global,
comprehensive,
end-to-end
suite of world-class service and support solutions designed to
help our customers meet their goals of simplifying their storage
solutions. We increased our business with our top enterprise
customers who typically purchase more complete and longer-term
service packages. The growth in service revenue in fiscal 2006
was also driven by increases in professional services. We expect
to continue to expand our global services and support and
believe that such investments will help accelerate the adoption
rate of our technology. We cannot assure you that service
revenue will continue to grow at previous rates. We expect to
invest in our services infrastructure commensurate with our
revenue growth.
Broadened our total addressable market and extended our
product lines into adjacent spaces. We have
brought a more comprehensive set of products to the market
place, with the new high end offering next generation operating
system with enhanced storage grid functionality, the
disk-to-disk
backup solution on the VTL space, the Decru security and
encryption solutions and in early fiscal 2007 our entry into the
small-to-medium
businesses. We also continued to broaden our addressable market
by increasing our focus on the V-Series product line, which uses
virtualization to let customers take advantage of the management
simplicity of NetApp Data ONTAP with their storage from other
vendors.
Fiscal
2006 Financial Performance
|
|
|
|
|
Our revenues for fiscal 2006 were $2.1 billion, a 29.3%
increase over the same period a year ago. Our revenues for
fiscal 2005 were $1.6 billion, a 36.6% increase compared to
revenues of $1.2 billion in fiscal 2004. Our revenue growth
was driven by the adoption of our new products targeted at the
areas of fastest growth in storage, secondary storage for
compliance applications and our broadened NetApp storage
solutions that simplify data management.
|
35
|
|
|
|
|
Our overall gross margins were 60.8%, 61.0% and 60.2% in fiscal
2006, 2005 and 2004, respectively. The slight decline in our
overall gross margins for fiscal 2006 compared to fiscal 2005
was primarily due to a shift in revenue mix with an increase in
disk sales and IBM OEM business partially offset by improved
service gross margins. The improvement in our overall gross
margins for fiscal 2005 compared to fiscal 2004 was primarily
attributable to a favorable change in product and add-on
software mix and improved services margins.
|
|
|
|
Cash, cash equivalents and short-term investments increased to
$1,322.9 million, compared to $1,170.0 million as of
April 30, 2005, due primarily to cash generated from
operations partially offset by cash repurchases of our common
stock of $488.9 million and net cash paid of
$53.7 million in connection with the Alacritus and Decru
acquisitions. Days Sales Outstanding in receivable were
63 days, and 60 days, respectively, as of
April 30, 2006 and 2005, reflecting increased sales and
less linear shipments. Inventory turns were 14.7 times and 17.9
times, respectively, as of April 30, 2006 and 2005 due to
higher consigned inventory for IBM sales and new products at
customer sites. Deferred revenue increased to
$681.5 million in fiscal 2006 from $449.2 million
reported in fiscal 2005 due to higher software subscription and
service arrangements attributable to our continuing shift toward
larger enterprise customers. Capital purchases of plant,
property, and equipment for fiscal 2006, 2005 and 2004 were
$132.9 million, $93.6 million and $48.7 million,
respectively, reflecting continued worldwide capital investment
to meet our business growth.
|
Critical
Accounting Estimates and Policies
Our discussion and analysis of financial condition and results
of operations are based upon our Consolidated Financial
Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of such statements requires us to make
estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period and the
reported amounts of assets and liabilities as of the date of the
financial statements. Our estimates are based on historical
experience and other assumptions that we consider to be
appropriate in the circumstances. However, actual future results
may vary from our estimates.
We believe that the following accounting policies are
critical as defined by the Securities and Exchange
Commission, in that they are both highly important to the
portrayal of our financial condition and results, and require
difficult management judgments and assumptions about matters
that are inherently uncertain. We also have other important
policies, including those related to derivative instruments and
concentration of credit risk. However, these policies do not
meet the definition of critical accounting policies because they
do not generally require us to make estimates or judgments that
are difficult or subjective. These policies are discussed in
Note 2 to the Consolidated Financial Statements
accompanying this Annual Report on
Form 10-K.
We believe the accounting policies described below are the ones
that most frequently require us to make estimates and judgments,
and therefore are critical to the understanding of our results
of operations:
|
|
|
|
|
Revenue recognition and allowances
|
|
|
|
Valuation of goodwill and intangibles
|
|
|
|
Accounting for income taxes
|
|
|
|
Inventory write-downs
|
|
|
|
Restructuring accruals
|
|
|
|
Impairment losses on investments
|
|
|
|
Accounting for stock-based compensation
|
|
|
|
Loss contingencies
|
36
Revenue
Recognition and Allowances
We apply the provisions of Statement of Position
(SOP)
No. 97-2,
Software Revenue Recognition, and related
interpretations to our product sales because we believe our
firmware and operating software are essential to the
functionality of our hardware products. We recognize revenue
when:
|
|
|
|
|
Persuasive evidence of an arrangement
exists. It is our customary practice to have a
purchase order
and/or
contract prior to recognizing revenue on an arrangement from our
end user customers, value-added resellers, or distributors.
|
|
|
|
Delivery has occurred. Our product is
physically delivered to our customers, generally with standard
transfer terms such as FOB origin. We typically do not allow for
restocking rights with any of our value-added resellers or
distributors. Products shipped with acceptance criteria or
return rights are not recognized as revenue until all criteria
are achieved. If undelivered products or services exist that are
essential to the functionality of the delivered product in an
arrangement, delivery is not considered to have occurred.
|
|
|
|
The fee is fixed or determinable. Arrangements
with payment terms extending beyond our standard terms,
conditions and practices are not considered to be fixed or
determinable. Revenue from such arrangements is recognized as
the fees become due and payable. We typically do not allow for
price-protection rights with any of our value-added resellers or
distributors.
|
|
|
|
Collection is probable. Probability of
collection is assessed on a
customer-by-customer
basis. Customers are subject to a credit review process that
evaluates the customers financial position and ultimately
their ability to pay. If it is determined at the outset of an
arrangement that collection is not probable based upon our
review process, revenue is deferred and recognized when
collection becomes probable.
|
For arrangements with multiple elements, we allocate revenue to
each element using the residual method. When all of the
undelivered elements are software-related, this allocation is
based on vendor specific objective evidence of fair value of the
undelivered items. When the undelivered elements include
non-software related items that are only sold as a bundle with
software related items, this allocation is based on objective
and reliable evidence of fair value, in accordance with Emerging
Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21).
We defer the portion of the arrangement fee equal to the fair
value of the undelivered elements until they are delivered.
Vendor specific objective evidence of fair value is based on the
price charged when the element is sold separately. If vendor
specific evidence cannot be obtained to determine fair value of
the undelivered elements, revenue from the entire arrangement
would be deferred and recognized as these elements are
delivered. This would have a material effect on the timing of
product revenues.
A typical arrangement includes product, software subscription,
and maintenance. Some arrangements include technical consulting
and training. Software subscriptions represent the right to
unspecified product upgrades and enhancements on a
when-and-if-available
basis, bug fixes, and patch releases. Service maintenance
includes contracts for technical support and hardware
maintenance. Revenue from software subscriptions and service
maintenance is recognized ratably over the contractual term,
generally one to three years. We typically sell technical
consulting services and training separately from any of our
other revenue elements, either on a time and materials basis or
for fixed price standard projects. The type of work that is
performed is not essential to the functionality of the software
or hardware. Accordingly, we recognize revenue as the services
are performed and in accordance with
EITF 03-05
Applicability of AICPA Statement of Position 97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental
Software. Revenue from hardware installation services
is a non-software deliverable because the software is not
essential to the functionality of the installation service and
is therefore outside of the scope of
SOP 97-2.
Revenue from shipping and handling is included in product
revenue and its related cost included in cost of product revenue.
We record reductions to revenue for estimated sales returns at
the time of shipment. Sales returns are estimated based on
historical sales returns, changes in customer demand, current
trends, and our expectations regarding future experience.
Reductions to revenue associated with sales returns include
consideration of historical sales levels, the timing and
magnitude of historical sales returns and a projection of this
experience into the future. We monitor and analyze the accuracy
of sales returns estimate by reviewing actual returns and adjust
it for future expectations to
37
determine the adequacy of our current and future reserve needs.
If actual future returns and allowances differ from past
experience and expectation, additional allowances may be
required.
We also maintain a separate allowance for doubtful accounts for
estimated losses based on our assessment of the collectibility
of specific customer accounts and the aging of the accounts
receivable. We analyze accounts receivable and historical bad
debts, customer concentrations, customer solvency, current
economic and geographic trends, and changes in customer payment
terms and practices when evaluating the adequacy of the
allowance for doubtful accounts. In circumstances where we are
aware of a specific customers inability to meet its
financial obligations to us, a specific allowance for bad debt
is estimated and recorded which reduces the recognized
receivable to the estimated amount we believe will ultimately be
collected. We monitor and analyze the accuracy of allowance for
doubtful accounts estimate by reviewing past collectibility and
adjust it for future expectations to determine the adequacy of
our current and future allowance. Our allowance for doubtful
accounts as of April 30, 2006 was $2.4 million,
compared to $5.4 million as of April 30, 2005. If the
financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.
Valuation
of Goodwill and Intangibles
Identifiable intangible assets are amortized over time, while
in-process research and development is recorded as a charge on
the date of acquisition and goodwill is capitalized, subject to
periodic review for impairment. Accordingly, the allocation of
the acquisition cost to identifiable intangible assets has a
significant impact on our future operating results. The
allocation process requires extensive use of estimates and
assumptions, including estimates of future cash flows expected
to be generated by the acquired assets. Should conditions be
different than managements current assessment, material
write-downs of the fair value of intangible assets may be
required. We periodically review the estimated remaining useful
lives of our other intangible assets. A reduction in the
estimate of remaining useful life could result in accelerated
amortization expense or a write-down in future periods. As such,
any future write-downs of these assets would adversely affect
our gross and operating margins.
Under our accounting policy we perform an annual review in the
fourth quarter of each fiscal year, or more often if indicators
of impairment exist. Triggering events for impairment reviews
may be indicators such as adverse industry or economic trends,
restructuring actions, lower projections of profitability, or a
sustained decline in our market capitalization. Evaluations of
possible impairment and, if applicable, adjustments to carrying
values, require us to estimate, among other factors, future cash
flows, useful lives, and fair market values of our reporting
units and assets. When we conduct our evaluation of goodwill,
the fair value of goodwill is assessed using valuation
techniques that require significant management judgment. Should
conditions be different from managements last assessment,
significant write-downs of goodwill may be required. In fiscal
2006 and 2005, we performed such evaluation and found no
impairment. However, any future write-downs of goodwill would
adversely affect our operating margins. As of April 30,
2006, our assets included $487.5 million in goodwill. See
Note 14, Goodwill and Purchased Intangible
Assets to our consolidated financial statements.
During fiscal 2006, we adjusted goodwill by $3.5 million
and $2.1 million relating to the tax benefits associated
with the subsequent exercise of previously vested assumed
Spinnaker and Decru options, respectively. Estimated future
adjustments to goodwill related to the tax benefits associated
with subsequent exercise of previously vested assumed options by
previous acquisitions are approximately $8.4 million,
subject to future cancellations relating to employee
terminations.
Accounting
for Income Taxes
The determination of our tax provision is subject to judgments
and estimates due to operations in several tax jurisdictions
outside the U.S. Earnings derived from our international
business are generally taxed at rates that are lower than
U.S. rates, resulting in a reduction of our effective tax
rate. The ability to maintain our current effective tax rate is
contingent upon existing tax laws in both the U.S. and the
respective countries in which our international subsidiaries are
located. Future changes in domestic or international tax laws
could affect the continued realization of the tax benefits we
are currently receiving and expect to receive from international
business. In addition, a
38
decrease in the percentage of our total earnings from our
international business or in the mix of international business
among particular tax jurisdictions could increase our overall
effective tax rate.
While most of our profits are earned in foreign jurisdictions
with income tax rates generally lower than the combined
U.S. federal and state income tax rates, judgment must be
made with respect to other estimates of income tax provision,
such as R&D tax credits and valuation allowances against
deferred tax assets, primarily those set up for net operating
losses and income tax credits.
The carrying value of our net deferred tax assets, which
consists primarily of the reversal of net deductible temporary
differences including credits and net operating loss
carryforwards, assumes that we will be able to generate
sufficient future taxable income to fully utilize these tax
attributes. If we do not generate sufficient future income, the
realization of these deferred tax assets may be impaired,
resulting in additional income tax expense. We have provided a
valuation allowance of $431.2 million as of April 30,
2006 on the deferred tax attributes associated with the exercise
of employee stock options (primarily credits and net operating
loss carryforwards) because of uncertainty regarding their
realization due to the expectation that future employee stock
option exercises will reduce our ability to generate sufficient
taxable income in the future. In the event these attributes are
realized, the associated tax benefit will be credited to
stockholders equity, rather than as a reduction in the
income tax provision.
Prior to fiscal year 2006, our current effective tax rate
assumed that U.S. income taxes were not provided for
undistributed earnings of certain
non-U.S. subsidiaries.
However, pursuant to the one-time incentive created under
Section 965 of The American Jobs Creation Act of 2004 (the
Jobs Act), our foreign subsidiaries remitted
approximately $405.5 million in accumulated earned income
on which we incurred approximately $22.5 million in federal
and state income taxes in the fourth quarter of fiscal year
2006. In fiscal 2004, we recorded an income tax benefit of
$16.8 million associated with a favorable foreign tax
ruling. This favorable ruling from the Netherlands provided for
retroactive benefits dating back to fiscal year 2001 and
continuing until December 31, 2005. Subsequent to our
fiscal 2005 year end, we obtained a new tax ruling from the
Netherlands, which terminated the first ruling and provides for
continuing favorable tax rate benefits until April 30,
2010. As of April 30, 2006, our Netherlands subsidiary had
a conditional royalty expense carryforward of $51.7 million
that may become available for offset against future Dutch
income. The carryforward may not, however, be used to offset
income under the new Dutch tax ruling expiring April 30,
2010. We have established a valuation allowance against the
deferred tax asset for this carryforward based upon our belief
that we will not be able to utilize this attribute.
We have been notified of examinations in the U.S. and several
foreign tax jurisdictions. Our management does not believe,
based upon information currently known to it that the final
resolution of any of these audits will have a material adverse
effect on our results of operations. However, if upon the
conclusion of these audits the ultimate determination of our
taxes owed in any of these tax jurisdictions is for an amount in
excess of the tax provision we have recorded or reserved for,
our overall effective tax rate may be adversely impacted.
Beginning with the fiscal year 2007 implementation of
SFAS No. 123R, we may experience adverse impacts to
future years effective tax rates in the event that we determine
that our APIC pool as of the beginning of fiscal year 2007 is
not sufficient enough to cover the impacts of future stock
compensation shortfalls.
Inventory
Write-Downs
Our inventories net balance was $64.5 million as of
April 30, 2006, compared with $39.0 million as of
April 30, 2005. Inventories are stated at the lower of cost
(first-in,
first-out basis) or market. We perform an in depth excess and
obsolete analysis of our inventory based upon assumptions about
future demand and market conditions. We adjust the inventory
value based on estimated excess and obsolete inventories
determined primarily by future demand forecasts. Although we
strive for accuracy in our forecasts of future product demand,
any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our
inventory and commitments, and our reported results. If actual
market conditions are less favorable than those projected,
additional write-downs and other charges against earnings may be
required. If actual market conditions are more favorable, we may
realize higher gross margins in the period when the written-down
inventory is sold.
39
We record purchase commitment liabilities with our contract
manufacturers and suppliers as a result of changes in demand
forecasts or as we transition our products. As of April 30,
2006, we do not have purchase commitment under such arrangements.
We engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our
component suppliers. We also provide for the estimated cost of
known product failures based on known quality issues when they
arise. Should actual cost of product failure differ from our
estimates, revisions to the estimated liability would be
required.
We are subject to a variety of federal, state, local and foreign
environmental regulations relating to the use, storage,
discharge and disposal of hazardous chemicals used during our
manufacturing process or requiring design changes or recycling
of products we manufacture. We will continue to monitor our
environmental compliance and could incur higher costs including
additional reserves for excess component inventory.
Restructuring
Accruals
In fiscal 2002, as a result of continuing unfavorable economic
conditions and a reduction in IT spending rates, we implemented
two restructuring plans, which included reductions in our
workforce and a consolidation of our facilities. In fiscal 2006,
we implemented the third restructuring plan related to the move
of our global service center operations. In determining
restructuring charges, we analyze our future business
requirements in order to properly align and manage our business
commensurate with our future revenue levels.
Our restructuring costs, and any resulting accruals, involve
significant estimates made by management using the best
information available at the time the estimates are made, some
of which may be provided by third parties. In recording
severance reserves, we accrue a liability when the following
conditions have been met: employees rights to receive
compensation is attributable to employees services already
rendered; the obligation relates to rights that vest or
accumulate; payment of the compensation is probable; and the
amount can be reasonably estimated. In recording facilities
lease restructuring reserve, we make various assumptions,
including the time period over which the facilities are expected
to be vacant, expected sublease terms, expected sublease rates,
anticipated future operating expenses, and expected future use
of the facilities.
Our estimates involve a number of risks and uncertainties, some
of which are beyond our control, including future real estate
market conditions and our ability to successfully enter into
subleases or lease termination agreements with terms as
favorable as those assumed when arriving at our estimates. We
regularly evaluate a number of factors to determine the
appropriateness and reasonableness of our restructuring and
lease loss accruals including the various assumptions noted
above. If actual results differ significantly from our
estimates, we may be required to adjust our restructuring and
lease loss accruals in the future. In fiscal 2005, we estimated
our facility restructuring reserve to be $4.5 million. Our
fiscal 2006 estimate for the facility restructuring reserve was
$2.7 million which included a $1.0 million adjustment
due to the execution of new sublease agreement for our Tewksbury
facility net of related cost.
Impairment
Losses on Investments
As of April 30, 2006, our short-term investments have been
classified as
available-for-sale
and are carried at fair value. There have been no significant
declines in fair value of investments that are considered to be
other-than-temporary,
for any of the three years in the period ended April 30,
2006. The fair value of our
available-for-sale
investment reflected in the Consolidated Balance Sheets was
$1,102.8 million and $976.4 million as of
April 30, 2006 and 2005, respectively. We have not
identified any of these declines to be other than temporary as
market declines of our investments have been caused by interest
rate changes and were not due to credit worthiness. Because we
have the ability to hold these investments until maturity, we
would not expect any significant decline in value of our
investments caused by market interest rate changes. We have no
impairment losses on our
available-for-sale
investment or investment in privately held companies for fiscal
2006, 2005 and 2004.
All of our
available-for-sale
investments and non-marketable equity securities are subject to
a periodic impairment review. Investments are considered to be
impaired when a decline in fair value is judged to be
40
other-than-temporary.
This determination requires significant judgment. For publicly
traded investments, impairment is determined based upon the
specific facts and circumstances present at the time, including
factors such as current economic and market conditions, the
credit rating of the securitys issuer, the length of time
an investments fair value has been below our carrying
value, and our ability to hold investments to maturity. If an
investments decline in fair value, caused by factors other
than changes in interest rates, is deemed to be
other-than-temporary,
we would reduce its carrying value to its estimated fair value,
as determined based on quoted market prices or liquidation
values. Our investments in privately held companies were
$11.0 million and $1.8 million as of April 30,
2006 and 2005, respectively. For non-marketable equity
securities, the impairment analysis requires the identification
of events or circumstances that would likely have a significant
adverse effect on the fair value of the investment, including,
revenue and earnings trends, overall business prospects, limited
capital resources, limited prospects of receiving additional
financing, limited prospects for liquidity of the related
securities and general market conditions in the investees
industry.
Accounting
for Stock-Based Compensation
We adopted the disclosure-only provisions of
SFAS No. 123 as amended by SFAS No. 148 and
provide pro forma disclosure using the Black-Scholes option
pricing model to value our employee stock options. The fair
value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model, and is not
remeasured as a result of subsequent stock price fluctuations.
Option pricing models require the input of highly subjective
assumptions, including the expected stock price volatility,
expected life and forfeiture rate. We are currently evaluating
the expected volatility rates in accordance with
SAB No. 107, including the use of historical, blended
and implied volatility. As of May 1, 2006, the contractual
life of our stock options has been shortened to seven years from
ten years for options issued on or after this date, and to the
extent that the shorter life changes employees exercise
behavior, it may change the expected term of an option going
forward. SFAS No. 123R will require us to include
estimated forfeitures, and therefore, the required adoption of
SFAS No. 123R could have a material impact on the
timing of and, based on the accuracy of estimates of future
actual forfeiters, the amount stock compensation expense. Any
changes in these highly objective assumptions may significantly
impact the stock compensation expenses for the future.
In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123R), see discussion under
New Accounting Standards below. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107
(SAB 107). SAB 107 includes interpretive
guidance for the initial implementation of
SFAS No. 123R. We will apply the principles of
SAB 107 in conjunction with our adoption of
SFAS No. 123R in our first quarter of fiscal 2007,
which begins on May 1, 2006.
Loss
Contingencies
We are subject to the possibility of various loss contingencies
arising in the course of business. We consider the likelihood of
the loss or impairment of an asset or the incurrence of a
liability as well as our ability to reasonably estimate the
amount of loss in determining loss contingencies. An estimated
loss contingency is accrued when it is probable that a liability
has been incurred or an asset has been impaired and the amount
of loss can be reasonably estimated. In fiscal 2006, 2005 and
2004, we did not identify or accrue for any loss contingencies.
We regularly evaluate current information available to us to
determine whether such accruals should be adjusted.
New
Accounting Standards
In November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position
FSP 115-1
which addresses the determination as to when an investment is
considered impaired, whether that impairment is
other-than-temporary,
and the measurement of an impairment loss. This FSP also
includes accounting considerations subsequent to the recognition
of an
other-than-temporary
impairment and requires certain disclosures about unrealized
losses that have not been recognized as
other-than-temporary
impairments. The guidance in this FSP amends Statement of
Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities and APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock. The
guidance in FSP 115-1 shall be applied to reporting periods
beginning after December 15, 2005. We are required to adopt
FSP 115-1 for fiscal years beginning after May 1, 2006. We
are
41
currently evaluating the effect that the adoption of FSP 115-1
will have on our consolidated results of operations and
financial condition but do not expect it to have a material
impact.
In June 2005, the FASB issued SFAS No. 154
(SFAS No. 154), Accounting Changes and
Error Corrections: a Replacement of Accounting Principles Board
Opinion No. 20 (APB 20) and FASB Statement
No 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting
principle unless it is impracticable to do so. Retrospective
application refers to the application of a different accounting
principle to previously issued financial statements as if that
principle had always been used. SFAS No. 154s
retrospective-application requirement replaces
APB 20s requirement to recognize most voluntary
changes in accounting principle by including in net income of
the period of the change the cumulative effect of changing to
the new accounting principle. This Statement defines
retrospective application as the application of a different
accounting principle to prior accounting periods as if that
principle had always been used or as the adjustment of
previously issued financial statements to reflect a change in
the reporting entity. This Statement also redefines restatement
as the revising of previously issued financial statements to
reflect the correction of an error. The requirements are
effective for accounting changes made in fiscal years beginning
after December 15, 2005 and will only impact the
consolidated financial statements in periods in which a change
in accounting principle is made.
In November 2004, the FASB issued SFAS No. 151
Inventory Costs (SFAS No. 151).
This statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage).
SFAS No. 151 requires that those items be recognized
as current-period charges. In addition, this Statement requires
that allocation of fixed production overhead to costs of
conversion be based upon the normal capacity of the production
facilities. The provisions of SFAS No. 151 are
effective for inventory cost incurred in fiscal years beginning
after June 15, 2005. As such, we are required to adopt
these provisions at the beginning of fiscal 2007, which begins
on May 1, 2006. We do not expect the adoption of
SFAS No. 151 to have a material impact on our
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R.
Generally, the requirements of SFAS No. 123R are
similar to those of SFAS No. 123. However,
SFAS No. 123R requires companies to now recognize all
share-based payments to employees, including grants of employee
stock options, in their statements of operations based on the
fair value of the payments. Pro forma disclosure will no longer
be an alternative. The effective date of the new standard for
our consolidated financial statements is the first quarter of
fiscal 2007, which begins on May 1, 2006.
In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 107, which provides guidance on the
implementation of SFAS No. 123R, Share-Based
Payments (SFAS No. 123R) (see discussion
below). In particular, SAB No. 107 provides key
guidance related to valuation methods (including assumptions
such as expected volatility and expected term), the accounting
for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123R, the modification of
employee share options prior to the adoption of
SFAS No. 123R, the classification of compensation
expense, capitalization of compensation cost related to
share-based payment arrangements, first-time adoption of
SFAS No. 123R in an interim period, and disclosures in
Managements Discussion and Analysis subsequent to the
adoption of SFAS No. 123R.
In November 2005, the FASB issued FSP
FAS 123R-3,
Transition Election and Accounting for Tax
Effects. The guidance provides a simplified
method to calculate the Additional Paid-In Capital (APIC) pool
for beginning balance of excess tax benefits and the method of
determining the subsequent impact on the pool of option awards
that are outstanding and fully or partially vested upon the
adoption of SFAS No. 123R beginning on May 1,
2006. In addition, this FSP addresses that when the alternative
APIC pool calculation is used, tax benefits related to certain
employee awards should be included as a cash flow from financing
activities and a cash outflow from operating activities within
the statements of cash flows. The FSP allows companies up to one
year from the later of the adoption date of
SFAS No. 123R or November 10, 2005 to evaluate
the available transition alternatives and make a one-time
election. We are in the process of evaluating the impact of the
new method provided by this guidance.
SFAS No. 123R and its related guidance permits public
companies to adopt its requirements using one of two methods:
modified prospective method or modified retrospective method. We
plan to adopt SFAS No. 123R using the modified
prospective method, in which compensation cost is recognized
beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based
payments granted after the effective date and
42
(b) based on the requirements of SFAS No. 123 for
all awards granted to employees prior to the effective date of
SFAS No. 123R that remain unvested on the effective
date. We will recognize in our results of operations the
compensation cost for stock-based awards issued after
April 30, 2006 on a straight-line basis over the requisite
service period for the entire award. For stock-based awards
issued prior to May 1, 2006, we amortized the related
compensation costs using the graded-vesting method.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using the APB 25
intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options as grant date value
equals fair value. The adoption of the SFAS No. 123R
fair value method will have a significant impact on our reported
results of operations because the stock-based compensation
expense will be charged directly against our reported earnings.
The pre-tax balance of unearned stock-based compensation to be
expensed in the period fiscal 2007 through 2010 related to
share-based awards unvested as of April 30, 2006, as
previously calculated under the disclosure-only requirements of
SFAS No. 123, is approximately $240.5 million. If
there are any modifications or cancellations of the underlying
unvested securities, we may be required to accelerate, increase,
or cancel any remaining unearned stock-based compensation
expense. To the extent that we grant additional equity
securities to employees or assume unvested securities in
connection with any acquisitions, our stock-based compensation
expense will be increased by the additional unearned
compensation resulting from those additional grants or
acquisitions. We anticipate that we will grant additional
employee stock options and restricted stock units in fiscal
2007. The fair value of these grants cannot be predicted with
certainty at this time due to the fact that the expense amount
will depend on the timing of new grants, the number of new
grants, changes in the market price or the volatility of our
common stock. However, we currently estimate that the impact on
our first fiscal quarter will be between
$0.07 $0.09 per share. As of May 1,
2006, the contractual life of our stock options has been
shortened to seven years from ten years for options issued on or
after this date, and to the extent that the shorter life changes
employees exercise behavior, it may change the expected
term of an option going forward. We are not aware of any other
changes in business practices and do not expect any violations
of debt covenants due to the adoption of SFAS No. 123R.
Results
of Operations
The following table sets forth certain consolidated statements
of income data as a percentage of total revenues for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
76.3
|
%
|
|
|
78.9
|
%
|
|
|
80.7
|
%
|
Software subscriptions
|
|
|
11.6
|
|
|
|
10.6
|
|
|
|
9.7
|
|
Service
|
|
|
12.1
|
|
|
|
10.5
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
30.1
|
|
|
|
30.4
|
|
|
|
31.6
|
|
Cost of software subscriptions
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Cost of service
|
|
|
9.0
|
|
|
|
8.5
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
60.8
|
|
|
|
61.0
|
|
|
|
60.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
28.9
|
|
|
|
29.1
|
|
|
|
29.9
|
|
Research and development
|
|
|
11.8
|
|
|
|
10.7
|
|
|
|
11.3
|
|
General and administrative
|
|
|
4.4
|
|
|
|
4.8
|
|
|
|
4.7
|
|
Acquired in process research and
development
|
|
|
0.2
|
|
|
|
|
|
|
|
0.4
|
|
Stock compensation
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.3
|
|
Restructuring charges (recoveries)
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
45.9
|
|
|
|
45.1
|
|
|
|
46.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income From Operations
|
|
|
14.9
|
|
|
|
15.9
|
|
|
|
13.5
|
|
Other Income (Expenses), Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2.1
|
|
|
|
1.5
|
|
|
|
1.2
|
|
Interest expense
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
Net gain on investments
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income, Net
|
|
|
2.1
|
|
|
|
1.4
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
17.0
|
|
|
|
17.3
|
|
|
|
14.6
|
|
Provision for Income Taxes
|
|
|
4.1
|
|
|
|
3.2
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
12.9
|
%
|
|
|
14.1
|
%
|
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2006 Compared to Fiscal 2005
Product Revenues Product revenues
increased by 25.1% to $1,577.4 million in fiscal 2006, from
$1,260.6 million in fiscal 2005. Product revenues growth
was across all geographies. This net increase year over year was
specifically attributable to increased software licenses, an
increase in units shipped, and an increase in demand for data
protection and mission-critical storage environments, partially
offset by a decline in shipments and lower average selling
prices of older generation products, lower
cost-per-megabyte
disks. Our systems are highly configurable because of customer
requirements in the open systems storage markets we serve. As a
result, the wide variation in customized configuration can
significantly impact revenue, cost of revenues, and gross margin
performance. Price changes, volumes and product model mix can
have an effect on changes in product revenues, the impact on
these forces is significantly affected by the configuration of
systems shipped.
Product revenues were favorably affected by the following
factors:
|
|
|
|
|
Increased revenues from our current product portfolio, such as
FAS980, and FAS270 storage systems; and introduction of new
products, such as FAS3020, FAS3050, and FAS6070 storage systems;
V3020, and V3050 storage virtualization systems; NetCache C2300,
and C3300 appliances and add-on software
|
|
|
|
Revenue generated from
disk-to-disk
backup/archival, and security solutions increased by 28.1% in
fiscal 2006 compared to fiscal 2005
|
|
|
|
Increased sales through indirect channels in absolute dollars,
including sales through our resellers, distributors, and OEM
partners, representing 55.5% and 51.2% of total revenues for
fiscal 2006 and 2005, respectively
|
Product revenues were negatively affected by the following
factors:
|
|
|
|
|
Lower-cost-per-megabyte disks which are a significant component
of our hardware costs. As performance has improved on these
devices, the related sales price we can charge per megabyte of
storage has decreased as well.
|
|
|
|
Declining average selling prices and unit sales of our older
products.
|
44
The Decru acquisition and the IBM OEM relationship did not have
a significant impact on the revenue for fiscal 2006. There can
be no assurance that IBM and Decru will contribute meaningful
revenue in future quarters. We also cannot assure you that we
will be able to maintain or increase market demand for our
products.
Software Subscriptions Revenues Software
subscriptions revenues increased by 40.9% to $239.1 million
in fiscal 2006, from $169.7 million in fiscal 2005 due
primarily to a larger installed base renewals, upgrades and an
increasing number of new enterprise customers. Software
subscriptions revenues represent 11.6% and 10.6% of total
revenues for fiscal 2006 and 2005, respectively.
Service Revenues Service revenues, which
include hardware support, professional services, and educational
services, increased by 48.9% to $249.9 million in fiscal
2006, from $167.8 million in fiscal 2005.
The increase in absolute dollars was due to the following
factors:
|
|
|
|
|
Professional service revenue increased by 49.0% to
$89.4 million in fiscal 2006 from $60.0 million in
fiscal 2005
|
|
|
|
An increasing number of enterprise customers, which typically
purchase more complete and generally longer-term service
packages than our non-enterprise customers
|
|
|
|
A growing installed base resulting in new customer support
contracts in addition to support contract renewals by existing
customers
|
While it is an element of our strategy to expand and offer a
more comprehensive, global enterprise support and service
solution, we cannot assure you that service revenue will grow at
the current rate in fiscal 2007.
A large portion of our service revenues is deferred and, in most
cases, recognized ratably over the service obligation periods,
which are typically one to three years, and are classified as
short-term and long-term deferred revenue on our Consolidated
Balance Sheets. Service revenues represented 12.1% and 10.5% of
total revenues for fiscal year 2006 and 2005, respectively.
International total
revenues International total revenues
(including U.S. exports) increased by 23.2% in fiscal year
2006 compared with fiscal 2005. International total revenues
were $943.8 million, or 45.7% of total revenues for fiscal
year 2006 compared with $765.8 million or 47.9% of total
revenues for fiscal 2005. The increase in international sales
was primarily a result of revenue growth from our European and
Asia Pacific geographies, driven by increased demand for our
solutions portfolio, new customers, and higher storage spending
in certain geographic regions as compared to the same period in
the prior fiscal year. We cannot assure you that we will be able
to maintain or increase international revenues in fiscal 2007.
Product Gross Margins Product gross
margins decreased to 60.5% for fiscal 2006, from 61.4% for
fiscal 2005.
Product gross margins were negatively affected by the following
factors:
|
|
|
|
|
Sales price reductions due to competitive pricing pressure and
selective pricing discounts
|
|
|
|
Increased sales through certain indirect channels, which may
have lower gross margins than our direct sales in certain
geographic regions
|
|
|
|
Sales of relatively lower margin add-on storage shelves and
hardware increased by 57.1% in fiscal 2006 compared to fiscal
2005
|
Product gross margins were favorably affected by the following
factors:
|
|
|
|
|
Favorable product and add-on software mix with software licenses
increasing by 32.8% in fiscal 2006 compared to fiscal 2005
|
|
|
|
Better disk utilization rates associated with sales of
higher-margins management software products like FlexClone and
FlexVol that run on the Data ONTAP 7G operating system allowing
customers to buy less disk storage but buy more high-value
software
|
|
|
|
Higher average selling prices for our newer products
|
45
We expect higher disk content associated with high-end storage
systems will negatively affect our gross margins in the future,
if not offset by software revenue and new products.
Amortization of existing technology from acquisitions included
in cost of product revenues was $11.8 million and
$3.4 million for fiscal 2006 and 2005, respectively.
Estimated future amortization of existing technology to cost of
product revenues relating to acquisitions will be
$15.5 million for each of fiscal years 2007 and 2008;
$14.7 million for fiscal year 2009; $10.3 million for
fiscal year 2010, $2.8 million for fiscal year 2011; and
none thereafter.
Software Subscriptions Gross
Margins Software subscriptions gross
margins increased slightly to 99.4% for fiscal 2006, from 99.1%
for fiscal 2005 due primarily to improved headcount utilization
and a larger installed base renewals, upgrades and an increasing
number of new enterprise customers.
Service Gross Margins Service gross
margins increased to 25.9% in fiscal 2006 compared to 19.4% in
fiscal 2005. Cost of service revenue increased by 36.9% to
$185.0 million in fiscal 2006, from $135.2 million in
fiscal 2005.
The improvement in service gross margins for fiscal 2006
compared to fiscal 2005 was primarily due to an increase in
services revenue and improved headcount utilization offset by
the continued spending in our service infrastructure to support
our increasing enterprise customer base. This spending included
additional professional support engineers, increased support
center activities, and global service partnership programs.
Service gross margins will typically experience some variability
over time due to the timing of technical support service
initiations, renewals and additional investments in our customer
support infrastructure. In fiscal 2007, we expect service gross
margins to be in the mid 20% range, as we continue to build out
our service capability and capacity to support our growing
enterprise customers and new products. Our fiscal 2007 total
gross margin will also be negatively impacted by stock
compensation expenses as a result of the adoption of
SFAS No. 123R.
Sales and Marketing Sales and marketing
expenses consist primarily of salaries, commissions, advertising
and promotional expenses, and certain customer service and
support costs. Sales and marketing expenses increased 27.7% to
$595.2 million for fiscal 2006, from $466.0 million
for fiscal 2005. These expenses were 28.9% and 29.1% of total
revenues for fiscal 2006 and fiscal 2005, respectively. The
increase in absolute dollars was attributed to increased
commission expenses resulting from increased revenues, higher
performance-based payroll expenses due to higher profitability,
higher partner program expenses, and the continued worldwide
investment in our sales and global service organizations
associated with selling complete enterprise solutions.
Amortization of acquisitions-related trademarks/tradenames and
customer contracts and relationships included in sales and
marketing expenses was $2.1 million and $0.8 million
for fiscal 2006 and fiscal 2005, respectively. Estimated future
amortization of trademarks, tradenames, customer contracts, and
relationships relating to acquisitions and included in sales and
marketing expenses will be $2.3 million for fiscal 2007,
$2.2 million for fiscal 2008, 2009, and 2010,
$1.3 million for fiscal 2011 and $0.3 million
thereafter.
Sales and marketing headcount increased to 1,927 at
April 30, 2006, from 1,918 at April 30, 2005. We
expect to continue to selectively add sales capacity in an
effort to expand domestic and international markets, introduce
new products, establish and expand new distribution channels,
and increase product and company awareness. Our sales and market
expenses will also increase as a result of the adoption of
SFAS No. 123R. We expect to increase our sales and
marketing expenses commensurate with future revenue growth.
Research and Development Research and
development expenses consist primarily of salaries and benefits,
prototype expenses, non-recurring engineering charges, fees paid
to outside consultants and amortization of capitalized patents.
Research and development expenses increased 42.1% to
$243.0 million for fiscal 2006 from $171.0 million for
fiscal 2005. These expenses represented 11.8% and 10.7% of total
revenues for fiscal 2006 and 2005, respectively. The increase in
research and development expenses was primarily a result of
increased headcount, ongoing operating impact of the
acquisitions, ongoing support of current and future product
development and enhancement efforts, and higher
performance-based payroll expenses due to higher profitability.
Research and development
46
headcount increased to 1,246 as of April 30, 2006, compared
to 827 as of April 30, 2005. For both fiscal 2006 and 2005,
no software development costs were capitalized.
Included in research and development expenses is amortization of
acquired patents of $2.0 million and $1.8 million for
fiscal 2006 and 2005, respectively. Based on acquired patents
existing at April 30, 2006, estimated future capitalized
patents amortization expenses will be $2.0 million for each
of the fiscal years 2007 and 2008, respectively, and $0.5 and
$0.2 million for fiscal 2009 and 2010.
We believe that our future performance will depend in large part
on our ability to maintain and enhance our current product line,
develop new products that achieve market acceptance, maintain
technological competitiveness, and meet an expanding range of
customer requirements. We expect to continuously support current
and future product development and enhancement efforts, and
incur prototyping expenses and nonrecurring engineering charges
associated with the development of new products and
technologies. We intend to continuously broaden our existing
product offerings and introduce new products that expand our
solutions portfolio.
We believe that our research and development expenses will
increase in absolute dollars for fiscal 2007, primarily due to
ongoing costs associated with the development of new products
and technologies, projected headcount growth, the operating
impact of potential future acquisitions as compared to fiscal
2006, and stock-based compensation as a result of the adoption
of SFAS No. 123R.
General and Administrative General and
administrative expenses increased 19.4% to $91.9 million
for fiscal 2006, from $76.9 million for fiscal 2005. These
expenses represented 4.4% and 4.8% of total revenues for fiscal
2006 and 2005, respectively. This increase in absolute dollars
was primarily due to expenses associated with expanded
regulatory requirements, higher legal expenses and professional
fees for general corporate matters including patents and higher
performance-based payroll expenses due to higher profitability.
General and administrative headcount increased to 568 at
April 30, 2006, from 331 at April 30, 2005. We believe
that our general and administrative expenses will increase in
absolute dollars for fiscal 2007 due to projected G&A
headcount growth and the stock-based compensation as a result of
the adoption of SFAS No. 123R. Amortization of
acquisitions-related covenants not to compete included in
general and administrative expenses was $2.2 million and
$5.1 million for fiscal 2006 and 2005, respectively.
Estimated future amortization of covenants not to compete
relating to acquisitions will be $1.0 million for fiscal
year 2007, and $0.2 million in fiscal year 2008.
In-Process Research and Development We
recorded in-process research and development charges of
$5.0 million in fiscal 2006 related to the acquisition of
Decru. The purchase price of the transaction was allocated to
the acquired assets and liabilities based on their estimated
fair values as of the date of the acquisition. Approximately
$5.0 million was allocated to in-process research and
development and charged to operations because the acquired
technology had not reached technological feasibility and had no
alternative uses. The value was determined by estimating the
costs to develop the acquired in-process technology into
commercially viable products, estimating the resulting future
net cash flows from such projects, and discounting the net cash
flows back to their present value. The discount rate included a
factor that took into account the uncertainty surrounding the
successful development of the acquired in-process technology.
These estimates are subject to change, given the uncertainties
of the development process, and no assurance can be given that
deviations from these estimates will not occur. Research and
development costs to bring the products from Decru to
technological feasibility are not expected to have a material
impact on our future results of operations or financial
conditions.
Stock Compensation Stock compensation
expenses were $13.3 million and $8.1 million for
fiscal 2006 and 2005, respectively. This net increase in
year-over-year
stock compensation expenses reflected primarily higher stock
compensation relating to stock options and restricted stocks
assumed in acquisitions, and restricted stock awards, partially
offset by forfeitures of unvested options and forfeited
restricted stock assumed in the acquisitions. Based on deferred
stock compensation recorded at April 30, 2006, estimated
future deferred stock compensation amortization expenses,
excluding the impact of SFAS No. 123R, are
$20.3 million in fiscal 2007, $14.3 million in fiscal
2008, $8.1 million in fiscal 2009, and $6.6 million in
fiscal 2010.
Restructuring Charges In fiscal 2002, as
a result of continuing unfavorable economic conditions and a
reduction in IT spending rates, we implemented two restructuring
plans, which included reductions in our workforce and
consolidations of our facilities. As of April 30, 2006, we
have no outstanding balance in our
47
restructuring liability for the first restructuring. The second
restructuring related to the closure of an engineering facility
and consolidation of resources to the Sunnyvale headquarters. In
the second quarter of fiscal 2006, we implemented a third
restructuring plan related to the move of our global services
center operations from Sunnyvale to our new flagship support
center at our Research Triangle Park facility in North Carolina.
Our restructuring estimates are reviewed and revised
periodically and may result in a substantial charge or reduction
to restructuring expense should different conditions prevail
than were anticipated in previous management estimates. Such
estimates included various assumptions such as the time period
over which the facilities will be vacant, expected sublease
terms, and expected sublease rates. In fiscal 2006, we recorded
a reduction in restructuring reserve of $1.3 million
resulting from the execution of a new sublease agreement for our
Tewksbury facility. In fiscal 2006, we recorded a restructuring
charge of $1.1 million, primarily attributed to
severance-related amounts and relocation expenses related to the
third restructuring plan.
Of the reserve balance at April 30, 2006, $0.9 million
was included in other accrued liabilities and the remaining
$2.1 million was classified as long-term obligations. The
balance of the reserve is expected to be paid by fiscal 2011.
The following analysis sets forth the significant components of
the second restructuring at April 30, 2006
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance-
|
|
|
Fixed Assets
|
|
|
|
|
|
|
|
|
|
Related Amounts
|
|
|
Write-off
|
|
|
Facility
|
|
|
Total
|
|
|
Restructuring charge
|
|
$
|
813
|
|
|
$
|
473
|
|
|
$
|
4,564
|
|
|
$
|
5,850
|
|
Cash payments and others
|
|
|
(706
|
)
|
|
|
|
|
|
|
(1,713
|
)
|
|
|
(2,419
|
)
|
Noncash portion
|
|
|
|
|
|
|
(473
|
)
|
|
|
|
|
|
|
(473
|
)
|
Adjustments
|
|
|
(107
|
)
|
|
|
|
|
|
|
2,357
|
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at April 30,
2004
|
|
|
|
|
|
|
|
|
|
|
5,208
|
|
|
|
5,208
|
|
Cash payments and others
|
|
|
|
|
|
|
|
|
|
|
(705
|
)
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at April 30,
2005
|
|
|
|
|
|
|
|
|
|
|
4,503
|
|
|
|
4,503
|
|
Restructuring charges
|
|
|
859
|
|
|
|
|
|
|
|
281
|
|
|
|
1,140
|
|
Cash payments and others
|
|
|
(521
|
)
|
|
|
|
|
|
|
(862
|
)
|
|
|
(1,383
|
)
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
(1,256
|
)
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at April 30,
2006
|
|
$
|
338
|
|
|
$
|
|
|
|
$
|
2,666
|
|
|
$
|
3,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income Interest income was
$41.5 million and $24.2 million for fiscal 2006 and
2005, respectively. Included in interest income for fiscal 2005
was a $1.3 million interest received on a tax refund. The
increase in interest income was primarily driven by higher
average interest rates on our investment portfolio. We expect
interest income to increase for fiscal 2007 as a result of
rising average interest rates and higher cash and invested
balances in a higher interest-rate portfolio environment.
Interest Expense Interest expense was
$1.3 million and $0.1 million in fiscal 2006 and 2005,
respectively. The increase in fiscal 2006 was primarily due to
interest incurred in connection with our debt.
Other Income (Expense), Net Other Income
(Expense), Net, included net exchange gains from foreign
currency transactions of $1.7 million in fiscal 2006, due
primarily to forecast variances offset by hedging costs as a
result of higher U.S. interest rates compared to other
countries. Net exchange losses from foreign currency
transactions were $1.6 million in fiscal 2005 as a result
of exchange rate volatility, forecast variances and higher
hedging costs.
Provision for Income Taxes The provision
for income taxes for fiscal 2006 included an income tax
provision of $22.5 million or $0.06 per share
associated with the repatriation of cumulative foreign earnings
which occurred during the fourth quarter of fiscal 2006 under
the one-time incentive created pursuant to Section 965 of
the Jobs Act. We will invest these earnings pursuant to an
approved Domestic Reinvestment Plan that conforms to the Jobs
Act guidelines.
48
For fiscal 2006, we had an effective tax rate of 23.9% to pretax
income, which included a 6.4% increase to account for the income
tax provision of $22.5 million associated with the cash
repatriation of cumulative foreign earnings. The effective tax
rate for fiscal 2006 differed from the U.S. statutory rate
primarily due to a beneficial foreign tax ruling for our
principal European subsidiary, the availability of tax credits,
and the generation of foreign earnings in lower tax
jurisdictions. For fiscal 2005, our effective tax rate was 18.3%.
Fiscal
2005 Compared to Fiscal 2004
Product Revenues Product revenues
increased by 33.4% to $1,260.6 million in fiscal 2005, from
$944.9 million in fiscal 2004. Product revenues growth was
across all geographies. This increase in product revenues was
specifically attributable to increased software licenses and an
increase in units shipped, compared to the prior year.
Product revenues were favorably affected by the following
factors:
|
|
|
|
|
Increased revenues from our then current products such as:
FAS960, FAS940, FAS270, and FAS250 storage systems; NearStore
R200 and R150 nearline storage systems; NetCache C2100 and C6200
appliances, as well as our gateway storage systems (gFiler),
GF960, GF940 and GF825
|
|
|
|
Increased revenues from data management software products that
are focused on solving enterprise customer storage challenges,
including regulatory and compliance data needs, storage
consolidation, Internet access and security, technical
applications, and data protection
|
|
|
|
Increased demand for regulatory compliance WORM solutions and
backup-to-disk
solutions
|
|
|
|
Increased sales through indirect channels, including sales
through our resellers, distributors, and OEM partners,
representing 51.2% and 47.9% of total revenues for fiscal 2005
and 2004, respectively.
|
Product revenues were negatively affected by the following
factors:
|
|
|
|
|
Lower-cost-per-megabyte disks which are a significant component
of our hardware costs. As performance has improved on these
devices, the related sales price we can charge per megabyte of
storage has decreased as well.
|
|
|
|
Incremental revenue due to an extra week of business in fiscal
2004 compared to fiscal 2005
|
|
|
|
Declining average selling price and unit sales of our older
storage systems.
|
Software Subscriptions Revenues Software
subscriptions revenues increased by 49.8% to $169.7 million
in fiscal 2005, from $113.3 million in fiscal 2004 due
primarily to a larger installed base renewals, upgrades and an
increasing number of new enterprise customers. Software
subscription revenues represent 10.6% and 9.7% of total revenues
for fiscal year 2005 and 2004, respectively.
Service Revenues Service revenues, which
include hardware support, professional services, and educational
services, increased by 49.7% to $167.8 million in fiscal
2005, from $112.1 million in fiscal 2004. Service revenues
are generally deferred and, in most cases, recognized ratably
over the service obligation periods, which are typically one to
three years. Service revenues represented 10.5%, and 9.6% of
total revenues for fiscal year 2005 and 2004, respectively. The
increase in absolute dollars was due to an increasing number of
enterprise customers, which typically purchase more complete and
generally longer-term service packages. Higher service revenues
were also related to a growing installed base resulting in new
customer support contracts in addition to support contract
renewals by existing customers.
International Total
Revenues International total revenues
(including U.S. exports) increased by 39.0% in fiscal year
2005 compared with fiscal 2004. International total revenues
were $765.8 million, or 47.9% of total revenues for fiscal
year 2005 compared with $551.0 million or 47.1% of total
revenues for fiscal 2004. The increase in international sales
for fiscal year 2005 was primarily a result of revenue growth
from our European and Asia Pacific geography, driven by larger
storage implementations, increased demand for our solutions
portfolio, new customers, and higher storage spending in certain
geographic regions, as compared to the same period in the prior
fiscal year.
49
Product Gross Margins Product gross
margins increased to 61.4% for fiscal 2005, from 60.8% for
fiscal 2004. Amortization of existing technology included in
cost of product revenues was $3.4 million and
$3.7 million for fiscal 2005 and 2004, respectively.
Product gross margins were favorably affected by the following
factors:
|
|
|
|
|
Favorable product and add-on software mix
|
|
|
|
Competitive pricing solutions with our bundled software and
solutions set
|
|
|
|
Higher average selling prices for our newer products
|
|
|
|
Growth in software subscription upgrades and software licenses
due primarily to a larger installed base and an increasing
number of new enterprise customers
|
|
|
|
Transitional expenses incurred in fiscal 2004 associated with
the initial implementation of a new Enterprise Resource Planning
(ERP) system, which we did not incur in fiscal 2005
|
Product gross margins were negatively affected by the following
factors:
|
|
|
|
|
Higher disk content with an expanded storage capacity for the
higher-end storage systems and NearStore systems, as resale of
disk drives generates lower gross margins
|
|
|
|
Increased sales through certain indirect channels, which
typically carry lower gross margins than our direct sales
|
|
|
|
Sales price reductions due to competitive pricing pressure and
selective pricing discounts
|
|
|
|
Lower average selling price of certain add-on software options
|
Software Subscriptions Gross
Margins Software Subscriptions gross
margins increased to 99.1% for fiscal 2005, from 98.9% for
fiscal 2004 due primarily to improved headcount utilization and
a larger installed base renewals, upgrades and an increasing
number of new enterprise customers.
Service Gross Margins Service gross
margins increased to 19.4% in fiscal 2005 as compared to 15.9%
in fiscal 2004. Cost of service revenue increased by 43.4% to
$135.2 million in fiscal 2005, from $94.3 million in
fiscal 2004. The improvement in service gross margins for fiscal
2005 compared to fiscal 2004 was primarily due to an increase in
services revenue and improved headcount utilization offset by
the continued spending in our service infrastructure to support
our increasing enterprise customer base. This spending included
additional professional support engineers, increased support
center activities, and global service partnership programs.
Service gross margins will typically experience some variability
over time due to the timing of technical support service
initiations and renewals and additional investments in our
customer support infrastructure.
Sales and Marketing Sales and marketing
expenses consist primarily of salaries, commissions, advertising
and promotional expenses, and certain global service and support
costs. Sales and marketing expenses increased 33.3% to
$466.0 million for fiscal 2005, from $349.5 million
for fiscal 2004. These expenses were 29.1% and 29.9% of total
revenues for fiscal 2005 and fiscal 2004, respectively. The
increase in absolute dollars was attributed to increased
commission expenses resulting from increased revenues, higher
performance-based payroll expenses due to higher profitability,
higher sales kickoff expenses, higher partner program expenses,
and the continued worldwide spending in our sales and global
service organizations associated with selling complete
enterprise solutions, partially offset by an extra week of
business in fiscal 2004 as compared to fiscal 2005.
Amortization of acquired trademarks/tradenames and customer
contracts, and relationships included in sales and marketing
expenses was $0.8 million and $0.2 million for fiscal
2005 and fiscal 2004, respectively.
Sales and marketing headcount increased to 1,918 at
April 30, 2005, from 1,421 at April 30, 2004.
Research and Development Research and
development expenses consist primarily of salaries and benefits,
prototype expenses, nonrecurring engineering charges, fees paid
to outside consultants and amortization of capitalized patents.
Research and development expenses increased 29.7% to
$171.0 million for fiscal 2005 from $131.9 million for
fiscal 2004. These expenses represented 10.7% and 11.3% of total
revenues for fiscal 2005 and
50
2004, respectively. The increase in research and development
expenses was primarily a result of increased headcount, ongoing
impact of the Spinnaker acquisition, ongoing support of current
and future product development and enhancement efforts, higher
performance-based payroll expenses due to higher profitability,
partially offset by an extra week of expenses in fiscal 2004
compared to fiscal 2005, cost control, and reduction in
discretionary spending efforts. Research and development
headcount increased to 827 as of April 30, 2005, compared
to 650 as of April 30, 2004. For both fiscal 2005 and 2004,
no software development costs were capitalized. Included in
research and development expenses is capitalized patents
amortization of $1.8 million and $1.5 million for
fiscal 2005 and 2004, respectively.
General and Administrative General and
administrative expenses increased 41.0% to $76.9 million
for fiscal 2005, from $54.6 million for fiscal 2004. These
expenses represented 4.8% and 4.7% of total revenues for fiscal
2005 and 2004, respectively. This increase in absolute dollars
was primarily due to expenses associated with expanded
regulatory requirements, higher legal expenses and professional
fees for general corporate matters including patents, higher
performance-based payroll expenses due to higher profitability,
partially offset by reduced expenses as a result of one less
week of expenses in fiscal 2005 compared to fiscal 2004 and
higher expenses associated with investments in our
enterprise-wide ERP system and back-office infrastructure in
fiscal 2004, which we did not incur in fiscal 2005.
General and administrative headcount increased to 432 at
April 30, 2005, from 331 at April 30, 2004.
Amortization of Spinnaker covenants not to compete included in
general and administrative expenses was $5.1 million and
$1.1 million for fiscal 2005 and 2004, respectively.
Stock Compensation Stock compensation
expenses were $8.1 million and $3.9 million for fiscal
2005 and 2004, respectively. This net increase
year-over-year
in stock compensation expenses reflected primarily higher stock
compensation relating to stock options and restricted stocks
assumed in the Spinnaker acquisition, restricted stock awards,
partially offset by forfeitures of unvested options and
forfeited restricted stock assumed in the Spinnaker acquisition.
Restructuring Charges In fiscal 2002, as
a result of continuing unfavorable economic conditions and a
reduction in IT spending rates, we implemented two restructuring
plans, which included reductions in our workforce and
consolidations of our facilities. During fiscal 2005, we paid
$0.6 million pursuant to final resolution of certain
severance-related restructuring accruals. As of April 30,
2005, we have no outstanding balance in our restructuring
liability for the first restructuring. The second restructuring
related to the closure of an engineering facility and
consolidation of resources to the Sunnyvale headquarters. Of the
reserve balance at April 30, 2005, $0.8 million was
included in other accrued liabilities and the remaining
$3.7 million was classified as long-term obligations.
Interest Income Interest income was
$24.2 million and $13.7 million for fiscal 2005 and
2004, respectively. Included in interest income for fiscal 2005
was $1.3 million interest received on a tax refund. In
addition, the increase in interest income was primarily driven
by higher cash and investment balances provided by operating
activities and higher average interest rates on our investment
portfolio.
Other Income (Expense), Net Other Income
(Expense), Net, included net exchange losses from foreign
currency transactions of $1.6 million and $2.9 million
in fiscal 2005 and 2004, respectively. The net exchange loss was
a result of the volatility of the currency exchange market and
increased hedging costs associated with our forward and option
activities.
Provision for Income Taxes For fiscal
2005, we had an effective tax rate of 18.3% to pretax income.
The effective tax rate for fiscal 2005 differed from the
U.S. statutory rate primarily due to a beneficial foreign
tax ruling for our principal European subsidiary, the
availability of tax credits, and the generation of foreign
earnings in lower tax jurisdictions. For fiscal 2004, our
effective tax rate was 10.8% which included 9.9% reduction to
account for the $16.8 million benefit from the retroactive
portion of foreign tax ruling.
51
Liquidity
and Capital Resources
The following sections discuss the effects of changes in our
balance sheet and cash flows, contractual obligations and other
commercial commitments, stock repurchase program, capital
commitments, other sources and uses of cash flows and tax
opportunities on our liquidity and capital resources.
Balance
Sheet and Other Cash Flows
As of April 30, 2006, compared to April 30, 2005, our
cash, cash equivalents, and short-term investments increased by
$152.9 million to $1,322.9 million. We derive our
liquidity and capital resources primarily from our cash flows
from operations and from working capital. Working capital
increased by $60.3 million to $1,116.0 million as of
April 30, 2006, compared to $1,055.7 million as of
April 30, 2005.
During fiscal 2006, we recorded cash flows from operating
activities of $554.3 million as compared with
$462.1 million and $313.0 million for fiscal 2005 and
fiscal 2004, respectively. The largest driver of this increase
was fiscal 2006 net income of $266.5 million as
compared to $225.8 million and $152.1 million in
fiscal 2005 and fiscal 2004, respectively. Noncash adjustments
were higher in fiscal 2006 compared to fiscal 2005, including
depreciation, which was higher by $9.2 million due to
worldwide facilities expansion; amortization of intangible
assets, which was higher by $6.8 million; stock
compensation, which was higher by $5.1 million, and
acquired in-process research and development of
$5.0 million. The increase in these acquisition-related
non-cash charges was related to the Decru and Alacritus
acquisitions during fiscal 2006. In addition to higher net
income and noncash adjustments in fiscal 2006 compared to fiscal
2005 and fiscal 2004, the primary factors that impacted the
period-to-period
change in cash flows relating to operating activities included
the following:
|
|
|
|
|
An increase in deferred revenues from higher software
subscription and service billings attributable to our continuing
shift toward larger enterprise customers, as well as increasing
renewals of existing maintenance agreements in fiscal 2006
compared to fiscal 2005 and fiscal 2004
|
|
|
|
An increase in accounts payable in fiscal 2005, compared to
fiscal 2006 and 2004, primarily attributable to elevated
purchasing activity in fiscal 2005 required to support our
business growth and facilities expansion projects
|
|
|
|
Increased income taxes payable in fiscal 2006 compared to fiscal
2005 and 2004, primarily reflecting the $22.5 million of
federal and state income tax liability relating to the
repatriation of accumulated foreign earnings under the Jobs Act
and higher profitability in fiscal 2006 compared to fiscal 2005
and 2004
|
The above factors were partially offset by the effects of the
following:
|
|
|
|
|
Increased accounts receivable balances due to increased sales in
fiscal 2006 compared to fiscal 2005 and fiscal 2004, and a
shipping profile weighted towards the second half of the fourth
quarter of fiscal 2006
|
|
|
|
An increase in inventories in fiscal 2006 compared to fiscal
2005 due primarily to higher consigned inventory for IBM sales,
new products at customer sites and configured units to meet
revenue growth and an increase in fiscal 2005 inventories
compared to fiscal 2004 due primarily to
end-of-life
buys for certain products
|
|
|
|
An increase in prepaid expenses and other assets in fiscal 2006
and fiscal 2004 as compared to fiscal 2005. The fiscal 2005
prepaid expenses included a tax refund of $9.0 million in
connection with a carryback of net operating losses generated in
fiscal 2000
|
We expect that cash provided by operating activities may
fluctuate in future periods as a result of a number of factors,
including fluctuations in our operating results, shipment
linearity, accounts receivable collections, inventory
management, and the timing of tax and other payments.
Cash used in investing activities was $326.0 million in
fiscal 2006 as compared to $351.3 million and
$259.8 million in fiscal 2005 and fiscal 2004,
respectively. Capital expenditures for fiscal 2006 were
$132.9 million, compared to $93.6 million and
$48.7 million in fiscal 2005 and fiscal 2004, respectively.
We used net proceeds of $128.5 million,
$266.8 million, and $191.7 million in fiscal 2006,
2005, and 2004, respectively, for net purchases/redemptions of
short-term investments. In fiscal 2006, we acquired Alacritus
and Decru and incurred total cash
52
payments including related transactions costs totaling
$53.7 million. In fiscal 2004, we incurred
$8.0 million on related transactions costs and assumed
$1.2 million relating to the Spinnaker acquisition. In
fiscal 2005 and 2004, we acquired additional patents for a
purchase price of approximately $0.9 million and
$9.0 million, respectively. Investing activities in fiscal
2006, 2005, and 2004 also included new investments in privately
held companies of $9.3 million, $0.4 million and
$0.9 million, respectively. We received $0.1 million,
$0.3 million, and $1.1 million in proceeds from sales
of investments in fiscal 2006, 2005, and 2004, respectively.
Under a split dollar insurance arrangement with our CEO entered
in May 2000, we paid total premiums of $10.2 million,
including $0.2 million and $3.9 million for fiscal
years 2005, and 2004, respectively. In April 2005, our CEO
reimbursed us $10.2 million for these premiums.
Cash provided by financing activities was $42.8 million in
fiscal 2006 as compared to cash used in financing activities of
$12.1 million and $54.6 million in fiscal 2005 and
fiscal 2004, respectively. During fiscal 2006, 2005 and 2004, we
repurchased 17.4 million, 7.7 million and
6.9 million shares of common stock at a total of
$488.9 million, $192.9 million and
$136.2 million, respectively. Other financing activities
provided $232.7 million, $181.9 million, and
$81.5 million in fiscal 2006, 2005, and 2004, respectively,
which related to sales of common stock from employee stock
transactions. Pursuant to the provisions of our Stock Option
plans, we allowed optionees to satisfy withholding tax
obligations by electing to have us withhold from the shares to
be issued upon exercise of a restricted stock the equivalent
shares having a fair market value equal to $1.1 million in
withholding taxes in both fiscal 2006 and fiscal 2005 to cover
for federal, state, and local withholding taxes. During fiscal
2006, we borrowed $300.0 million to fund the repatriation
in cash from foreign earnings and investments under the Jobs Act.
The change in cash flows from financing activities was primarily
due to the effects of higher common stock repurchases partially
offset by proceeds from issuance of common stock under employee
programs compared to the same periods in the prior year. Net
proceeds from the issuance of common stock related to employee
participation in employee stock programs have historically been
a significant component of our liquidity. The extent to which
our employees participate in these programs generally increases
or decreases based upon changes in the market price of our
common stock. As a result, our cash flows resulting from the
issuance of common stock related to employee participation in
employee stock programs will vary.
Stock
Repurchase Program
Through April 30, 2006, the Board of Directors had
authorized the repurchase of up to $650.0 million in shares
of our outstanding common stock. At April 30, 2006,
$405.7 million remained available for future repurchases.
The stock repurchase program may be suspended or discontinued at
any time.
Other
Sources and Uses of Cash and Tax Opportunities
The Jobs Act created a one-time incentive for
U.S. corporations to repatriate accumulated income earned
abroad by providing an 85% dividend-received deduction for
certain dividends from certain
non-U.S. subsidiaries.
During the fourth quarter of fiscal 2006, we repatriated
$405.5 million of accumulated foreign earnings and recorded
a $22.5 million federal and state income tax liability upon
the remittance of these foreign earnings.
For fiscal 2006, 2005, and 2004, we recorded tax benefits, in
the form of reduced payments, of $42.2 million,
$27.8 million, and $49.5 million, respectively,
associated with disqualifying dispositions of employee stock
options. If stock option exercise patterns change, we may
receive less cash from stock option exercises and may not
receive the same level of tax benefits in the future, which
could cause our cash payments for income taxes to increase.
Debt
In March 2006, we received proceeds of the term loans totaling
$300.0 million to finance a dividend under the Jobs Act.
(See Note 6). The loan repayments of $166.2 million
and $133.8 million are due in fiscal 2007 and 2008,
respectively. This debt was collateralized by restricted
investments totaling $241.2 million, as well as certain
foreign receivables. In accordance with the payment terms of the
loan agreement, interest payments will be approximately
$12.4 million and $4.1 million in fiscal 2007 and
2008, respectively. As of April 30, 2006, we are in
compliance with the liquidity and leverage ratio as required by
the Loan Agreement with the lenders.
53
Contractual
Cash Obligations and Other Commercial Commitments
The following summarizes our contractual cash obligations and
commercial commitments at April 30, 2006, and the effect
such obligations are expected to have on our liquidity and cash
flows in future periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office operating lease payments(1)
|
|
$
|
15,466
|
|
|
$
|
15,630
|
|
|
$
|
14,942
|
|
|
$
|
12,026
|
|
|
$
|
9,703
|
|
|
$
|
20,934
|
|
|
$
|
88,701
|
|
Real estates lease payments(2)
|
|
|
|
|
|
|
1,252
|
|
|
|
2,147
|
|
|
|
2,147
|
|
|
|
2,147
|
|
|
|
35,766
|
|
|
|
43,459
|
|
Equipment operating lease
payments(3)
|
|
|
7,215
|
|
|
|
6,534
|
|
|
|
4,083
|
|
|
|
50
|
|
|
|
6
|
|
|
|
|
|
|
|
17,888
|
|
Venture capital funding
commitments(4)
|
|
|
381
|
|
|
|
368
|
|
|
|
356
|
|
|
|
343
|
|
|
|
331
|
|
|
|
21
|
|
|
|
1,800
|
|
Capital expenditures(5)
|
|
|
10,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,684
|
|
Communications and maintenance(6)
|
|
|
9,098
|
|
|
|
5,956
|
|
|
|
2,072
|
|
|
|
419
|
|
|
|
1
|
|
|
|
|
|
|
|
17,546
|
|
Restructuring charges(7)
|
|
|
806
|
|
|
|
579
|
|
|
|
603
|
|
|
|
637
|
|
|
|
379
|
|
|
|
|
|
|
|
3,004
|
|
Debt(8)
|
|
|
178,633
|
|
|
|
137,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations
|
|
$
|
222,283
|
|
|
$
|
168,214
|
|
|
$
|
24,203
|
|
|
$
|
15,622
|
|
|
$
|
12,567
|
|
|
$
|
56,721
|
|
|
$
|
499,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For purposes of the above table, contractual obligations for the
purchase of goods and services are defined as agreements that
are enforceable, legally binding on us, and subject us to
penalties if we cancel the agreement. Some of the figures we
include in this table are based on managements estimates
and assumptions about these obligations, including their
duration, the possibility of renewal or termination, anticipated
actions by third parties, and other factors. Because these
estimates and assumptions are necessarily subjective, the
enforceable and legally binding obligations we will actually pay
in future periods may vary from those reflected in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Other Commercial
Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit(9)
|
|
$
|
1,471
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
337
|
|
|
$
|
1,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We enter into operating leases in the normal course of business.
We lease sales offices, research and development facilities, and
other property under operating leases throughout the U.S. and
internationally, which expire through fiscal 2015. Substantially
all lease agreements have fixed payment terms based on the
passage of time and contain escalation clauses. Some lease
agreements provide us with the option to renew the lease or to
terminate the lease. Our future operating lease obligations
would change if we were to exercise these options or if we were
to enter into additional operating lease agreements. Sublease
income of $0.03 million has been included as a reduction of
the payment amounts shown in the table. Facilities operating
lease payments exclude the leases impacted by the
restructurings. The amounts for the leases impacted by the
restructurings are included in subparagraph (7) below. |
|
(2) |
|
On December 16, 2005, we entered into financing,
construction and leasing arrangements with BNP for office space
to be located on land currently owned by us in Sunnyvale,
California. This arrangements requires us to lease our land to
BNP for a period of 50 years to construct approximately
190,000 square feet of office space costing up to
$38.5 million. After completion of construction, we will
pay minimum lease payments which vary based on London Interbank
Offered Rate (LIBOR) plus a spread (5.58% at
April 30, 2006) on the cost of the facilities. We
expect to begin paying lease payments on the completed buildings
on September 2007 for a term of five years. We have the option
to renew the lease for two consecutive five-year periods upon
approval by BNP. |
54
|
|
|
|
|
Upon expiration (or upon any earlier termination) of the lease
term, we must elect one of the following options: we may
(i) purchase the building from BNP for $38.5 million,
(ii) if certain conditions are met, arrange for the sale of
the building by BNP to a third party for an amount equal to at
least $32.7 million, and be liable for any deficiency
between the net proceeds received from the third party and
$32.7 million, or (iii) pay BNP a supplemental payment
of $32.7 million, in which event, we may recoup some or all
of such payment by arranging for a sale of the building by BNP
during the ensuing 2 year period. |
|
|
|
Included in the above contractual cash obligations are
(a) lease commitments of $1.3 million in fiscal 2008,
$2.1 million in each of the fiscal years 2009, 2010, 2011,
2012 and $0.9 million in fiscal 2013, which are based on
the LIBOR rate at April 30, 2006 for a term of
5 years, and (b) at the expiration or termination of
the lease, a supplemental payment obligation equal to our
minimum guarantee of $32.7 million in the event that we
elect not to purchase or arrange for a sale of the building. |
|
|
|
The lease also requires us to maintain specified financial
covenants with which we were in compliance as of April 30,
2006. Such specified financial covenants include a maximum ratio
of Total Debt to Earnings Before Interest, Taxes, Depreciation
and Amortization (EBITDA) and a Minimum Unencumbered
Cash and Short Term Investments. |
|
|
|
(3) |
|
Equipment operating leases include servers and IT equipment used
in our Engineering labs and data centers. |
|
(4) |
|
Venture capital funding commitments include a quarterly
committed management fee based on a percentage of our committed
funding to be payable through June 2011. |
|
(5) |
|
Capital expenditures include worldwide contractual commitments
to purchase equipment and to construct building and leasehold
improvements, which will be recorded as Property and Equipment. |
|
(6) |
|
We are required to pay based on a minimum volume under certain
communication contracts with major telecommunication companies
as well as maintenance contracts with multiple vendors. Such
obligations expire in April 2010. |
|
(7) |
|
These amounts are included on our Consolidated Balance Sheets
under Other accrued liabilities and Long-term Obligations, which
is comprised of committed lease payments and operating expenses
net of committed sublease income. |
|
(8) |
|
Included in these amounts are $300.0 million loan on our
Consolidated Balance Sheets under Current portion of long-term
debt and Long-term Debt. This amount also includes estimated
interest payments of $12.4 million and $4.1 million
for fiscal 2007 and 2008, respectively. |
|
(9) |
|
The amounts outstanding under these letters of credit relate to
workers compensation, a customs guarantee, a corporate
credit card program, and a foreign rent guarantee. |
Capital
Expenditure Requirements
We expect capital expenditures to increase in the future
consistent with the growth in our business, as we continue to
invest in people, land, buildings, capital equipment and
enhancements to our worldwide infrastructure. We expect that our
existing facilities and those being developed in Sunnyvale,
California; RTP, North Carolina; and worldwide are adequate for
our requirements over at least the next two years and that
additional space will be available as needed. We expect to
finance these construction projects, including our commitments
under facilities and equipment operating leases, and any
required capital expenditures over the next few years through
cash from operations and existing cash, cash equivalents and
investments.
Off-Balance
Sheet Arrangements
As of April 30, 2006, our financial guarantees of
$1.8 million that were not recorded on our balance sheet
consisted of standby letters of credit related to workers
compensation, a customs guarantee, a corporate credit card
program, and a foreign lease.
As of April 30, 2006, our notional fair values of foreign
exchange forward and foreign currency option contracts totaled
$345.1 million. We do not believe that these derivatives
present significant credit risks because the counterparties to
the derivatives consist of major financial institutions, and we
manage the notional amount of contracts entered into with any
one counterparty. We do not enter into derivative financial
instruments for
55
speculative or trading purposes. Other than the risk associated
with the financial condition of the counterparties, our maximum
exposure related to foreign currency forward and option
contracts is limited to the premiums paid.
We have entered into indemnification agreements with third
parties in the ordinary course of business. Generally, these
indemnification agreements require us to reimburse losses
suffered by the third party due to various events, such as
lawsuits arising from patent or copyright infringement. These
indemnification obligations are considered off-balance sheet
arrangements in accordance with FASB, Interpretation 45, of
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. See Guarantees in
footnote 15 for further discussion of these indemnification
agreements.
We have commitments related to a lease arrangement with BNP for
approximately 190,000 square feet of office space to be
located on land currently owned by us in Sunnyvale, California
(as further described above under Contractual Cash
Obligations and Other Commercial Commitments). We have
evaluated our accounting for this lease under the provisions of
FIN 46R, and have determined the following:
|
|
|
|
|
BNP is a leasing company for BNP Paribas in the U.S. BNP is
not a special purpose entity organized for the sole
purpose of facilitating the lease to us. The obligation to
absorb expected losses and receive expected residual returns
rests with the parent BNP Paribas. Therefore, we are not the
primary beneficiary of BNP as we do not absorb the majority of
BNPs expected losses or expected residual returns; and
|
|
|
|
BNP has represented in the Closing Agreement (filed as Exhibit
10.40) that the fair value of the property leased to us by BNP
is less than half of the total of the fair values of all assets
of BNP, excluding any assets of BNP held within a silo. Further,
the property leased to Network Appliance is not held within a
silo. The definition of held within a silo means
that BNP has obtained funds equal to or in excess of 95% of the
fair value of the leased asset to acquire or maintain its
investment in such asset through non-recourse financing or other
contractual arrangements, the effect of which is to leave such
asset (or proceeds thereof) as the only significant asset of BNP
at risk for the repayment of such funds.
|
Accordingly, under the current FIN 46R standard, we are not
required to consolidate either the leasing entity or the
specific assets that we lease under the BNP lease. Assuming this
transaction will continue to meet the provisions of FIN 46R
as new standards evolve over time, our future minimum lease
payments under this real estates lease will amount to a total of
$43.5 million reported under our Note 4
Commitments and Contingencies.
As of April 30, 2006, except for operating leases and other
contractual obligations outlined under the Contractual
Cash Obligations table, we do not have any off-balance
sheet financing arrangements or liabilities, retained or
contingent interests in transferred assets, or any obligation
arising out of a material variable interest in an unconsolidated
entity. We also do not have any majority-owned subsidiaries that
are not included in the consolidated financial statements.
Additionally, we do not have any interest in or relationship
with, any special purpose entities.
Liquidity
and Capital Resource Requirements
Key factors affecting our cash flows include our ability to
effectively manage our working capital, in particular, accounts
receivable and inventories and future demand for our products
and related pricing. We expect to incur higher capital
expenditures in the near future to expand our operations. We
will from time to time acquire products and businesses
complementary to our business. In the future, we may continue to
repurchase our common stock, which would reduce cash, cash
equivalents,
and/or
short-term investments available to fund future operations and
meet other liquidity requirements. Based on past performance and
current expectations, we believe that our cash and cash
equivalents, short-term investments, and cash generated from
operations will satisfy our working capital needs, capital
expenditures, stock repurchases, contractual obligations, and
other liquidity requirements associated with our operations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We are exposed to market risk related to fluctuations in
interest rates and foreign currency exchange rates. We use
certain derivative financial instruments to manage these risks.
We do not use derivative financial instruments for
56
speculative or trading purposes. All financial instruments are
used in accordance with management-approved policies.
Market
Interest and Interest Income Risk
Interest and Investment Income As of
April 30, 2006, we had
available-for-sale
investments of $1,102.8 million. Our investment portfolio
primarily consists of highly liquid investments with original
maturities at the date of purchase of greater than three months,
which are classified as available for sale. These highly liquid
investments, consisting primarily of government, municipal,
corporate debt, and auction-rate securities, are subject to
interest rate and interest income risk and will decrease in
value if market interest rates increase. A hypothetical 10%
increase in market interest rates from levels at April 30,
2006, would cause the fair value of these short-term investments
to decline by approximately $3.5 million. Because we have
the ability to hold these investments until maturity, we would
not expect any significant decline in value of our investments
caused by market interest rate changes. Declines in interest
rates over time will, however, reduce our interest income. We do
not use derivative financial instruments in our investment
portfolio.
Lease Commitments As of April 30,
2006, we have arrangements with BNP to lease our land for a
period of 50 years to construct approximately
190,000 square feet of office space costing up to
$38.5 million. After completion of construction, we will
pay minimum lease payments which vary based on London Interbank
Offered Rate (LIBOR) plus a spread. We expect to pay
lease payments on the completed buildings from BNP on September
2007 for a term of five years. We have the option to renew the
lease for two consecutive five-year periods upon approval by
BNP. A hypothetical 10% increase in market interest rates from
levels at April 30, 2006, would increase our total lease
payments under the initial
5-year term
by approximately $0.9 million. We do not currently hedge
against market interest rate increases. As cash from operating
cash flows are invested in a higher interest rate environment,
it will offer a natural hedge against interest rate risk from
our lease commitments in the event of a significant increase in
market interest rate.
Debt Obligation We have an outstanding
variable rate term loan totaling $300.0 million as of
April 30, 2006. Under terms of these arrangements, we
expect to pay interest payments at LIBOR plus a spread. Due to
the short-term nature of these debt arrangements, a hypothetical
10% change in interest rates would not have a material effect on
our financial position, results of operations and cash flows
over the next two fiscal years. We do not currently use
derivatives to manage interest rate risk.
Equity securities We have from time to
time made cash investments in companies with distinctive
technologies that are potentially strategically important to us.
Our investments in non-marketable equity securities would be
negatively affected by an adverse change in equity market
prices, although the impact cannot be directly quantified. Such
a change, or any negative change in the financial performance or
prospects of the companies whose non-marketable securities we
own, would harm the ability of these companies to raise
additional capital and the likelihood of our being able to
realize any gains or return of our investments through liquidity
events such as initial public offerings, acquisitions and
private sales. These types of investments involve a high degree
of risk, and there can be no assurance that any company we
invest in will grow or be successful. Accordingly, we could lose
all or part of our investment. Our investments in non-marketable
equity securities had a carrying amount of $11.0 million as
of April 30, 2006 and $1.8 million as of
April 30, 2005. If we determine that an
other-than-temporary
decline in fair value exists for a non-marketable equity
security, we write down the investment to its fair value and
record the related write-down as an investment loss in our
Consolidated Statements of Income.
Foreign
Currency Exchange Rate Risk and Foreign Exchange Forward
Contracts
We hedge risks associated with foreign currency transactions to
minimize the impact of changes in foreign currency exchange
rates on earnings. We utilize forward and option contracts to
hedge against the short-term impact of foreign currency
fluctuations on certain assets and liabilities denominated in
foreign currencies. All balance sheet hedges are marked to
market through earnings every period. We also use foreign
exchange forward contracts to hedge foreign currency forecasted
transactions related to certain sales and operating expenses.
These derivatives are designated as cash flow hedges under
SFAS No. 133. For cash flow hedges outstanding at
April 30, 2006, the gains or losses were included in other
comprehensive income.
57
We do not enter into foreign exchange contracts for speculative
or trading purposes. In entering into forward and option foreign
exchange contracts, we have assumed the risk that might arise
from the possible inability of counterparties to meet the terms
of their contracts. We attempt to limit our exposure to credit
risk by executing foreign exchange contracts with creditworthy
multinational commercial banks. All contracts have a maturity of
less than one year.
The following table provides information about our foreign
exchange forward contracts and currency options contracts
outstanding on April 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Notional
|
|
|
|
|
|
|
Foreign
|
|
|
Contract Value
|
|
|
Fair Value
|
|
Currency
|
|
Buy/Sell
|
|
|
Currency Amount
|
|
|
USD
|
|
|
in USD
|
|
|
Forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD
|
|
|
Sell
|
|
|
|
13,493
|
|
|
$
|
12,072
|
|
|
$
|
12,065
|
|
CHF
|
|
|
Sell
|
|
|
|
2,984
|
|
|
$
|
2,414
|
|
|
$
|
2,414
|
|
ILS
|
|
|
Sell
|
|
|
|
15,151
|
|
|
$
|
3,374
|
|
|
$
|
3,373
|
|
ZAR
|
|
|
Sell
|
|
|
|
26,673
|
|
|
$
|
4,403
|
|
|
$
|
4,403
|
|
EUR
|
|
|
Sell
|
|
|
|
145,804
|
|
|
$
|
183,852
|
|
|
$
|
184,716
|
|
GBP
|
|
|
Sell
|
|
|
|
45,292
|
|
|
$
|
82,258
|
|
|
$
|
82,614
|
|
AUD
|
|
|
Buy
|
|
|
|
13,866
|
|
|
$
|
10,509
|
|
|
$
|
10,508
|
|
JPY
|
|
|
Buy
|
|
|
|
236,841
|
|
|
$
|
2,092
|
|
|
$
|
2,093
|
|
DKK
|
|
|
Buy
|
|
|
|
10,864
|
|
|
$
|
1,841
|
|
|
$
|
1,841
|
|
NOK
|
|
|
Buy
|
|
|
|
6,139
|
|
|
$
|
999
|
|
|
$
|
999
|
|
SEK
|
|
|
Buy
|
|
|
|
15,707
|
|
|
$
|
2,141
|
|
|
$
|
2,142
|
|
EUR
|
|
|
Buy
|
|
|
|
12,092
|
|
|
$
|
15,156
|
|
|
$
|
15,322
|
|
GBP
|
|
|
Buy
|
|
|
|
2,851
|
|
|
$
|
5,129
|
|
|
$
|
5,201
|
|
Option contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
10,000
|
|
|
$
|
12,655
|
|
|
$
|
12,778
|
|
GBP
|
|
|
Sell
|
|
|
|
2,500
|
|
|
$
|
4,559
|
|
|
$
|
4,598
|
|
The following table provides information about our foreign
exchange forward contracts and currency options contracts
outstanding on April 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Notional
|
|
|
|
|
|
|
Foreign
|
|
|
Contract Value
|
|
|
Fair Value
|
|
Currency
|
|
Buy/Sell
|
|
|
Currency Amount
|
|
|
USD
|
|
|
in USD
|
|
|
Forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD
|
|
|
Sell
|
|
|
|
9,612
|
|
|
$
|
7,631
|
|
|
$
|
7,631
|
|
CHF
|
|
|
Sell
|
|
|
|
3,454
|
|
|
$
|
2,890
|
|
|
$
|
2,890
|
|
ILS
|
|
|
Sell
|
|
|
|
9,136
|
|
|
$
|
2,092
|
|
|
$
|
2,092
|
|
ZAR
|
|
|
Sell
|
|
|
|
16,405
|
|
|
$
|
2,682
|
|
|
$
|
2,682
|
|
EUR
|
|
|
Sell
|
|
|
|
90,856
|
|
|
$
|
117,233
|
|
|
$
|
117,113
|
|
GBP
|
|
|
Sell
|
|
|
|
21,087
|
|
|
$
|
40,063
|
|
|
$
|
40,111
|
|
AUD
|
|
|
Buy
|
|
|
|
9,283
|
|
|
$
|
7,234
|
|
|
$
|
7,233
|
|
DKK
|
|
|
Buy
|
|
|
|
5,988
|
|
|
$
|
1,036
|
|
|
$
|
1,036
|
|
SEK
|
|
|
Buy
|
|
|
|
17,752
|
|
|
$
|
2,502
|
|
|
$
|
2,502
|
|
EUR
|
|
|
Buy
|
|
|
|
8,759
|
|
|
$
|
11,298
|
|
|
$
|
11,284
|
|
GBP
|
|
|
Buy
|
|
|
|
2,357
|
|
|
$
|
4,481
|
|
|
$
|
4,484
|
|
Option contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
7,000
|
|
|
$
|
9,020
|
|
|
$
|
9,124
|
|
GBP
|
|
|
Sell
|
|
|
|
1,500
|
|
|
$
|
2,857
|
|
|
$
|
2,881
|
|
58
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Network Appliance, Inc.
Sunnyvale, California
We have audited the accompanying consolidated balance sheets of
Network Appliance, Inc. and its subsidiaries (the
Company) as of April 30, 2006 and 2005, and the
related consolidated statements of income, cash flows and
stockholders equity and comprehensive income (loss) for
each of the three years in the period ended April 30, 2006.
Our audits also included the consolidated financial statement
schedule listed in Item 15(a)(2). These financial
statements and the financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Network Appliance, Inc. and its subsidiaries as of
April 30, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended April 30, 2006 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the consolidated financial
statement schedule listed in Item 15(a)(2), when considered
in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of April 30, 2006, based on the
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated July 11, 2006 expressed an unqualified
opinion on managements assessment of the effectiveness of
the Companys internal control over financial reporting and
an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE
LLP
San Jose, California
July 11, 2006
59
NETWORK
APPLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
461,256
|
|
|
$
|
193,542
|
|
Short-term investments
|
|
|
861,636
|
|
|
|
976,423
|
|
Accounts receivable, net of
allowances of $2,380 in 2006 and $5,445 in 2005
|
|
|
415,295
|
|
|
|
296,885
|
|
Inventories
|
|
|
64,452
|
|
|
|
38,983
|
|
Prepaid expenses and other assets
|
|
|
43,536
|
|
|
|
30,773
|
|
Short-term restricted cash and
investments
|
|
|
138,539
|
|
|
|
1,699
|
|
Deferred income taxes
|
|
|
48,496
|
|
|
|
37,584
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,033,210
|
|
|
|
1,575,889
|
|
Property and Equipment,
net
|
|
|
513,193
|
|
|
|
418,749
|
|
Goodwill
|
|
|
487,535
|
|
|
|
291,816
|
|
Intangible Assets,
net
|
|
|
75,051
|
|
|
|
21,448
|
|
Long-Term Restricted Cash and
Investments
|
|
|
108,371
|
|
|
|
2,361
|
|
Other Assets
|
|
|
43,605
|
|
|
|
62,384
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,260,965
|
|
|
$
|
2,372,647
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
166,211
|
|
|
$
|
|
|
Accounts payable
|
|
|
101,278
|
|
|
|
83,572
|
|
Income taxes payable
|
|
|
51,577
|
|
|
|
20,823
|
|
Accrued compensation and related
benefits
|
|
|
129,636
|
|
|
|
100,534
|
|
Other accrued liabilities
|
|
|
69,073
|
|
|
|
53,262
|
|
Deferred revenue
|
|
|
399,388
|
|
|
|
261,998
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
917,163
|
|
|
|
520,189
|
|
Long-Term Debt
|
|
|
133,789
|
|
|
|
|
|
Long-Term Deferred
Revenue
|
|
|
282,149
|
|
|
|
187,180
|
|
Long-Term Obligations
|
|
|
4,411
|
|
|
|
4,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,337,512
|
|
|
|
711,843
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Note 4)
|
|
|
|
|
|
|
|
|
Stockholders
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value, 5,000 shares authorized; shares outstanding: none in
2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value; 885,000 shares authorized:
|
|
|
|
|
|
|
|
|
shares issued: 407,994 in 2006 and
381,509 in 2005
|
|
|
408
|
|
|
|
381
|
|
Additional paid-in capital
|
|
|
1,872,962
|
|
|
|
1,347,352
|
|
Deferred stock compensation
|
|
|
(49,266
|
)
|
|
|
(15,782
|
)
|
Treasury stock (31,996 shares
in 2006, 14,566 shares in 2005)
|
|
|
(817,983
|
)
|
|
|
(329,075
|
)
|
Retained earnings
|
|
|
928,430
|
|
|
|
661,978
|
|
Accumulated other comprehensive
loss
|
|
|
(11,098
|
)
|
|
|
(4,050
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,923,453
|
|
|
|
1,660,804
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,260,965
|
|
|
$
|
2,372,647
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
60
NETWORK
APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
1,577,435
|
|
|
$
|
1,260,611
|
|
|
$
|
944,902
|
|
Software subscriptions
|
|
|
239,139
|
|
|
|
169,726
|
|
|
|
113,302
|
|
Service
|
|
|
249,882
|
|
|
|
167,794
|
|
|
|
112,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,066,456
|
|
|
|
1,598,131
|
|
|
|
1,170,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
623,564
|
|
|
|
486,383
|
|
|
|
370,271
|
|
Cost of software subscriptions
|
|
|
1,382
|
|
|
|
1,497
|
|
|
|
1,209
|
|
Cost of service
|
|
|
185,049
|
|
|
|
135,203
|
|
|
|
94,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
809,995
|
|
|
|
623,083
|
|
|
|
465,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,256,461
|
|
|
|
975,048
|
|
|
|
704,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
595,154
|
|
|
|
466,032
|
|
|
|
349,490
|
|
Research and development
|
|
|
242,988
|
|
|
|
171,049
|
|
|
|
131,856
|
|
General and administrative
|
|
|
91,852
|
|
|
|
76,903
|
|
|
|
54,550
|
|
Acquired in-process research and
development
|
|
|
5,000
|
|
|
|
|
|
|
|
4,940
|
|
Stock compensation(1)
|
|
|
13,293
|
|
|
|
8,148
|
|
|
|
3,895
|
|
Restructuring charges (recoveries)
|
|
|
(117
|
)
|
|
|
(271
|
)
|
|
|
1,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
948,170
|
|
|
|
721,861
|
|
|
|
546,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
Operations
|
|
|
308,291
|
|
|
|
253,187
|
|
|
|
158,463
|
|
Other Income (Expenses),
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
41,519
|
|
|
|
24,249
|
|
|
|
13,704
|
|
Interest expense
|
|
|
(1,283
|
)
|
|
|
(97
|
)
|
|
|
(292
|
)
|
Other income (expenses), net
|
|
|
1,644
|
|
|
|
(1,152
|
)
|
|
|
(2,168
|
)
|
Net gain on investments
|
|
|
101
|
|
|
|
41
|
|
|
|
747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
41,981
|
|
|
|
23,041
|
|
|
|
11,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income
Taxes
|
|
|
350,272
|
|
|
|
276,228
|
|
|
|
170,454
|
|
Provision for Income
Taxes
|
|
|
83,820
|
|
|
|
50,474
|
|
|
|
18,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
|
$
|
152,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in per Share
Calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
371,061
|
|
|
|
361,009
|
|
|
|
346,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
388,381
|
|
|
|
380,412
|
|
|
|
366,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Stock compensation
includes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
3,986
|
|
|
$
|
2,168
|
|
|
$
|
1,640
|
|
Research and development
|
|
|
8,342
|
|
|
|
5,251
|
|
|
|
1,746
|
|
General and administrative
|
|
|
965
|
|
|
|
729
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,293
|
|
|
$
|
8,148
|
|
|
$
|
3,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
61
NETWORK
APPLIANCE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
|
$
|
152,087
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
63,679
|
|
|
|
54,459
|
|
|
|
53,052
|
|
Acquired in-process research and
development
|
|
|
5,000
|
|
|
|
|
|
|
|
4,940
|
|
Amortization of intangible assets
|
|
|
16,136
|
|
|
|
9,332
|
|
|
|
4,898
|
|
Amortization of patents
|
|
|
1,982
|
|
|
|
1,833
|
|
|
|
1,503
|
|
Stock compensation
|
|
|
13,293
|
|
|
|
8,148
|
|
|
|
3,895
|
|
Net gain on investments
|
|
|
(101
|
)
|
|
|
(70
|
)
|
|
|
(941
|
)
|
Loss on disposal of equipment
|
|
|
1,381
|
|
|
|
1,990
|
|
|
|
291
|
|
Allowance for doubtful accounts
(reduction)
|
|
|
46
|
|
|
|
1,110
|
|
|
|
(259
|
)
|
Deferred income taxes
|
|
|
1,545
|
|
|
|
6,321
|
|
|
|
(21,446
|
)
|
Deferred rent
|
|
|
669
|
|
|
|
294
|
|
|
|
301
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(116,816
|
)
|
|
|
(103,352
|
)
|
|
|
(40,078
|
)
|
Inventories
|
|
|
(46,247
|
)
|
|
|
(14,996
|
)
|
|
|
(9,975
|
)
|
Prepaid expenses and other assets
|
|
|
(12,964
|
)
|
|
|
(2,336
|
)
|
|
|
(10,571
|
)
|
Accounts payable
|
|
|
17,405
|
|
|
|
30,460
|
|
|
|
11,714
|
|
Income taxes payable
|
|
|
72,669
|
|
|
|
32,541
|
|
|
|
35,000
|
|
Accrued compensation and related
benefits
|
|
|
28,353
|
|
|
|
33,828
|
|
|
|
22,722
|
|
Other accrued liabilities
|
|
|
8,571
|
|
|
|
7,369
|
|
|
|
1,608
|
|
Deferred revenue
|
|
|
233,229
|
|
|
|
169,433
|
|
|
|
104,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
554,282
|
|
|
|
462,118
|
|
|
|
313,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(1,029,412
|
)
|
|
|
(872,237
|
)
|
|
|
(1,050,915
|
)
|
Redemptions of investments
|
|
|
900,863
|
|
|
|
605,426
|
|
|
|
859,259
|
|
Increase in restricted cash
|
|
|
(1,678
|
)
|
|
|
|
|
|
|
|
|
Purchase of patents
|
|
|
|
|
|
|
(895
|
)
|
|
|
(9,015
|
)
|
Purchases of property and equipment
|
|
|
(132,915
|
)
|
|
|
(93,568
|
)
|
|
|
(48,675
|
)
|
Purchases of equity securities
|
|
|
(9,275
|
)
|
|
|
(425
|
)
|
|
|
(925
|
)
|
Proceeds from sales of investments
|
|
|
130
|
|
|
|
347
|
|
|
|
1,113
|
|
Proceeds from disposal of property
and equipment
|
|
|
32
|
|
|
|
|
|
|
|
123
|
|
Payments for split-dollar
insurance premiums
|
|
|
|
|
|
|
(183
|
)
|
|
|
(3,912
|
)
|
Reimbursements for split-dollar
insurance premiums
|
|
|
|
|
|
|
10,227
|
|
|
|
|
|
Purchase of businesses, net of
cash acquired
|
|
|
(53,747
|
)
|
|
|
|
|
|
|
(6,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(326,002
|
)
|
|
|
(351,308
|
)
|
|
|
(259,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
related to employee stock transactions
|
|
|
232,745
|
|
|
|
181,922
|
|
|
|
81,548
|
|
Proceeds from debt
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
Tax withholding payments
reimbursed by restricted stock
|
|
|
(1,062
|
)
|
|
|
(1,122
|
)
|
|
|
|
|
Repurchases of common stock
|
|
|
(488,908
|
)
|
|
|
(192,903
|
)
|
|
|
(136,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
42,775
|
|
|
|
(12,103
|
)
|
|
|
(54,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes
on Cash and Cash Equivalents
|
|
|
(3,341
|
)
|
|
|
2,507
|
|
|
|
1,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash
Equivalents
|
|
|
267,714
|
|
|
|
101,214
|
|
|
|
462
|
|
Cash and Cash
Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
193,542
|
|
|
|
92,328
|
|
|
|
91,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
461,256
|
|
|
$
|
193,542
|
|
|
$
|
92,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
62
NETWORK
APPLIANCE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
|
|
|
Treasury
|
|
|
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balances, April 30,
2003
|
|
|
340,668
|
|
|
$
|
341
|
|
|
$
|
704,338
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(1,363
|
)
|
|
$
|
284,137
|
|
|
$
|
(96
|
)
|
|
$
|
987,357
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,087
|
|
|
|
|
|
|
|
152,087
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,440
|
|
|
|
2,440
|
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341
|
|
|
|
341
|
|
Unrealized loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,063
|
)
|
|
|
(2,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152,805
|
|
Issuance of common stock related to
employee transactions
|
|
|
11,170
|
|
|
|
11
|
|
|
|
81,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,548
|
|
Issuance of restricted stock
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to acquire
Spinnaker Networks, Inc.
|
|
|
12,377
|
|
|
|
12
|
|
|
|
259,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,678
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,853
|
)
|
|
|
(136,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136,172
|
)
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
2,725
|
|
|
|
|
|
|
|
|
|
|
|
(2,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumption of options in connection
with Spinnaker acquisition
|
|
|
|
|
|
|
|
|
|
|
43,094
|
|
|
|
|
|
|
|
|
|
|
|
(25,892
|
)
|
|
|
|
|
|
|
|
|
|
|
17,202
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,397
|
|
|
|
|
|
|
|
|
|
|
|
3,397
|
|
Reversal of deferred stock
compensation due to employee terminations
|
|
|
|
|
|
|
|
|
|
|
(3,235
|
)
|
|
|
|
|
|
|
|
|
|
|
3,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
expense nonemployee
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
Income tax benefit from employee
stock transactions
|
|
|
|
|
|
|
|
|
|
|
49,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30,
2004
|
|
|
364,335
|
|
|
$
|
364
|
|
|
$
|
1,138,158
|
|
|
|
(6,853
|
)
|
|
$
|
(136,172
|
)
|
|
$
|
(23,348
|
)
|
|
$
|
436,224
|
|
|
$
|
622
|
|
|
$
|
1,415,848
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,754
|
|
|
|
|
|
|
|
225,754
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
81
|
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
(201
|
)
|
Unrealized loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,552
|
)
|
|
|
(4,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,082
|
|
Issuance of common stock related to
employee transactions
|
|
|
17,111
|
|
|
|
17
|
|
|
|
181,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,922
|
|
Issuance of restricted stock
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spinnaker restricted stock units
exercises
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock withheld for taxes
|
|
|
(37
|
)
|
|
|
|
|
|
|
(1,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,122
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,713
|
)
|
|
|
(192,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(192,903
|
)
|
Repurchase of Spinnaker restricted
stock units
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of restricted stock
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
1,401
|
|
|
|
|
|
|
|
|
|
|
|
(1,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,720
|
|
|
|
|
|
|
|
|
|
|
|
7,720
|
|
Reversal of deferred stock
compensation due to employee terminations
|
|
|
|
|
|
|
|
|
|
|
(1,247
|
)
|
|
|
|
|
|
|
|
|
|
|
1,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
expense nonemployee
|
|
|
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
428
|
|
Income tax benefit from employee
stock transactions
|
|
|
|
|
|
|
|
|
|
|
27,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30,
2005
|
|
|
381,509
|
|
|
$
|
381
|
|
|
$
|
1,347,352
|
|
|
|
(14,566
|
)
|
|
$
|
(329,075
|
)
|
|
$
|
(15,782
|
)
|
|
$
|
661,978
|
|
|
$
|
(4,050
|
)
|
|
$
|
1,660,804
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266,452
|
|
|
|
|
|
|
|
266,452
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(914
|
)
|
|
|
(914
|
)
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,271
|
)
|
|
|
(4,271
|
)
|
Unrealized loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,863
|
)
|
|
|
(1,863
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,404
|
|
Issuance of common stock related to
employee transactions
|
|
|
18,081
|
|
|
|
18
|
|
|
|
232,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,744
|
|
Spinnaker restricted stock units
exercises
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock withheld for taxes
|
|
|
(34
|
)
|
|
|
|
|
|
|
(1,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,062
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,430
|
)
|
|
|
(488,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(488,908
|
)
|
Repurchase of restricted stock
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to acquire
Decru, Inc.
|
|
|
8,270
|
|
|
|
9
|
|
|
|
191,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,874
|
|
Assumption of options in connection
with Decru
|
|
|
|
|
|
|
|
|
|
|
36,142
|
|
|
|
|
|
|
|
|
|
|
|
(18,549
|
)
|
|
|
|
|
|
|
|
|
|
|
17,593
|
|
Assumption of options in connection
with Alacritus
|
|
|
|
|
|
|
|
|
|
|
2,314
|
|
|
|
|
|
|
|
|
|
|
|
(1,199
|
)
|
|
|
|
|
|
|
|
|
|
|
1,115
|
|
Deferred stock compensation
|
|
|
85
|
|
|
|
|
|
|
|
29,855
|
|
|
|
|
|
|
|
|
|
|
|
(29,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,233
|
|
|
|
|
|
|
|
|
|
|
|
13,233
|
|
Reversal of deferred stock
compensation due to employee terminations
|
|
|
|
|
|
|
|
|
|
|
(2,886
|
)
|
|
|
|
|
|
|
|
|
|
|
2,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
expense nonemployee
|
|
|
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Income tax benefit from employee
stock transactions
|
|
|
|
|
|
|
|
|
|
|
36,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 30,
2006
|
|
|
407,994
|
|
|
$
|
408
|
|
|
$
|
1,872,962
|
|
|
|
(31,996
|
)
|
|
$
|
(817,983
|
)
|
|
$
|
(49,266
|
)
|
|
$
|
928,430
|
|
|
$
|
(11,098
|
)
|
|
$
|
1,923,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statement
63
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in thousands, except per-share
data)
Based in Sunnyvale, California, Network Appliance was
incorporated in California in April 1992 and reincorporated in
Delaware in November 2001. Network Appliance, Inc.
(we or the Company) is a leading
supplier of enterprise storage and data management software and
hardware products and services. Our solutions help global
enterprises meet major information technology challenges such as
managing storage growth, assuring secure and timely information
access, protecting data and controlling costs by providing
innovative solutions that simplify the complexity associated
with managing corporate data. Network Appliance solutions are
the data management and storage foundation for many of the
worlds leading corporations and government agencies.
|
|
2.
|
Significant
Accounting Policies
|
Fiscal Year We operate on a
52-week or
53-week year
ending on the last Friday in April. For presentation purposes we
have indicated in the accompanying consolidated financial
statements that our fiscal year end is April 30. Fiscal
2006 and 2005 were
52-week
fiscal years. Fiscal 2004 was
53-week
fiscal year.
Basis of Presentation The consolidated
financial statements include the Company and its wholly-owned
subsidiaries. Intercompany accounts and transactions are
eliminated in consolidation.
Risk and Uncertainties There are no
concentrations of business transacted with a particular customer
nor concentrations of sales from a particular market or
geographic area that would severely impact our business in the
near term. However, we currently rely on a limited number of
suppliers for certain key components and several key contract
manufacturers to manufacture most of our products; any
disruption or termination of these arrangements could materially
adversely affect our operating results.
Cash and Cash Equivalents We consider
all highly liquid debt investments with original maturities of
three months or less to be cash equivalents at time of purchase.
Available-for-Sale
Investments Available-for-sale
investments with original maturities of greater than three
months are classified as short-term investments as these
investments generally consist of highly marketable securities
that are intended to be available to meet current cash
requirements. All of our investments are classified as
available-for-sale,
are carried at fair market value, and unrealized gains or losses
are recorded, net of taxes in accumulated other comprehensive
income (loss), which is a separate component of
stockholders equity. Any gains or losses on sales of
investments are computed based upon specific identification. For
all periods presented, realized gains and losses on
available-for-sale
investments were not material. Management determines the
appropriate classification of debt and equity securities at the
time of purchase and reevaluates the classification at each
reporting date. The fair value of our
available-for-sale
investment reflected in the Consolidated Balance Sheets was
$1,102,787 and $976,423 as of April 30, 2006 and 2005,
respectively.
Restricted Investments We have
available-for-sale
investments that are pledged as collateral pursuant to the Loan
agreement entered into with JPMorgan Chase Bank. These
investments are classified as short-term and long-term
restricted investment in our Consolidated Balance Sheets in
accordance with the investment maturity and loan repayment
schedule.
Investments in Nonpublic Companies We
have certain investments in nonpublicly traded companies in
which we have less than 20% of the voting rights and in which we
do not exercise significant influence and accordingly, we
account for these investments under the cost method. As of
April 30, 2006 and 2005, $11,020 and $1,837 of these
investments are included in other long-term assets on the
balance sheet and are carried at cost. We perform periodic
reviews of our investments for impairment.
Other-than-temporary
Impairment All of our
available-for-sale
investments and non-marketable equity securities are subject to
a periodic impairment review. Investments are considered to be
impaired when a decline in fair value is judged to be
other-than-temporary.
This determination requires significant judgment. For publicly
64
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
traded investments, impairment is determined based upon the
specific facts and circumstances present at the time, including
factors such as current economic and market conditions, the
credit rating of the securitys issuer, the length of time
an investments fair value has been below our carrying
value, and our ability to hold investments to maturity. If an
investments decline in fair value, caused by factors other
than changes in interest rates, is deemed to be
other-than-temporary,
we would reduce its carrying value to its estimated fair value,
as determined based on quoted market prices or liquidation
values. Declines in value judged to be
other-than-temporary,
if any, are recorded in operations as incurred. For
non-marketable equity securities, the impairment analysis
requires the identification of events or circumstances that
would likely have a significant adverse effect on the fair value
of the investment, including, revenue and earnings trends,
overall business prospects, limited capital resources, limited
prospects of receiving additional financing, limited prospects
for liquidity of the related securities and general market
conditions in the investees industry.
Inventories Inventories are stated at
the lower of cost
(first-in,
first-out basis) or market. Cost components include materials,
labor, and manufacturing overhead costs. We write down inventory
and record purchase commitment liabilities for excess and
obsolete inventory equal to the difference between the cost of
inventory and the estimated fair value based upon assumptions
about future demand and market conditions.
Property and Equipment Property and
equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the
assets, which generally range from three to five years. The land
at the Sunnyvale headquarters site and Research Triangle Park
(RTP), North Carolina are not depreciated but are reviewed for
impairment similar to our review of goodwill and intangible
assets discussed below. Leasehold improvements are amortized
over the shorter of the estimated useful lives of the assets or
the remaining term of the lease. Building improvements are
amortized over the estimated lives of the assets, which
generally range from 10 to 40 years. Construction in
progress will be amortized over the estimated useful lives of
the respective assets when they are ready for their intended use.
We review the carrying values of long-lived assets whenever
events and circumstances indicate that the net book value of an
asset may not be recovered through expected future cash flows
from its use and eventual disposition. The amount of impairment
loss, if any, is measured as the difference between the net book
value and the estimated fair value of the asset.
Goodwill and Purchased Intangible
Assets Goodwill and identifiable
intangibles are accounted for in accordance with
SFAS No. 141 Business Combinations
and SFAS No. 142 Goodwill and Other
Intangible Assets. We recorded goodwill and
identifiable intangibles related to the acquisitions and
evaluate these items for impairment on an annual basis, or
sooner if events or changes in circumstances indicate that
carrying values may not be recoverable. If an evaluation is
required, the estimated future undiscounted cash flows
associated with these assets would be compared to their carrying
amount to determine if a write-down to fair market value or
discounted cash flow value is required. We performed an annual
impairment test of goodwill on February 24, 2006 and
February 25, 2005, respectively, and found no impairment.
Purchased intangible assets include patents, trademarks,
tradenames, customer contracts/relationships and covenants not
to compete, which are carried at cost less accumulated
amortization. Amortization of purchased intangible assets is
computed using the straight-line method over estimated useful
lives of the assets, which generally range from 18 months
to five years. See Note 14 Goodwill and Purchased
Intangible Assets.
Revenue Recognition and Allowance We
apply the provisions of Statement of Position (SOP)
No. 97-2,
Software Revenue Recognition, and related
interpretations to our product sales because we believe our
firmware and operating software are essential to the
functionality of our hardware products. We recognize revenue
when:
|
|
|
|
|
Persuasive Evidence of an Arrangement
Exists. It is our customary practice to have a
purchase order
and/or
contract prior to recognizing revenue on an arrangement from our
end users, customers, value-added resellers, or distributors.
|
65
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Delivery has Occurred. Our product is
physically delivered to our customers, generally with standard
transfer terms such as FOB origin. We typically do not allow for
restocking rights with any of our value-added resellers or
distributors. Products shipped with acceptance criteria or
return rights are not recognized as revenue until all criteria
are achieved. If undelivered products or services exist that are
essential to the functionality of the delivered product in an
arrangement, delivery is not considered to have occurred.
|
|
|
|
The Fee is Fixed or Determinable. Arrangements
with payment terms extending beyond our standard terms,
conditions and practices are not considered to be fixed or
determinable. Revenue from such arrangements is recognized as
the fees become due and payable. We typically do not allow for
price-protection rights with any of our value-added resellers or
distributors.
|
|
|
|
Collection is Probable. Probability of
collection is assessed on a
customer-by-customer
basis. Customers are subjected to a credit review process that
evaluates the customers financial position and ultimately
their ability to pay. If it is determined at the outset of an
arrangement that collection is not probable based upon our
review process, revenue is recognized upon cash receipt.
|
For arrangements with multiple elements, we allocate revenue to
each element using the residual method. When all of the
undelivered elements are software-related, this allocation is
based on vendor specific objective evidence of fair value of the
undelivered items. When the undelivered elements include
non-software related items that are only sold as a bundle with
software related items, this allocation is based on objective
and reliable evidence of fair value, in accordance with
EITF 00-21.
We defer the portion of the arrangement fee equal to the fair
value of the undelivered elements until they are delivered.
Vendor specific objective evidence of fair value is based on the
price charged when the element is sold separately.
A typical arrangement includes product, software subscription,
and maintenance. Some arrangements include technical consulting
and training. Software subscriptions represent the right to
unspecified product upgrades and enhancements on a
when-and-if-available
basis, bug fixes, and patch releases. Service maintenance
includes contracts for technical support and hardware
maintenance. Revenue from software subscriptions and service
maintenance is recognized ratably over the contractual term,
generally one to three years. We typically sell technical
consulting services and training separately from any of our
other revenue elements, either on a time and materials basis or
for fixed price standard projects. The type of work that is
performed is not essential to the functionality of the software
or hardware. Accordingly, we recognize revenue as the services
are performed and in accordance with
EITF 03-05
Applicability of AICPA Statement of Position 97-2 to
Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental
Software. Revenue from hardware installation services
is a non-software deliverable because the software is not
essential to the functionality of the installation service and
is therefore outside of the scope of
SOP 97-2.
Revenue from shipping and handling is included in product
revenue and its related cost included in cost of product revenue.
In prior years, software subscriptions revenue was included as a
part of product revenue and disclosed separately in our
footnotes. Beginning in fiscal 2006, this revenue and its
related cost of revenue have been separately disclosed in our
income statements, and prior periods have been revised to
reflect this presentation.
We record reductions to revenue for estimated sales returns at
the time of shipment. These estimates are based on historical
sales returns, changes in customer demand, and other factors. If
actual future returns and allowances differ from past
experience, additional allowances may be required.
We also maintain a separate allowance for doubtful accounts for
estimated losses based on our assessment of the collectibility
of specific customer accounts and the aging of our accounts
receivable. We analyze accounts receivable and historical bad
debts, customer concentrations, customer solvency, current
economic and geographic trends, and changes in customer payment
terms and practices when evaluating the adequacy of the
allowance for doubtful accounts. Our allowance for doubtful
accounts as of April 30, 2006 was $2,380, compared to
$5,445 as of April 30, 2005. If the financial condition of
our customers deteriorates, resulting in an impairment of their
ability to make payments, additional allowances may be required.
66
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred Revenues Deferred revenues
consist primarily of amounts related to software subscriptions
and other service arrangements.
Software Development Costs The costs for
the development of new software products and substantial
enhancements to existing software products are expensed as
incurred until technological feasibility has been established,
at which time any additional costs would be capitalized in
accordance with SFAS No. 86, Accounting for
the Costs of Software to Be Sold, Leased, or Otherwise
Marketed. Because we believe our current process for
developing software is essentially completed concurrently with
the establishment of technological feasibility, which occurs
upon the completion of a working model, no costs have been
capitalized for any of the periods presented. In accordance with
SOP No.
98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use, the cost of internally
developed software is capitalized and included in property and
equipment at the point at which the conceptual formulation,
design, and testing of possible software project alternatives
have been completed and management authorizes and commits to
funding the project. Pilot projects and projects where expected
future economic benefits are less than probable are not
capitalized. Internally developed software costs include the
cost of software tools and licenses used in the development of
our systems, as well as consulting costs. Completed projects are
transferred to property and equipment at cost and are amortized
on a straight-line basis over their estimated useful lives,
generally three years. We did not capitalize any software
development costs in fiscal 2006 and 2005.
Income Taxes Deferred income tax assets
and liabilities are provided for temporary differences that will
result in future tax deductions or income in future periods, as
well as the future benefit of tax credit carryforwards. A
valuation allowance reduces tax assets to their estimated
realizable value. In years prior to fiscal 2006,
U.S. income taxes were not provided on that portion of
unremitted earnings of foreign subsidiaries that were expected
to be reinvested indefinitely. The Jobs Act created a one-time
incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85% dividend-received
deduction for certain dividends from certain
non-U.S. subsidiaries.
During the fourth quarter of fiscal 2006, we repatriated
$405.5 million of accumulated foreign earnings and recorded
a $22.5 million federal and state income tax liability upon
the remittance of those foreign earnings.
Foreign Currency Translation For
subsidiaries whose functional currency is the local currency,
gains and losses resulting from translation of these foreign
currency financial statements into U.S. dollars are
recorded within stockholders equity as part of accumulated
other comprehensive income (loss). For subsidiaries where the
functional currency is the U.S. dollar, gains and losses
resulting from the process of remeasuring foreign currency
financial statements into U.S. dollars are included in
other income (expenses), net.
Derivative Instruments We follow
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as amended.
Derivatives that are not designated as hedges are adjusted to
fair value through earnings. If the derivative is designated as
a hedge, depending on the nature of the exposure being hedged,
changes in fair value will either be offset against the change
in fair value of the hedged items through earnings, or
recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of the hedge
is recognized in earnings immediately. For all periods
presented, realized gains and losses on ineffective portion of
the hedge were not material.
As a result of our significant international operations, we are
subject to risks associated with fluctuating exchange rates. We
use derivative financial instruments, principally currency
forward contracts and currency options, to attempt to minimize
the impact of exchange rate movements on our balance sheet and
operating results. Factors that could have an impact on the
effectiveness of our hedging program include the accuracy of
forecasts and the volatility of foreign currency markets. These
programs reduce, but do not always entirely eliminate, the
impact of currency exchange movements. The maturities of these
instruments are generally less than one year.
67
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Currently, we do not enter into any foreign exchange forward
contracts to hedge exposures related to firm commitments or
equity investments. Our major foreign currency exchange
exposures and related hedging programs are described below:
Balance Sheet. We utilize foreign currency
forward and options contracts to hedge exchange rate
fluctuations related to certain foreign assets and liabilities.
Gains and losses on these derivatives offset gains and losses on
the assets and liabilities being hedged and the net amount is
included in earnings. In fiscal 2006, net gains generated by
hedged assets and liabilities totaled $3,505, which were offset
by losses on the related derivative instruments of $1,681. In
fiscal 2005, net gains generated by hedged assets and
liabilities totaled $4,312, which were offset by losses on the
related derivative instruments of $5,933. In fiscal 2004, net
gains generated by hedged assets and liabilities totaled $7,265,
which were offset by losses on the related derivative
instruments of $10,115.
The premiums paid on the foreign currency option contracts are
recognized as a reduction to other income when the contract is
entered into. Other than the risk associated with the financial
condition of the counterparties, our maximum exposure related to
foreign currency options is limited to the premiums paid.
Forecasted Transactions. We use currency
forward contracts to hedge exposures related to forecasted sales
and operating expenses denominated in certain foreign
currencies. These contracts are designated as cash flow hedges
and in general closely match the underlying forecasted
transactions in duration. The contracts are carried on the
balance sheet at fair value and the effective portion of the
contracts gains and losses is recorded as other
comprehensive income until the forecasted transaction occurs.
If the underlying forecasted transactions do not occur, or it
becomes probable that they will not occur, the gain or loss on
the related cash flow hedge is recognized immediately in
earnings. For fiscal years 2006, 2005 and 2004, we did not
record any gains or losses related to forecasted transactions
that did not occur or became improbable.
We measure the effectiveness of hedges of forecasted
transactions on at least a quarterly basis by comparing the fair
values of the designated currency forward contracts with the
fair values of the forecasted transactions. No ineffectiveness
was recognized in earnings during fiscal 2006, 2005 and 2004.
As of April 30, 2006 the notional fair values of foreign
exchange forward and foreign currency option contracts totaled
$345,067.
We do not believe that these derivatives present significant
credit risks, because the counterparties to the derivatives
consist of major financial institutions, and we manage the
notional amount of contracts entered into with any one
counterparty. We do not enter into derivative financial
instruments for speculative or trading purposes.
Use of Estimates The preparation of the
consolidated financial statements and related disclosures are in
conformity with accounting principles generally accepted in the
United States of America requires management to establish
accounting policies which contain estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
Concentration of Credit Risk and Allowance for Doubtful
Accounts Financial instruments that
potentially subject us to concentrations of credit risk consist
primarily of cash equivalents, short-term investments, and
accounts receivable. Cash, cash equivalents, and short-term
investments consist primarily of U.S. government agencies,
corporate bonds, auction-rate securities and municipal bonds,
cash accounts held at various banks, and money market funds held
at several financial institutions. We sell our products
primarily to large organizations in different industries and
geographies. Credit risk is mitigated by our credit evaluation
process and limited payment terms. We do not require collateral
or other security to support accounts receivable. In addition,
we maintain an allowance for potential credit losses. In
entering into forward foreign exchange contracts, we have
assumed the risk that might arise from the possible inability of
counterparties to meet the terms of their contracts. The
counterparties
68
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to these contracts are major multinational commercial banks, and
we do not expect any losses as a result of counterparty defaults.
Comprehensive Income Comprehensive
income is defined as the change in equity during a period from
nonowner sources. Comprehensive income for the years ending
April 30, 2006, 2005 and 2004 has been disclosed within the
consolidated statement of stockholders equity and
comprehensive income (loss).
The components of accumulated other comprehensive income (loss)
at April 30, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Accumulated translation adjustments
|
|
$
|
367
|
|
|
$
|
1,283
|
|
|
$
|
1,202
|
|
Accumulated unrealized gain (loss)
on derivatives
|
|
|
(1,751
|
)
|
|
|
111
|
|
|
|
312
|
|
Accumulated unrealized loss on
available-for-sale
investments
|
|
|
(9,714
|
)
|
|
|
(5,444
|
)
|
|
|
(892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive income (loss)
|
|
$
|
(11,098
|
)
|
|
$
|
(4,050
|
)
|
|
$
|
622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share Basic net income
per share is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for that period. Diluted net income per share is
computed giving effect to all dilutive potential shares that
were outstanding during the period. Dilutive potential common
shares consist of incremental common shares subject to
repurchase, common shares issuable upon exercise of stock
options and restricted stock awards.
The following is a reconciliation of the numerators and
denominators of the basic and diluted net income per share
computations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
April 30
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net Income
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
|
$
|
152,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
371,544
|
|
|
|
361,514
|
|
|
|
347,134
|
|
Weighted average common shares
outstanding subject to repurchase
|
|
|
(483
|
)
|
|
|
(505
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic computation
|
|
|
371,061
|
|
|
|
361,009
|
|
|
|
346,965
|
|
Weighted average common shares
outstanding subject to repurchase
|
|
|
483
|
|
|
|
505
|
|
|
|
169
|
|
Diluted effect of stock options
|
|
|
16,837
|
|
|
|
18,898
|
|
|
|
19,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted computation
|
|
|
388,381
|
|
|
|
380,412
|
|
|
|
366,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 30, 2006, 2005 and 2004, 8,831, 15,994, and
19,794 shares of common stock options with a weighted
average exercise price of $65.34, $52.81, and $47.16
respectively, were excluded from the diluted net income per
share computation, as their exercise prices were greater than
the average market price of the common shares for the periods
presented and would therefore be antidilutive.
Stock-Based Compensation We account for
stock-based compensation in accordance with the provisions of
APB No. 25, Accounting for Stock Issued to
Employees, and comply with the disclosure provisions
of SFAS No. 123 as amended by SFAS No. 148,
Accounting for Stock-Based
Compensation Transition and
69
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Disclosures. Deferred compensation recognized under
APB No. 25 is amortized ratably to expense over the vesting
periods. We account for stock options issued to nonemployees in
accordance with the provisions of SFAS No. 123 and
EITF
No. 96-18
Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services under the
fair-value-based
method.
We adopted the disclosure-only provisions of
SFAS No. 123, and accordingly, no expense has been
recognized for options granted to employees under the various
option plans described under Note 7. We amortize deferred
stock-based compensation ratably over the vesting periods of the
applicable stock purchase rights, restricted stocks, and stock
options, generally four years. Deferred stock compensation under
APB No. 25 and pro forma net income (loss) under the
provisions of SFAS No. 123 are adjusted to reflect
cancellations and forfeitures due to employee terminations as
they occur.
Had compensation expense been determined based on the fair value
at the grant date for awards, consistent with the provisions of
SFAS No. 123, our pro forma net income (loss) and pro
forma net income (loss) per share would be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
April 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income as reported
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
|
$
|
152,087
|
|
Add: stock based employee
compensation expense included in reported net income under APB
No. 25, net of related tax effects
|
|
|
7,976
|
|
|
|
4,607
|
|
|
|
2,038
|
|
Deduct: total stock based
compensation determined under fair value based method for all
awards, net of related tax effects
|
|
|
(98,762
|
)
|
|
|
(81,745
|
)
|
|
|
(94,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
175,666
|
|
|
$
|
148,616
|
|
|
$
|
59,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, as
reported
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, as
reported
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, pro
forma
|
|
$
|
0.47
|
|
|
$
|
0.41
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, pro
forma
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair values of each option grant and shares purchased were
estimated on the date of grant using the Black-Scholes option
pricing model and were not remeasured as a result of subsequent
stock price fluctuations. The following assumptions were used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plans
|
|
Employee Stock Purchase
Plan
|
|
|
Years Ended
April 30,
|
|
Years Ended
April 30,
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
2004
|
|
Expected Life (in years)
|
|
3.85
|
|
3.74
|
|
3.42
|
|
0.50
|
|
0.50
|
|
0.50
|
Risk-free interest rate
|
|
4% - 5%
|
|
3% - 4%
|
|
2%
|
|
3% - 5%
|
|
1% - 3%
|
|
1%
|
Volatility
|
|
66% - 69%
|
|
70% - 73%
|
|
74% - 77%
|
|
66% - 69%
|
|
70% - 73%
|
|
74% - 77%
|
Expected dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective
assumptions, including the expected stock price volatility. We
use projected volatility rates, which are based upon historical
volatility rates since our initial public offering trended into
future years.
70
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statements of Cash Flows Supplemental
cash flows and noncash investing and financing activities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
April 30
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Supplemental Cash Flows
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
13,730
|
|
|
$
|
13,284
|
|
|
$
|
14,566
|
|
Income tax refund
|
|
|
4,262
|
|
|
|
12,399
|
|
|
|
13,812
|
|
Interest expense paid
|
|
|
1,239
|
|
|
|
97
|
|
|
|
292
|
|
Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of evaluation inventory
to equipment
|
|
|
21,918
|
|
|
|
10,122
|
|
|
|
7,892
|
|
Deferred stock compensation, net
of reversals
|
|
|
26,968
|
|
|
|
154
|
|
|
|
25,382
|
|
Income tax benefit from employee
stock transactions
|
|
|
36,596
|
|
|
|
27,829
|
|
|
|
49,535
|
|
Acquisition of property and
equipment on account
|
|
|
4,618
|
|
|
|
|
|
|
|
|
|
Reclassification of restricted
investments
|
|
|
241,152
|
|
|
|
|
|
|
|
|
|
Stock issued for acquisition
|
|
|
191,874
|
|
|
|
|
|
|
|
259,518
|
|
Options assumed for acquired
business
|
|
|
38,456
|
|
|
|
|
|
|
|
43,094
|
|
Interest accrued for debt
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Goodwill adjustment related to
acquisitions
|
|
|
3,553
|
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Standards In
November 2005, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position FSP 115-1 which
addresses the determination as to when an investment is
considered impaired, whether that impairment is
other-than-temporary,
and the measurement of an impairment loss. This FSP also
includes accounting considerations subsequent to the recognition
of an
other-than-temporary
impairment and requires certain disclosures about unrealized
losses that have not been recognized as
other-than-temporary
impairments. The guidance in this FSP amends Statement of
Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities and APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock. The
guidance in FSP 115-1 shall be applied to reporting periods
beginning after December 15, 2005. We are required to adopt
FSP 115-1 for fiscal years beginning after May 1, 2006. We
are currently evaluating the effect that the adoption of FSP
115-1 will have on our consolidated results of operations and
financial condition but do not expect it to have a material
impact.
In June 2005, the FASB issued SFAS No. 154
(SFAS No. 154), Accounting Changes and
Error Corrections: a Replacement of Accounting Principles Board
Opinion No. 20 (APB 20) and FASB Statement
No 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting
principle unless it is impracticable to do so. Retrospective
application refers to the application of a different accounting
principle to previously issued financial statements as if that
principle had always been used. SFAS No. 154s
retrospective-application requirement replaces
APB 20s requirement to recognize most voluntary
changes in accounting principle by including in net income of
the period of the change the cumulative effect of changing to
the new accounting principle. This Statement defines
retrospective application as the application of a different
accounting principle to prior accounting periods as if that
principle had always been used or as the adjustment of
previously issued financial statements to reflect a change in
the reporting entity. This Statement also redefines restatement
as the revising of previously issued financial statements to
reflect the correction of an error. The requirements are
effective for accounting changes made in fiscal years beginning
after December 15, 2005 and will only impact the
consolidated financial statements in periods in which a change
in accounting principle is made.
In November 2004, the FASB issued SFAS No. 151
Inventory Costs (SFAS No. 151).
This statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage).
SFAS No. 151 requires that those items be
71
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognized as current-period charges. In addition, this
Statement requires that allocation of fixed production overhead
to costs of conversion be based upon the normal capacity of the
production facilities. The provisions of SFAS No. 151
are effective for inventory cost incurred in fiscal years
beginning after June 15, 2005. As such, we are required to
adopt these provisions at the beginning of fiscal 2007, which
begins on May 1, 2006. We do not expect the adoption of
SFAS No. 151 to have a material impact on our
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123R.
Generally, the requirements of SFAS No. 123R are
similar to those of SFAS No. 123. However,
SFAS No. 123R requires companies to now recognize all
share-based payments to employees, including grants of employee
stock options, in their statements of operations based on the
fair value of the payments. Pro forma disclosure will no longer
be an alternative. The effective date of the new standard for
our consolidated financial statements is the first quarter of
fiscal 2007, which begins on May 1, 2006.
In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 107, which provides guidance on the
implementation of Statement SFAS No. 123R,
Share-Based Payments
(SFAS No. 123R) (see discussion below). In particular,
SAB No. 107 provides key guidance related to valuation
methods (including assumptions such as expected volatility and
expected term), the accounting for income tax effects of
share-based payment arrangements upon adoption of
SFAS No. 123R, the modification of employee share
options prior to the adoption of SFAS No. 123R, the
classification of compensation expense, capitalization of
compensation cost related to share-based payment arrangements,
first-time adoption of SFAS No. 123R in an interim
period, and disclosures in Managements Discussion and
Analysis subsequent to the adoption of SFAS No. 123R.
In November 2005, the FASB issued FSP
FAS 123R-3,
Transition Election and Accounting for Tax
Effects. The guidance provides a simplified
method to calculate the Additional Paid-In Capital (APIC) pool
for beginning balance of excess tax benefits and the method of
determining the subsequent impact on the pool of option awards
that are outstanding and fully or partially vested upon the
adoption of SFAS No. 123R beginning on May 1,
2006. In addition, this FSP addresses that when the alternative
APIC pool calculation is used, tax benefits related to certain
employee awards should be included as a cash flow from financing
activities and a cash outflow from operating activities within
the statements of cash flows. The FSP allows companies up to one
year from the later of the adoption date of
SFAS No. 123R or November 10, 2005 to evaluate
the available transition alternatives and make a one-time
election. We are in the process of evaluating the impact of the
new method provided by this guidance.
SFAS No. 123R and its related guidance permits public
companies to adopt its requirements using one of two methods:
modified prospective method or modified retrospective method. We
plan to adopt SFAS No. 123R using the modified
prospective method, in which compensation cost is recognized
beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based
payments granted after the effective date and (b) based on
the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of
SFAS No. 123R that remain unvested on the effective
date. We will recognize in our results of operations the
compensation cost for stock-based awards issued after
April 30, 2006 on a straight-line basis over the requisite
service period for the entire award. For stock-based awards
issued prior to May 1, 2006, we amortized the related
compensation costs using the graded-vesting method.
As permitted by SFAS No. 123, we currently account for
share-based payments to employees using the APB 25
intrinsic value method and, as such, generally recognize no
compensation cost for employee stock options as grant date value
equals fair value. The adoption of the SFAS No. 123R
fair value method will have a significant impact on our reported
results of operations because the stock-based compensation
expense will be charged directly against our reported earnings.
The pre-tax balance of unearned stock-based compensation to be
expensed in the period fiscal 2007 through 2010 related to
share-based awards unvested as of April 30, 2006, as
previously calculated under the disclosure-only requirements of
SFAS No. 123, is approximately $241,000. If there are
any modifications or cancellations of the underlying unvested
securities, we may be required to accelerate, increase, or
cancel any remaining unearned stock-based compensation expense.
To the extent that we grant additional equity securities to
employees or assume unvested securities in connection with any
acquisitions, our stock-based compensation
72
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expense will be increased by the additional unearned
compensation resulting from those additional grants or
acquisitions. We anticipate that we will grant additional
employee stock options and restricted stock units in fiscal
2007. The fair value of these grants cannot be predicted with
certainty at this time due to the fact that the expense amount
will depend on the timing of new grants, the number of new
grants, changes in the market price or the volatility of our
common stock. However, we currently estimate that the impact on
our first fiscal quarter will be between
$0.07 $0.09 per share. As of May 1,
2006, the contractual life of our stock options has been
shortened to seven years from ten years for options issued on or
after this date, and to the extent that the shorter life changes
employees exercise behavior, it may change the expected
term of an option going forward. We are not aware of any other
changes in business practices and do not expect any violations
of debt covenants due to the adoption of SFAS No. 123R.
|
|
3.
|
Balance
Sheet Components
|
Short-term
investments
The following is a summary of investments at April 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Auction rate securities
|
|
$
|
325,608
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
325,609
|
|
Municipal bonds
|
|
|
5,024
|
|
|
|
|
|
|
|
65
|
|
|
|
4,959
|
|
Corporate securities
|
|
|
4,945
|
|
|
|
|
|
|
|
3
|
|
|
|
4,942
|
|
Corporate bonds
|
|
|
469,135
|
|
|
|
9
|
|
|
|
5,339
|
|
|
|
463,805
|
|
U.S. government agencies
|
|
|
286,983
|
|
|
|
|
|
|
|
3,812
|
|
|
|
283,171
|
|
U.S. Treasuries
|
|
|
20,189
|
|
|
|
|
|
|
|
386
|
|
|
|
19,803
|
|
Money market funds
|
|
|
472,722
|
|
|
|
17
|
|
|
|
114
|
|
|
|
472,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and equity securities
|
|
|
1,584,606
|
|
|
|
27
|
|
|
|
9,719
|
|
|
|
1,574,914
|
|
Less cash equivalents
|
|
|
472,224
|
|
|
|
17
|
|
|
|
114
|
|
|
|
472,127
|
|
Less short-term restricted
investments
|
|
|
138,215
|
|
|
|
|
|
|
|
1,507
|
|
|
|
136,708
|
(1)
|
Less long-term restricted
investments
|
|
|
106,616
|
|
|
|
|
|
|
|
2,173
|
|
|
|
104,443
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
867,551
|
|
|
$
|
10
|
|
|
$
|
5,925
|
|
|
$
|
861,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of investments at April 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Auction rate securities
|
|
$
|
145,803
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
145,803
|
|
Municipal bonds
|
|
|
22,280
|
|
|
|
|
|
|
|
64
|
|
|
|
22,216
|
|
Corporate securities
|
|
|
29
|
|
|
|
21
|
|
|
|
|
|
|
|
50
|
|
Corporate bonds
|
|
|
441,484
|
|
|
|
25
|
|
|
|
4,119
|
|
|
|
437,390
|
|
U.S. government agencies
|
|
|
354,108
|
|
|
|
17
|
|
|
|
3,124
|
|
|
|
351,001
|
|
U.S. Treasuries
|
|
|
20,187
|
|
|
|
|
|
|
|
224
|
|
|
|
19,963
|
|
Money market funds
|
|
|
125,762
|
|
|
|
|
|
|
|
|
|
|
|
125,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and equity securities
|
|
|
1,109,653
|
|
|
|
63
|
|
|
|
7,531
|
|
|
|
1,102,185
|
|
Less cash equivalents
|
|
|
125,762
|
|
|
|
|
|
|
|
|
|
|
|
125,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
983,891
|
|
|
$
|
63
|
|
|
$
|
7,531
|
|
|
$
|
976,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Additional restricted cash of $1,831 and $3,928 are included in
short-term and long-term restricted cash and investments,
respectively in the accompanying Consolidated Balance Sheets. |
We record net unrealized gains or losses on
available-for-sale
securities in stockholders equity. Realized gains or
losses are reflected in income which have not been material for
all years presented. The following table shows the gross
unrealized losses and fair values of our investments, aggregated
by investment category and length of time that individual
securities have been in a continuous unrealized loss position,
at April 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Municipal bonds
|
|
$
|
4,019
|
|
|
$
|
(41
|
)
|
|
$
|
940
|
|
|
$
|
(24
|
)
|
|
$
|
4,959
|
|
|
$
|
(65
|
)
|
Corporate Securities
|
|
|
4,942
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
4,942
|
|
|
|
(3
|
)
|
U.S. Treasuries
|
|
|
9,969
|
|
|
|
(130
|
)
|
|
|
9,834
|
|
|
|
(256
|
)
|
|
|
19,803
|
|
|
|
(386
|
)
|
U.S. Government Agencies
|
|
|
169,401
|
|
|
|
(2,139
|
)
|
|
|
113,770
|
|
|
|
(1,673
|
)
|
|
|
283,171
|
|
|
|
(3,812
|
)
|
Corporate bonds
|
|
|
252,504
|
|
|
|
(1,678
|
)
|
|
|
195,531
|
|
|
&nbs |