e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended
April 27, 2007
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission File Number 0-27130
Network Appliance,
Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
77-0307520
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
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:
|
|
|
Title of Each Class
|
|
Name of Exchange on Which Registered
|
|
Common Stock, $0.001 Par Value
|
|
The NASDAQ Stock Market LLC
|
Securities registered pursuant to Section 12(g) of the
Act:
None
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.
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
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 27, 2006, the last day of
Registrants most recently completed second fiscal quarter,
was $7,421,945,441 (based on the closing price for shares of the
Registrants common stock as reported by the NASDAQ Global
Select 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 22, 2007, 363,479,924 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
September 5, 2007, which will be filed with the Securities
and Exchange Commission not later than 120 days after
April 27, 2007.
TABLE OF
CONTENTS
TRADEMARKS
©2007
Network Appliance, Inc. All rights reserved. Specifications
subject to change without notice. NetApp, the Network Appliance
logo, DataFabric, Data ONTAP, FAServer, FilerView, FlexClone,
FlexVol, MultiStore, NearStore, NetCache, SecureShare,
SnapDrive, SnapLock, SnapManager, SnapMirror, SnapRestore,
SnapVault, SyncMirror, Topio, VFM, and WAFL are registered
trademarks and Network Appliance, ApplianceWatch, FlexShare,
LockVault, Protection Manager, RAID-DP, ReplicatorX, Snapshot,
StoreVault, and Virtual File Manager are trademarks of Network
Appliance, Inc. in the U.S. and other countries. Decru and
Decru DataFort are registered trademarks of Decru, a NetApp
company. 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
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 expectation to pay lease payments on our lease
arrangements; (3) our expectation that our existing
facilities and those being developed are adequate for our
requirements over at least the next two years; (4) our
anticipation that we will retain all available funds to finance
internal growth and product development as well as other
possible management initiatives; (5) our belief that our
strategic investments are targeted at some of the strongest
growth areas of the storage market; (6) our anticipation
that we will experience further price decline per petabyte for
our hardware products; (7) our expectation that our future
gross margins will be negatively affected by various factors
such as global service investment cost and competition;
(8) our belief that our products continue to offer the best
price-performance value in the industry; (9) our
anticipation regarding the SAN competitiveness of our new
products; (10) our expectation that higher disk content
associated with high-end storage systems will negatively affect
our gross margins in the future; (11) our estimates
regarding future amortization of existing technology relating to
our acquisitions; (12) our expectation that service margins
will experience some variability; (13) our estimates
regarding future amortization of trademarks, tradenames,
customer contracts, and relationships relating to our
acquisitions; (14) our expectation that we will continue to
selectively add sales capacity in an effort to expand domestic
and international markets; (15) our expectation that we
will increase our sales and marketing expenses commensurate with
future revenue growth; (16) our estimates regarding future
capitalized patents amortization expenses; (17) 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 customer requirements;
(18) our expectation that we will continuously support
current and future product development and enhancement efforts
and incur corresponding charges; (19) our intention to
continuously broaden our existing product offerings and
introduce new products; (20) our belief that our research
and development, and general and administrative expenses will
increase in absolute dollars in fiscal 2008; (21) our
estimates regarding future amortization of covenants not to
compete relating to our acquisitions; (22) our expectation
that interest income will increase in fiscal 2008; (23) our
belief that period-to-period changes in foreign exchange gains
or losses will continue to be impacted by hedging costs
associated with our forward and option activities and forecast
variance; (24) our expectation that cash provided by
operating activities may fluctuate in future periods;
(25) the possibility we may receive less cash from stock
option exercises if stock option exercise patterns change;
(26) our expectations regarding our contractual cash
obligations and other commercial commitments at April 27,
2007, for future periods; (27) our expectation regarding
the complete construction of our building under the BNP lease
and the estimates regarding future minimum lease payments under
the lease term; (28) our expectation that capital
expenditures will increase consistent with our business growth;
(29) our expectation that we will incur higher capital
expenditures in the near future to expand our operations;
(30) 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; (31) 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 twelve
months; (32) 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, and (33) our belief that the results of our
GSA audit will not have a materially adverse effect on us, are
inherently uncertain as they are based on managements
current expectations and assumptions concerning future events,
and
2
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 build non-deferred
backlog to levels more consistent with our past results and to
increase our revenue over the next several quarters (5) our
ability to successfully introduce new products; (6) our
ability to achieve and capitalize on changes in market demand;
(7) acceptance of, and demand for, our products;
(8) demand for our global service and support and
professional services; (9) our ability to identify and
respond to significant market trends and emerging standards;
(10) our ability to realize our financial objectives
through increased investment in people, process, and systems;
(11) our ability to maintain our supplier and contract
manufacturer relationships; (12) the ability of our
competitors to introduce new products that compete successfully
with our products; (13) our ability to expand direct and
indirect sales and global service and support; (14) the
general economic environment and the continued growth of the
storage markets; (15) our ability to sustain
and/or
improve our cash and overall financial position; (16) the
results of our GSA audit; and (17) 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 20.
Overview
Network Appliance, Inc. (Network Appliance or
NetApp), a Delaware corporation, is a leading
provider of data management solutions that simplify the
complexities of storing, managing, protecting, and archiving
enterprise data. NetApp has a broad portfolio of data-center
proven solutions that deliver unmatched simplicity and value.
Meeting the needs of todays data center means delivering
not only products of the highest quality and reliability, but
also products that can meet the expansive requirements and
demanding service-levels of todays critical business
applications. To better meet these requirements, NetApp has
partnerships with key industry leaders such as IBM Corporation
(IBM), Microsoft Corporation
(Microsoft), Oracle Corporation
(Oracle), SAP Corporation (SAP),
Symantec Corporation (Symantec), and VMware, Inc.
(VMware), with whom we work closely to ensure our
integrated solutions work well together.
NetApp was founded in 1992 with the goal of simplifying data
management. We shipped the worlds first network storage
appliance a year later. Since then, we have brought to market
many significant advancements in storage and data management,
and we have introduced technologies to increase the efficiency
and reliability of enterprise storage systems. These are the
result of applied innovation solutions specifically
designed to help customers quickly adapt and respond to change.
The company has grown to over 6,600 employees. To date,
thousands of customers in 138 countries around the world have
deployed more than 94,000 NetApp systems.
The NetApp approach to delivering value to our customers is
unique. Our unified architecture offers unparalleled scalability
and flexibility. It also employs a single set of software and
processes across all attachment types and tiers of storage,
increasing the efficiency of our customers people,
systems, processes, and business.
From the quality and reliability of the products we ship, to the
support and services we provide, to our financial interactions,
to the way we manage customer accounts, we strive to go beyond
customer satisfaction to help our customers succeed
in their businesses. We measure our success by our
customers success, and we work to form long-lasting
partnerships with our customers and partners, built on the
principles of trust and integrity.
NetApp endeavors to provide the lowest total cost of ownership
(TCO) by offering a broad portfolio of solutions
that:
|
|
|
|
|
Reduce cost and complexity. We work to
increase the overall efficiency of our customers systems
by maximizing the utilization of their storage and data
management systems. Not only do we simplify the management of
systems to lower personnel costs, we also help ensure the
nonstop availability of our customers critical business
data to reduce or eliminate the business costs associated with
outages and unavailability.
|
3
|
|
|
|
|
Minimize risk. NetApp offers highly available
solutions that minimize risks associated with data stewardship.
Our solutions protect against data loss or corruption and
unauthorized access or data theft. They also help ensure
infrastructure availability even in the event of a natural
disaster while enabling regulatory compliance and legal
discovery.
|
|
|
|
Enable change. NetApp systems offer unmatched
architectural simplicity that delivers scalability and
flexibility to our customers. This adaptability helps our
customers respond nimbly to changes in business direction,
competitive pressure, new business opportunity, and growth.
NetApp helps customers stay in control by preserving flexibility
and the ability to scale quickly.
|
Customer
Challenges
Network
Appliancetm
enterprise data management solutions address several major
information technology (IT) challenges that plague
todays corporations.
|
|
|
|
|
Explosive data growth. Managing the continued
growth in data volume is one of the most critical challenges
enterprises face today. By some estimates, the amount of data
corporations are required to keep is doubling annually. Network
Appliance specializes in storage consolidation solutions that
allow customers to manage this explosive growth, while lowering
their costs. Centralized management of pooled storage capability
frees up valuable infrastructure and staff resources to improve
enterprise productivity, performance, and profitability.
|
|
|
|
Doing more with less. Many of the costs that
drive up the total cost of data management are associated with
such data center operations as data backup and recovery,
hardware and software upgrade and maintenance arrangements,
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 efficiency and utilization. This means that our
customers can do more while buying less.
|
|
|
|
Scaling the infrastructure. As enterprises
grow, customers are challenged to quickly adapt their
infrastructures to meet corporate needs. A flexible, scalable,
unified storage platform allows Network Appliance to deliver
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 increase
data access throughout their organizations by quickly
replicating and relaying information between many locations
while fully protecting the data.
|
|
|
|
Around-the-clock access. All companies need to
avoid costly downtime whether a result of 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
existing network infrastructures, NetApp storage appliances and
data management software enable customers to implement fast,
robust replication and recovery solutions within the bounds of
their IT budgets.
|
|
|
|
Regulatory compliance. Regulatory compliance
is a growing concern for every industry on a global basis.
NetApp offers compliance and security solutions that reduce
business risk by addressing government and industry regulations
while satisfying the need for data permanence, security, and
confidentiality. By utilizing open industry-standard solutions
and
best-in-class
partners, NetApp regulatory compliance solutions improve access
to information transparently and seamlessly.
|
|
|
|
Electronic data discovery. Electronic
discovery (or
e-discovery)
is a standard requirement for todays litigation process.
NetApp information management solutions enable data discovery to
mitigate litigation and compliance risks and to facilitate
informed decision making. Our industry-leading information
classification and management capabilities give organizations
unmatched visibility and control of unstructured data across the
enterprise.
|
|
|
|
Security of corporate and personal data. With
increasing amounts of personal customer data, companies assume
great potential risk for their customers, their businesses, and
their reputations. NetApp data encryption appliances provide the
highest level of security available and can be seamlessly added
to existing data infrastructures as required.
|
4
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.
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 any 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 Data ONTAP operating system includes two standard features,
FlexVoltm
and
FlexSharetm,
which improve the effectiveness of consolidation. FlexVol
creates volumes that can be readily expanded or contracted while
reducing the need for spare capacity. FlexShare enables the
consolidation and prioritization of disparate workloads by
ensuring that critical workloads get fast response.
The operating system also includes integrated secure access
capabilities and
FilerView®,
a Web-based element manager. Snapshot technology, included as
part of the base system, enables 256 virtual 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.
Data ONTAP GX is our high-performance operating system, to
support fully integrated, multinode systems. Data ONTAP GX
systems are optimized to meet the extreme performance
requirements of high-performance computing applications running
on large
Linux®
and UNIX clusters, while delivering unmatched management
simplicity and reliability. 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. NetApp is in the process of merging the features
of Data ONTAP 7G with Data ONTAP GX.
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 FlexVol,
FlexClone®,
FlexSharetm,
FlexCache and
MultiStore®.
5
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 2007 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.
FlexCache
FlexCache technology allows the creation of read-writeable
replicas of volumes by creating caching volumes on multiple
storage controllers. FlexCache technology is used by top
enterprise customers in compute farm environments to scale
Network File System (NFS) read I/O operations per
second by surrounding volumes with multiple storage controllers.
FlexCache technology is also used in distributed environments to
improve user productivity by providing locally cached access to
remote volumes over NFS.
MultiStore
NetApp MultiStore software lets you quickly and easily create
completely separate logical partitions in storage systems and
network storage resources. Each virtual storage partition
maintains absolute separation from every other storage
partition. The result is that different enterprise departments
sharing the same storage resources cannot access or in any way
find other partitions. MultiStore assures that no information on
any virtual partition can be viewed, used, or downloaded by
unauthorized users.
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 network (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
6
servers and server clusters with dedicated access. All FAS
systems run the highly efficient Data
ONTAP®
microkernel operating system.
|
|
|
|
|
FAS6000 series enterprise storage systems. The
FAS6000 series is the flagship of the FAS product line,
delivering the performance, scalability, and resiliency required
to consolidate data for the largest application environments.
FAS6000 systems provide consistent high performance, whether
handling the aggregated workloads of many servers or serving a
single, high-capacity application, making them superb storage
solutions for business applications, online transaction
processing, databases, and large-scale
e-mail, as
well as for a variety of technical applications such as
electronics and aerospace design, seismic processing, and
computer graphics imaging. The FAS6000 series scales to over
1,000 disk drives and 504 terabytes (TB) of
capacity, with support for tiered storage using FC and Serial
ATA (SATA) disk drives. Input/output
(I/O)
connectivity scales up to 56 FC ports or 56 Ethernet ports (or a
combination of the two), including support for both 4Gb FC SAN
and 10 Gigabit Ethernet.
|
When installed with the NearStore software bundle, the FAS6000
systems are optimized for secondary disk operations (data
protection and retention) and are flexible disk-based near-line
storage systems that combine the powerful Data ONTAP operating
system with economical, high-capacity disk drives providing the
performance, reliability, and flexibility of disk storage at
near-tape storage costs.
|
|
|
|
|
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 100 TB and can be deployed for performance-intensive
applications.
|
|
|
|
FAS3000 series enterprise storage systems. The
FAS3000 series addresses the core requirements of the midrange
enterprise storage market, delivering a superb blend of price,
performance, and scalability along with an exceptional storage
value for database applications,
e-mail, and
large-scale file sharing. The compact, modular design delivers
integrated FC SAN, IP SAN (iSCSI), and NAS storage
with scalability to over 500 disk drives and 252 TB of capacity.
The FAS3000 series supports both FC and SATA disk drives for
tiered storage. The FAS3000 systems, when deployed with
NearStore, are also optimized for secondary disk operations
(data protection and retention). FAS3000 systems support as many
as 32 FC ports or 32 Ethernet ports (or a combination of the
two), including support for both 4Gb FC and 10 Gigabit Ethernet.
|
|
|
|
FAS200 series enterprise storage systems. The
FAS200 series provides departmental and remote office storage
for distributed enterprise deployment and is an ideal system for
primary storage in small and medium-sized enterprises. FAS200
systems offer the same integrated block- and file-level data
access and data protection capabilities as the FAS6000 and
FAS3000 series, packaged to meet the needs of smaller
installations. The FAS270 scales to 56 disk drives and 16TB, and
the FAS250 squeezes up to 4TB in a single 3U enclosure. Both are
easily upgraded to larger FAS systems.
|
V-Series Family
NetApp V-Series is a network-based solution that consolidates
storage arrays from different suppliers behind the NetApp data
management interface, enabling unified SAN and NAS file access
to data stored in 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 will be able to:
|
|
|
|
|
Transform existing heterogeneous multivendor storage systems
into a single storage pool
|
|
|
|
Simplify storage provisioning and management with Data ONTAP
thin provisioning
|
|
|
|
Dramatically lower backup time, space, and cost with Data ONTAP
Snapshottm
copies
|
|
|
|
Increase storage utilization and improve performance and TCO
with
FlexVol®
technology
|
|
|
|
Use comprehensive, simple-to-use Snapshot data protection
solutions
|
7
The V-Series family includes V3000 and V6000 models and supports
storage arrays from EMC Corporation (EMC), IBM,
Hewlett-Packard (HP), Hitachi Data Systems
(HDS), and Fujitsu.
Data
Protection Software Products
Network Appliance offers comprehensive business continuance and
disk backup solutions for enterprise customer environments.
MetroCluster,
SnapMirror®,
SyncMirror®,
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 automatic 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.
Data
Protection Platform Products
In recent years, enterprises have centralized terabytes of data
into networked storage environments to achieve lower costs,
higher utilization, and simplified management. However,
geopolitical events such as September 11, 2001; natural
disasters such as the Hurricane Katrina disaster; government
regulations such as Securities and Exchange Commissions
(SEC)
Rule 17a-4;
banking regulations such as Basel II; increased privacy concerns
such as thefts of laptops 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 to 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 cost-effective
SATA-based storage with built-in data reduction capabilities,
disk-to-disk backup solutions, a family of replication and
business continuance solutions, compliance and security
solutions, and tools to manage this information ecosystem.
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 the
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. Our
DataFort®
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.
8
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 multimedia 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, as well as meet the electronic
discovery needs for our customers.
NearStore
The NetApp NearStore family of products 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 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 near-line 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 7TB to
336TB 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 benefits
to the customer are 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 hardware-accelerated compression and tape
smart sizing capabilities. Hardware-accelerated compression
enables NearStore VTL to compress backup data onto disk at very
high sequential throughput rates (up to 1900MB/sec in the most
high-end NetApp VTL solution), thus enabling large amounts of
customer data to be backed up in short amounts of time while
using VTL disk very efficiently. Tape smart sizing enables
physical tape utilization that is far more efficient than is
possible with other VTLs that directly create physical tapes.
Storage
Security Products
Security has become a critical element of data management, and
NetApp has taken a leading role in driving security innovation.
Our DataFort storage security appliances provide a unified
platform for enterprise-wide security, including heterogeneous
NAS, IP SAN, FC SAN, and tape backup environments. The platform
combines wire-speed encryption, access controls, authentication,
and automated key management to provide strong security for data
at rest.
9
NetApp works closely with many of the major storage and
networking vendors, including Brocade Communication Systems,
Inc.; Cisco Systems, Inc.; EMC and its RSA business unit; HP;
IBM; Quantum Corporation; Sun Microsystems, Inc.; and Symantec
to offer joint solutions and provide ongoing interoperability
testing.
Storage
Management and Application Software
Our Network Appliance management software family of products
provides comprehensive storage and data management tools to
simplify IT administration and enhance flexibility and
productivity. NetApp delivers our own differentiated products
and collaborates with industry open standards and interfaces to
deliver this value to our customers.
NetApp has four suites of products targeted to different IT
administrative roles:
Storage
Suite
|
|
|
|
|
Operations Manager, formerly known as
DataFabric®
Manager (DFM), provides comprehensive storage and
infrastructure management for storage administrators.
|
|
|
|
File Storage Resource Manager provides file-based storage
utilization reporting and analysis.
|
|
|
|
Command Central storage provides a centralized operational
console for delivering storage management services in
large-scale, heterogeneous, SAN environments.
|
Data
Suite
|
|
|
|
|
Protection
Managertm
is intuitive and innovative backup and replication management
software for NetApp disk-based data protection environments.
Protection Manager delivers greater assurance of data protection
and higher productivity by providing policy-based management,
including automated data protection setup.
|
|
|
|
VFM®
(Virtual File
Managertm)
Migration Edition (VFM-ME) is a migration product
for file data. It includes simplified namespace management and
facilitates customers ability to migrate data nondisruptively
from other storage to NetApp storage.
|
|
|
|
Virtual File Manager Enterprise Edition (VFM-EE) is
a comprehensive and integrated solution that provides
nondisruptive storage consolidation, remote office data
management, disaster recovery, and data lifecycle management for
file data through policy-based management leveraging a global
namespace.
|
Server
Suite
|
|
|
|
|
SnapDrive®
products provide integrated data management for Windows and UNIX
environments. System administrators can provision storage faster
and manage all of the server volume and file system dependencies.
|
|
|
|
ApplianceWatchtm
products simplify management of NetApp systems within
third-party system management consoles such as Tivoli, Openview,
and
Microsoft®
Operations Manager (MOM).
|
Application
Suite
|
|
|
|
|
Using
SnapManager®
products for SQL Server, SnapManager for
Oracle®,
SnapManager for Exchange and SnapManager for SAP, application
administrators and database administrators (DBAs)
can enhance the performance of these applications as well as
manage their own data with application-consistent Snapshot
copies, data protection and disaster recovery management, and
application cloning.
|
Industry
Collaboration with Open Standards and Interfaces
|
|
|
|
|
NetApp actively participates in various industry standards
organizations such as SNIA, Aperi, and Open Grid Forum and
supports open standards such as SMI-S, SNMP, and NDMP that
simplify and scale industry collaboration and thus deliver a
broader set of storage and data management solutions to our
customers.
|
10
|
|
|
|
|
NetApp delivers open interfaces for industry collaboration via
the Advantage Developer Program. Over 200 participating
companies, both vendors and customers, utilize these interfaces
to deliver value-added solutions to our customers utilizing
NetApp technologies.
|
StoreVaulttm
StoreVault is an Enterprise-proven ONTAP technology developed to
focused on serving small to medium-sized businesses
(SMBs). The product is exclusively sold through
value added resellers (VAR) in the U.S. and has
garnered several accolades for its industry-leading ease of use
and simplicity. StoreVault is the only packaging of advanced
enterprise storage technologies that has been simplified and
made available for SMB use. To serve this high-volume, low-cost
market, StoreVault has innovated on multiple dimensions,
including product, manufacturing, support and distribution. It
is currently in the channel expansion phase.
Content
Delivery
(NetCache®)
In order to focus resources on core storage and data management
solutions, NetApp sold the NetCache assets during the year.
NetCache solutions required technology investments that were not
synergistic with our storage investments, as its internet access
and security (IAS) and wide area network
(WAN) optimization offerings were sold to different
buyers within enterprise customers. For the long-term success of
our customers, employees, and overall business, on
September 11, 2006, NetApp completed the sale of NetCache
business assets to Blue Coat Systems, Inc.
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:
|
|
|
|
|
Business applications. Major corporations and
government agencies rely on NetApp solutions for storage and
data management of their mission-critical applications and
databases. Thousands of organizations around the world choose
NetApp storage systems to support key applications from IBM,
Microsoft, Oracle, SAP, SAS, Sybase, and many other companies.
Oracle, SAP, and SAS all use NetApp extensively products to
develop the software that they sell.
|
|
|
|
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.
|
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 enables
customers in these industries to accelerate product development
and data analysis, facilitate collaboration, and reduce
operational costs.
|
|
|
|
|
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 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.
|
The net effects are lower storage management costs and
significant time savings, because storage is intelligently
configured and reconfigured nondisruptively, even during
production hours. Network Appliance enterprise file services
solutions free up valuable organizational infrastructure and
staff resources, increasing productivity, performance, and
profitability.
11
|
|
|
|
|
Enterprise data center infrastructure. With
its modular fabric-attached storage systems and advanced Data
ONTAP operating system, NetApp ensures scalability and high
availability for the largest applications and consolidations.
The advanced storage virtualization and data protection
capabilities in Data ONTAP 7G provide 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 designed to protect against
future business-and technology-related disruptions, providing
immediate enterprise return on investment (ROI) and
according to a Mercer Consulting Study, the lowest TCO.
|
|
|
|
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 deduplication,
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.
|
|
|
|
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 programming 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.
|
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 work 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.
|
|
|
|
|
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
Fibre Channel Industry Association (FCIA), the Open
Grid Forum (OGF), the Eclipse/Aperi Open SRM
initiative, the Linux Foundation, the International Committee
for Information Technology Standards (INCITS), the
Institute of Electrical and Electronics Engineers
(IEEE), and the Internet Engineering Task Force
(IETF), that have defined standards that are
|
12
|
|
|
|
|
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,
and the 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.
|
|
|
|
|
|
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 IBM, Microsoft, Oracle, and
SAP. 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 AMD, Bakbone, Brocade,
Cisco Systems, CommVault, Computer Associates, Egenera, Fujitsu
Siemens Computers, HP Openview and Storage Essentials, IBM
Tivoli, Intel, IronMountain, Juniper Networks, McAfee,
Novell/SuSE, Red Hat, Secure Computing, Spectra Logic, Symantec,
Syncsort, TekTools, Trend Micro, and VMware. NetApp also has
strong application-level solutions with key partners enabling
customers to accelerate product development and data analysis,
facilitate collaboration, and reduce operation costs. Our
application partner lists includes 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.
|
|
|
|
Professional Services and Global
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 manage
their data. The professional services and support solutions we
offer resolve customer business problems, save money, help
customers keep their business up and running continuously,
comply with regulations and policies, and improve their overall
operational results. We utilize a global, integrated model to
provide consistent service delivery and global support during
every phase of the customer engagement, including assessment and
analysis, planning, design, installation, implementation,
integration, optimization, ongoing support, and remote
management and monitoring. 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 global
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, which include
e-support,
remote management and monitoring, and phone and in-person
support. All of our Professional Services and global support
offerings serve to lower the cost and minimize the risk of
storing and managing data.
|
|
|
|
Network Appliance Financial Solutions
(NAFS). NAFS, the customer finance
group for Network Appliance, offers a variety of standard and
tailored financial products to help customers acquire NetApp
solutions. NAFS offers financial programs in the U.S., 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.
|
13
Markets
and Distribution Channels
Markets
NetApp markets products globally in over 138 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 (SMBs). We have also
expanded into the virtual tape library and data encryption
markets, bringing us into parts of the data center we have not
competed in before. With our next-generation operating system,
Data ONTAP GX, we offer a 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, original equipment
manufacturers (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
2007, 2006, or 2005.
The NetApp and IBM OEM 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.
NetApp
Global Services
NetApp Global Services brings a valuable mix of data center
management and storage expertise combined with a strategic
business focus to give customers a full range of professional
services designed to provide our customers with comprehensive,
enduring storage solutions. From assessment, design and
implementation, custom consulting, and ongoing storage
management, our Professional Services team provides the
expertise our customers require to more efficiently manage their
storage environments and the people and processes that support
them.
Our Global Support Services 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:
Global Support 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. The Network Appliance
Global Support portfolio features sophisticated monitoring and
diagnostic tools plus regular system availability audits of
installed equipment to help anticipate problems before they
affect availability.
Professional Services is designed to address 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:
|
|
|
|
|
Risk avoidance. Ensuring a seamless transition
to new technologies through world-class domain expertise coupled
with active project management and training.
|
|
|
|
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.
|
14
|
|
|
|
|
Improved performance. Enhanced storage service
quality, resource utilization, and ease of administration.
|
|
|
|
Accelerated time to deployment. Speeding up
production implementation and deriving benefit from IT
investments more quickly and without adverse impact on an
organizations productivity.
|
|
|
|
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.
|
We intend to continue to enhance our service offerings in this
segment with additional capabilities by adding new resources and
expertise.
Manufacturing
We have manufacturing operations in insourced and outsourced
locations in Sunnyvale, San Jose, and Fremont, California;
Livingston, Scotland; Shanghai, China; Tao Yuan Shien, Taiwan;
and Schiphol Airport, The Netherlands. These operations 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 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. This manufacturing strategy minimizes
capital investments 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.
See Risk Factors We rely on a limited number
of suppliers and Risk Factors The loss
of our contract manufacturers.
Research
and Development
We conduct research and development activities in various
locations throughout the world. In fiscal 2007, 2006 and 2005,
research and development expenses represented 13.7%, 12.2% and
11.0% of our total revenue, respectively. These costs relate
primarily to personnel and related costs incurred to conduct
product development activities. Although we develop many of our
products internally, we may acquire technology through business
combinations or through licensing from third parties when
appropriate. Our expenditures on research and development
activities in the last three fiscal years are discussed below
under Managements Discussion and Analysis of Financial
Condition and Results of Operations Research and
Development. We believe that technical leadership is essential
to our success and we expect to continue to commit substantial
resources to research and development.
The research and development investment in fiscal year 2007
continued to emphasize innovation and enterprise solutions. The
storage platform family has been expanded from entry-level
solutions through highly scalable clusters. This is represented
by the StoreVault S500 at the low end through the FAS3040,
FAS3070, FAS6030 and FAS6070 at the high end. The S500, ideally
suited for SMBs, can be configured with a minimum of 1TB of
storage. The highly clusterable FAS family can exceed a
breakthrough 6PB in capacity. NetApp continues to be unique in
running a single storage appliance operating system, Data ONTAP,
across the breadth of our product line.
With the introduction of Data ONTAP GX in June 2006, NetApp
delivered its most scalable solutions to date. This system can
satisfy the most demanding capacity and I/O requirements found
in the high-performance computing and technical application
markets. The outstanding performance of this system was
demonstrated by its ability to exceed 1 million operations
per seconds using the industry standard and audited SPEC
benchmark. This is more than triple the performance of the
highest previously reported SPEC results.
Our software portfolio has grown over the past year. New network
and protocol capabilities have been delivered throughout the
year. Examples include support for 10 Gigabit Ethernet, iSCSI
boot, Microsoft Simple
15
SAN, and Microsoft multipathing support. We have introduced new
versions of SnapManager for Oracle, SnapManager for Microsoft
Exchange and SnapManager for SAP. Protection Manager is now
available and brings a new level of simplicity to automated
backup and replication for disk-to-disk recovery. We have also
delivered the next-generation autosupport system that is well
integrated with NetApp Global Support services.
The V-Series product line has gained traction this year. The
V-Series brings the NetApp ease of use and powerful
virtualization capabilities to an expanded set of third-party
storage arrays that include EMC, IBM, HP, HDS, Fujitsu, and
others. Also, in FY07 we added new platforms to the product
offering, including the V3040, V3070, V6030, and V6070.
The NetApp DataFort FC1020 was recognized as the
Innovation of the Year by PC Professional in
2006. The unique DataFort approach to encryption of data at
rest, authentication, key management, and access control
addresses the security requirements in demanding and regulated
enterprise environments.
The NearStore VTL products experienced healthy growth throughout
the year, especially among large enterprise customers, as
several important new capabilities were added, including
hardware-accelerated data compression, support for the ACSLS
protocol required by many high-end tape libraries, and a
doubling of both maximum system performance and storage
capacity. The development of next-generation technologies such
as deduplication is expected to further the adoption of NetApp
disk-to-disk backup solutions as customers continue to repurpose
and downsize their existing tape backup systems.
Our
Topiotm
acquisition allows for heterogeneous any-to-any data replication
for disaster recovery, application support, and data migration.
ReplicatorXtm
enables IT organizations to replicate, recover, and protect data
over any distance regardless of the source or target storage
solution. Furthermore, due to ReplicatorX and Data ONTAP
integration, it allows a broad set of potential customers to
quickly and easily benefit from the powerful Data ONTAP
capabilities such as FlexVol and FlexClone.
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:
|
|
|
|
|
Energy. Customers in the energy market have
traditionally deployed our products to support their upstream
seismic analysis, 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. Our solutions help enable energy
companies to meet their workflow optimization objectives,
improve quality, reduce cycle times, and lower costs.
|
|
|
|
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.
|
|
|
|
Government. State and local government
agencies, U.S. Federal and international governments are
continually challenged with the critical tasks of effectively
managing to the health and welfare of their domestic
constituents, and as a result, represent the largest set of IT
consumers in the world. Whether conducting civilian program
operations or analyzing intelligence to assess criminal and
military threats, governments rely on NetApp to provide highly
secure and cost effective solutions.
|
16
|
|
|
|
|
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, thereby
reducing the time required for software builds and chip
simulations.
|
|
|
|
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 TCO.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Media, entertainment, animation and video
postproduction. 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.
|
|
|
|
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.
|
Seasonality
Our operating results have not been significantly affected by
seasonality in the past. In the future, as we expand our
presence internationally and into other vertical markets, we may
experience more seasonality in the sale of our products. For
example, sales to European customers tend to be weaker in the
summer months and sales to the U.S. government are
typically stronger in the third calendar quarter.
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.
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
17
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.
See Risk Factors Factors beyond our control
could cause our quarterly results to fluctuate.
Competition
The storage market is intensely competitive and is characterized
by rapidly changing technology and rapidly changing business
models.
In the storage market, our primary and near-line storage system
products and our associated storage software portfolio compete
primarily with storage system products and data management
software from EMC, HDS, HP, IBM, and Sun Microsystems. We also
see Dell, Inc. (Dell) as an emerging competitor in
the storage marketplace, primarily due to the 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 the Storage Systems Group
of LSI Logic Corporation (LSI Logic). In the
near-line 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.
Additionally, a number of small, new companies are currently
attempting to enter the storage systems and data management
software markets, the near-line and VTL storage markets, and the
storage security markets, some of which may become significant
competitors in the future. We believe that the principal
competitive factors affecting the storage and storage security
markets include product benefits such as response time,
reliability, data availability, scalability, ease of use, price,
multiprotocol capabilities, professional services and customer
service and support.
See Risk Factors An increase in competition
could materially and 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®,
FlexVol, FilerView, NearStore, NetApp, NetCache, SecureShare,
SnapDrive, SnapLock, SnapManager, SnapMirror, SnapRestore,
SnapVault, WAFL, and others as trademarks in the U.S.. 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.
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.
18
Employees
As of April 27, 2007, we had 6,635 employees. Of the
total, 2,500 were in sales and marketing, 1,698 in research and
development, 759 in finance and administration, and 1,678 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 25, 2007,
are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Daniel J. Warmenhoven
|
|
|
56
|
|
|
Chief Executive Officer and
Director
|
Thomas F. Mendoza
|
|
|
56
|
|
|
President
|
Thomas Georgens
|
|
|
47
|
|
|
Executive Vice President, Product
Operations
|
Steven J. Gomo
|
|
|
55
|
|
|
Executive Vice President, Finance
and Chief Financial Officer
|
Robert E. Salmon
|
|
|
46
|
|
|
Executive Vice President, Field
Operations
|
Daniel J. Warmenhoven joined Network Appliance 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 equipment 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 Aruba Networks,
Inc. Mr. Warmenhoven holds a B.S. degree in electrical
engineering from Princeton University.
Thomas F. Mendoza joined Network Appliance in 1994 and
has served as president since 2000. From 1994 to 2000, he served
in various capacities including senior vice president, worldwide
sales and marketing, senior vice president, worldwide sales and
vice president, North American sales. Mr. Mendoza has more
than 30 years of experience as a high-technology and has
held executive positions at Auspex Systems, Inc. and Stratus
Technologies, Inc. He holds a B.A. 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 in honor of an endowment from Tom and his wife, Kathy.
Thomas Georgens joined Network Appliance in October 2005
and has served as the Companys executive vice president of
product operations since January 2007. From October 2005 to
January 2007, he served as the Companys executive vice
president and general manager of enterprise storage systems.
Prior to joining the Company, Mr. Georgens served in
various capacities from 1996 to 2005, including president, chief
executive officer, vice president and general manager and a
director of LSI Logic. Mr. Georgens graduated from
Rensselaer Polytechnic Institute with a B.S. and M.S. degrees in
computer and systems engineering, and also holds an M.B.A. from
Babson College.
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 M.B.A. from
Santa Clara University and a B.S. degree in business
administration from Oregon State University.
19
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 in computer science.
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.
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 occurs, 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:
|
|
|
|
|
Changes in general economic conditions and specific economic
conditions in the computer, storage, and networking industries
|
|
|
|
General decrease in global corporate spending on information
technology leading to a decline in demand for our products
|
|
|
|
A shift in federal government spending patterns
|
|
|
|
The possible effects of terrorist activity and international
conflicts, which could lead to business interruptions and
difficulty in forecasting
|
|
|
|
The level of competition in our target product markets
|
|
|
|
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
|
|
|
|
The size, timing, and cancellation of significant orders
|
|
|
|
Product configuration and mix
|
|
|
|
The extent to which our customers renew their service and
maintenance contracts with us
|
|
|
|
Market acceptance of new products and product enhancements
|
|
|
|
Announcements, introductions, and transitions of new products by
us or our competitors
|
20
|
|
|
|
|
Deferrals of customer orders in anticipation of new products or
product enhancements introduced by us or our competitors
|
|
|
|
Changes in pricing by us in response to competitive pricing
actions
|
|
|
|
Our ability to develop, introduce, and market new products and
enhancements in a timely manner
|
|
|
|
Supply constraints
|
|
|
|
Technological changes in our target product markets
|
|
|
|
The levels of expenditure on research and development and sales
and marketing programs
|
|
|
|
Our ability to achieve targeted cost reductions
|
|
|
|
Excess or inadequate facilities
|
|
|
|
Disruptions resulting from new systems and processes as we
continue to enhance and adapt our system infrastructure to
accommodate future growth
|
|
|
|
Future accounting pronouncements and changes in accounting
policies
|
|
|
|
Seasonality
|
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
intraquarter seasonality patterns weighted toward 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. If revenues do
not meet our expectations, our operating profit may be
negatively impacted because portions of our expenses are fixed
and difficult to reduce in a short period of time. If our
revenues are lower than expected, our fixed expenses could
adversely affect our net income and cash flow until revenues
increase or until such fixed expenses are reduced to a level
commensurate with revenues.
For example, due to macroeconomic conditions and an IT spending
slowdown in the U.S., our fourth quarter fiscal 2007 bookings
were back-end loaded and finished lower than our forecast. In
addition, in the last two weeks of the fourth quarter in fiscal
2007, we experienced a shift in the mix of our bookings towards
more deferred elements. As a result, we did not build our normal
levels of non-deferred backlog at the end of the fourth quarter,
which will impact the first quarter of fiscal 2008. Without the
benefit of normal backlog, we do not expect our usual level of
growth in first quarter revenue, and as a result, our expense
levels as a percentage of our revenue will be above our targeted
business model. Given the lack of growth in our non-deferred
backlog, we lowered our forecasts for the first quarter of
fiscal 2008 in revenues, operating margins and earnings.
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.
The
marketplace 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:
|
|
|
|
|
Fluctuations in our operating results
|
|
|
|
Variations between our operating results and either the guidance
we have furnished to the public or the published expectations of
securities analysts
|
21
|
|
|
|
|
Fluctuations in the valuation of companies perceived by
investors to be comparable to us
|
|
|
|
Changes in analysts recommendations or projections
|
|
|
|
Inquiries by the SEC, NASDAQ, law enforcement, or other
regulatory bodies
|
|
|
|
Economic developments in the storage and data management market
as a whole
|
|
|
|
International conflicts and acts of terrorism
|
|
|
|
Announcements of new products, applications, or product
enhancements by us or our competitors
|
|
|
|
Changes in our relationships with our suppliers, customers, and
channel and strategic partners
|
|
|
|
General market conditions
|
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.
Macroeconomic conditions and IT spending slowdown in the U.S as
well as variations in our expected operating performance may
continue to cause volatility in our stock price. We are unable
to predict changes in general economic conditions and when
global IT spending rates will be affected. Furthermore, if there
are future reductions in either domestic or international IT
spending rates, or if IT spending rates do not increase, our
revenues, operating results and stock price may continue to be
adversely affected.
Our
forecasts of our revenues and earnings outlook may be inaccurate
and could materially and adversely impact our business or our
planned results of operations.
Our revenues are difficult to forecast. We use a
pipeline system, a common industry practice, to
forecast revenues and trends in our business. Sales personnel
monitor the status of potential business and estimate when a
customer will make a purchase decision, the dollar amount of the
sale and the products or services to be sold. These estimates
are aggregated periodically to generate a sales pipeline. Our
pipeline estimates may prove to be unreliable either in a
particular quarter or over a longer period of time, in part
because the conversion rate of the pipeline into
contracts varies from customer to customer, can be difficult to
estimate and requires management judgment. Small deviations from
our forecasted conversion rate may result in inaccurate plans
and budgets and materially adversely impact our business or our
planned results of operations. In particular, a slowdown in IT
spending or weak economic conditions or evolving technology
generally can reduce the conversion rate in a particular quarter
as our customers purchasing decisions are delayed, reduced
in amount or cancelled. Moreover, even after contracts have been
executed, extensive analysis is required before the timing of
revenue recognition can be reliably determined; this delay
reflects both the complexity of the revenue recognition rules
applicable to software and the effect that the multiple element
arrangements and other terms and conditions can have when these
rules are applied.
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, or if we cannot provide the level of
service and support for our new 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
22
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.
As we enter into new or emerging markets, we will likely
increase demands on our service and support operations and may
be exposed to additional competition. We may not be able to
provide products, service, and support to effectively compete
for these market opportunities. Further, provision of greater
levels of services from us may result in a delay in the timing
of revenue recognition.
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, HP, IBM, and Sun/StorageTek. We also see Dell, Inc. as a
competitor in the storage marketplace, primarily through its
business partnership with EMC, allowing Dell to resell EMC
storage hardware and software products. We have also
historically encountered less-frequent competition from
companies including LSI Logic. 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/StorageTek. Our NearStore VTL
appliances also compete with traditional tape backup solutions
in the broader data backup/recovery space. Additionally, a
number of small, new, privately-held companies are currently
attempting to enter the storage systems and data management
software markets and the near-line and NearStore VTL storage
markets, some of which may become significant competitors in the
future.
There has been a trend toward industry consolidation in our
markets for several years. We expect this trend to continue as
companies attempt to strengthen or hold their market positions
in an evolving industry and as companies are acquired or are
unable to continue operations. We believe that industry
consolidation may result in stronger competitors that are better
able to compete as sole-source vendors for customers. 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.
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 for components such as
disk drives, computer boards, and microprocessors utilized in
the assembly of our products. In recent years, rapid industry
consolidation has led to fewer component suppliers, which could
subject us to periodic supply constraints and price rigidity.
Our reliance on a limited number of suppliers involves several
risks, including:
|
|
|
|
|
A potential inability to obtain an adequate supply of required
components because we do not have long-term supply commitments
|
|
|
|
Supplier capacity constraints
|
|
|
|
Price increases
|
|
|
|
Timely delivery
|
|
|
|
Component quality
|
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
23
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 and
prospective customers and suppliers.
In addition, we license certain technology and software from
third parties that are 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 27, 2007, 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.
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 U.S. 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.
24
We are
also exposed to unfavorable economic and market conditions and
the uncertain geopolitical environment.
Our operating results may be adversely affected by unfavorable
economic and market conditions and the uncertain geopolitical
environment. 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.
Recent turmoil in the geopolitical environment in many parts of
the world, including terrorist activities and military actions,
particularly the continuing tension in and surrounding Iraq, and
changes in energy costs may continue to put pressure on global
economic conditions. If the economic and market conditions in
the U.S. and globally do not improve, or if they
deteriorate, we may experience material impacts on our business,
operating results, and financial condition.
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:
|
|
|
|
|
Demand for storage and data management products
|
|
|
|
Discount levels and price competition
|
|
|
|
Direct versus indirect and OEM sales
|
|
|
|
Product and add-on software mix
|
|
|
|
The mix of services as a percentage of revenue
|
|
|
|
The mix and average selling prices of products
|
|
|
|
The mix of disk content
|
|
|
|
New product introductions and enhancements
|
|
|
|
Excess inventory purchase commitments as a result of changes in
demand forecasts and possible product and software defects as we
transition our products
|
|
|
|
The cost of components, manufacturing labor, and quality
|
Changes in service gross margins may result from various factors
such as continued investments in our customer support
infrastructure and 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:
|
|
|
|
|
Earnings being lower than anticipated in countries where we are
taxed at lower rates as compared to the U.S. statutory tax
rate
|
25
|
|
|
|
|
Material differences between forecasted and actual tax rates as
a result of a shift in the mix of pretax profits and losses by
tax jurisdiction, our ability to use tax credits, or effective
tax rates by tax jurisdiction different than our estimates
|
|
|
|
Changing tax laws, accounting standards, including
SFAS No. 123R and FIN No. 48, regulations,
and interpretations in multiple tax jurisdictions in which we
operate, as well as the requirements of certain tax rulings
|
|
|
|
An increase in expenses not deductible for tax purposes,
including certain stock-based compensation expense, write-offs
of acquired in-process research and development, and impairment
of goodwill
|
|
|
|
The tax effects of purchase accounting for acquisitions and
restructuring charges that may cause fluctuations between
reporting periods
|
|
|
|
Changes in the valuation of our deferred tax assets and
liabilities
|
|
|
|
Changes in tax laws or the interpretation of such tax laws
|
|
|
|
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
|
|
|
|
A change in our decision to indefinitely reinvest foreign
earnings
|
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 are currently undergoing
federal income tax audits in the U.S. and several foreign
tax jurisdictions. The rights to some of our intellectual
property (IP) are 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
face increased risks and uncertainties related to our current or
future acquisitions and nonmarketable securities, 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.
Acquisitions of companies entail numerous risks, and we may not
be able to successfully integrate acquired operations and
products or to realize anticipated synergies, economies of
scale, or other value. Integration risks and issues may include,
but are 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.
On occasion, we invest in nonmarketable securities of private
companies. As of April 27, 2007, the carrying value of our
investments in nonmarketable securities totaled
$8.9 million. Investments in nonmarketable securities are
inherently risky, and some of these companies are likely to
fail. Their success (or lack thereof) is dependent on these
companies product development, market acceptance, operational
efficiency and other key business success factors. In addition,
depending on these companies future prospects, they may
not be able to raise additional funds when needed or they may
receive lower valuations, with less favorable investment terms
than in previous financings, and our investments in them would
likely become impaired. In fiscal 2007, we recorded a
$2.1 million write-down relating to our investments in two
privately-held companies.
26
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 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; therefore we cannot
assure you that this relationship will contribute any revenue in
future years. In addition, we have no control over the products
that IBM selects to sell, or their release schedule and timing
of those products; nor do we control their pricing. In the event
that sales through IBM will increase, 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 that 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.
We
cannot assure you that we are able to maintain existing
resellers and 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 (VAR), systems integrators,
distributors, OEMs, and strategic business partners, and we
derive a significant portion of our revenue from these indirect
channel partners. In fiscal 2007, our indirect channels
accounted for 59.6% of our consolidated revenues.
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 effectively
manage 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
27
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 27, 2007, 44.7% of our total revenues was 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. Conversely, lowering our price
in local currency may result in lower
U.S.-based
revenue. 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 until
forecasted transactions occur, at which time such realized gains
and losses are recognized in earnings. 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 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.
Our operating results have not been significantly affected by
seasonality in the past. In the future, as we expand our
presence internationally, we may experience more seasonality in
the sale of our products. For example, sales to European
customers tend to be weaker in the summer months, which is our
first fiscal quarter.
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.
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,
investing in people, facilities and capital equipment, and
managing our assets. 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.
28
In addition, continued expansion 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.
As we
continue to grow our business, we are likely to incur costs
earlier than some of the anticipated benefits, which could harm
our operating results. A significant percentage of our expenses
are fixed, which could materially and adversely affect our net
income.
We are increasing our investment in engineering, sales, service
support, and other functions to grow our business. We are likely
to recognize the costs associated with these increased
investments earlier than some of the anticipated benefits and
the return on these investments may be lower, or may develop
more slowly, than we expect, which could harm our business.
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.
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 that 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 caused 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, background, 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 errors, 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. Product quality problems could lead to reduced
revenue, gross margins, and net income.
Our products may contain undetected software errors, 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
29
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 fail to remedy a product defect, we may experience a
failure of a product line, temporary or permanent withdrawal
from a product or market, damage to our reputation, inventory
costs, or product reengineering expenses, any of which could
have a material impact on our revenue, margins, and net income.
In addition, we may be subject to losses that may result or are
alleged to result from defects in our products, which could
subject us to claims for damages, including consequential
damages. Based on our historical experience, we believe that the
risk of exposure to product liability claims is currently low.
However, should we experience increased exposure to product
liability claims, our business could be adversely impacted.
We are
exposed to various risks related to legal proceedings or claims
and protection of intellectual property rights, which could
adversely affect our operating results.
We are a party to lawsuits in the normal course of our business.
Litigation can be expensive, lengthy, and disruptive to normal
business operations. Moreover, the results of complex legal
proceedings are difficult to predict. An unfavorable resolution
of a particular lawsuit could have a material adverse effect on
our business, operating results, or financial condition.
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 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
U.S.. 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.
30
Our
business is subject to increasingly complex corporate
governance, public disclosure, accounting, and tax requirements
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 27, 2007, 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.
Because new and modified laws, regulations, and standards are
subject to varying interpretations in many cases due to their
lack of specificity, their application in practice may evolve
over time as new guidance is provided by regulatory and
governing bodies. This evolution may result in continuing
uncertainty regarding compliance matters and additional costs
necessitated by ongoing revisions to our disclosure and
governance practices.
Our
ability to forecast earnings is limited by the impact of new
accounting requirements such as
SFAS No. 123R.
The Financial Accounting Standards Board requires companies to
recognize the fair value of stock options and other share-based
payment compensation to employees as compensation expense in the
statement of income. Option pricing models require the input of
highly subjective assumptions, including the expected stock
price volatility, expected life, and forfeiture rate. We have
chosen to base our estimate of future volatility using the
implied volatility of traded options to purchase the
Companys common stock as permitted by
SAB No. 107. As of April 29, 2006, the
contractual life of our stock options was 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 requires us to use
estimated forfeitures, and therefore the adoption of
SFAS No. 123R could have a material impact on the
timing of and, based on the accuracy of estimates of future
actual forfeitures, the amount of stock-based compensation
expense. Given the unpredictable nature of the Black
Scholes variables and other management assumptions such as
number of options to be granted, underlying strike price, and
associated income tax impacts, it is very difficult to estimate
stock-based compensation expense for any given quarter or year.
Any changes in these highly subjective assumptions may
significantly impact our ability to make accurate forecasts of
future earnings and volatility of our stock price. 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.
The
U.S. government has contributed to our revenue growth and has
become an important customer for us.
The U.S. government has become an important customer for
the storage market and for us; however, government demand is
unpredictable, and there is no guarantee of future revenue
growth from the U.S. government. 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.
31
The General Services Administration (GSA) is
currently auditing our records under the schedule contracts it
had with us to verify our compliance with various contract
provisions. If the audit determines that we did not comply with
such provisions, we may be required to pay the GSA a potential
settlement. The exact date for completion of the audit and the
subsequent negotiation process is unknown and may not be
concluded for some time. Our management does not believe, based
upon information currently known to us that the final resolution
of our audit will have a material adverse effect upon our
consolidated financial position and the results of operations
and cash flows.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
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 two lease arrangements with BNP
Paribas LLC (BNP) for approximately
380,000 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 first lease in October 2007 for a term of five
years, and the second lease in September 2008 for a term of five
years. We have the option to renew both leases for two
consecutive five-year periods upon approval by BNP.
We lease other sales offices and research and development
facilities throughout the U.S. 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.
|
|
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.
32
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 Global Select
Market on November 21, 1995, and is traded under the symbol
NTAP. As of April 27, 2007 there were 1,234
holders of record of the common stock. The closing price for our
common stock on June 22, 2007 was $31.20. 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 Global Select Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
37.58
|
|
|
$
|
26.92
|
|
|
$
|
30.47
|
|
|
$
|
25.51
|
|
Second Quarter
|
|
|
39.63
|
|
|
|
28.99
|
|
|
|
27.12
|
|
|
|
22.77
|
|
Third Quarter
|
|
|
41.28
|
|
|
|
35.54
|
|
|
|
32.67
|
|
|
|
26.92
|
|
Fourth Quarter
|
|
|
40.49
|
|
|
|
34.93
|
|
|
|
37.79
|
|
|
|
30.81
|
|
The following graph shows a five-year comparison of cumulative
total return on our common stock, the NASDAQ Composite Index and
the S&P 500 Information Technology Index from
April 30, 2002 through April 30, 2007. The past
performance of our common stock is no indication of future
performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Network Appliance, Inc., The NASDAQ Composite Index
And The S&P Information Technology Index
|
|
|
* |
|
$100 invested on 4/30/02 in stock or index-including
reinvestment of dividends. Fiscal year ending April 30. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Returns
|
|
|
4/02
|
|
4/03
|
|
4/04
|
|
4/05
|
|
4/06
|
|
4/07
|
Network Appliance, Inc.
|
|
|
100.00
|
|
|
|
75.99
|
|
|
|
106.65
|
|
|
|
152.84
|
|
|
|
212.44
|
|
|
|
213.24
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
84.83
|
|
|
|
114.47
|
|
|
|
114.98
|
|
|
|
142.84
|
|
|
|
156.41
|
|
S&P Information Technology
|
|
|
100.00
|
|
|
|
83.80
|
|
|
|
105.56
|
|
|
|
103.71
|
|
|
|
121.18
|
|
|
|
133.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
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 2007 Annual Meeting of Stockholders.
Unregistered
Securities Sold in Fiscal 2007
We did not sell any unregistered shares of our common stock
during fiscal 2007.
Issuer
Purchases of Equity Securities
The table below sets forth activity in the fourth quarter of
fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
That May Yet
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
be Purchased
|
|
|
|
|
|
|
Average
|
|
|
Part of the
|
|
|
Under the
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Repurchase
|
|
|
Repurchase
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Program(1)
|
|
|
Program(2)
|
|
|
January 27, 2007
February 23, 2007
|
|
|
|
|
|
$
|
|
|
|
|
48,980,176
|
|
|
$
|
599,948,253
|
|
February 24, 2007
March 23, 2007
|
|
|
4,945,843
|
|
|
$
|
35.63
|
|
|
|
53,926,019
|
|
|
$
|
423,712,040
|
|
March 24, 2007
April 27, 2007
|
|
|
666,894
|
|
|
$
|
35.63
|
|
|
|
54,592,913
|
|
|
$
|
399,948,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,612,737
|
|
|
$
|
35.63
|
|
|
|
54,592,913
|
|
|
$
|
399,948,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount represented total number of shares purchased under
our publicly announced repurchase programs since inception. |
|
(2) |
|
At April 27, 2007, $399,948,323 remained available for
future repurchases. The stock repurchase program may be
suspended or discontinued at any time. |
On November 15, 2006, the Board of Directors approved a new
stock repurchase program in which up to $800,000,000 of
additional shares may be purchased.
34
|
|
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 27, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per-share amounts)
|
|
|
Total Revenues
|
|
$
|
2,804,282
|
|
|
$
|
2,066,456
|
|
|
$
|
1,598,131
|
|
|
$
|
1,170,310
|
|
|
$
|
892,068
|
|
Income from Operations
|
|
|
301,242
|
|
|
|
308,291
|
|
|
|
253,187
|
|
|
|
158,463
|
|
|
|
87,606
|
|
Net Income(1)
|
|
|
297,735
|
|
|
|
266,452
|
|
|
|
225,754
|
|
|
|
152,087
|
|
|
|
76,472
|
|
Net Income per Share, Basic
|
|
|
0.80
|
|
|
|
0.72
|
|
|
|
0.63
|
|
|
|
0.44
|
|
|
|
0.23
|
|
Net Income per Share, Diluted
|
|
|
0.77
|
|
|
|
0.69
|
|
|
|
0.59
|
|
|
|
0.42
|
|
|
|
0.22
|
|
Cash, Cash Equivalents and
Short-Term Investments
|
|
|
1,308,781
|
|
|
|
1,322,892
|
|
|
|
1,169,965
|
|
|
|
807,965
|
|
|
|
618,838
|
|
Total Assets
|
|
|
3,658,478
|
|
|
|
3,260,965
|
|
|
|
2,372,647
|
|
|
|
1,877,266
|
|
|
|
1,319,173
|
|
Short-Term Debt
|
|
|
85,110
|
|
|
|
166,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Deferred Revenue
|
|
|
472,423
|
|
|
|
282,149
|
|
|
|
187,180
|
|
|
|
112,337
|
|
|
|
63,698
|
|
Long-Term Debt and Other
|
|
|
9,487
|
|
|
|
138,200
|
|
|
|
4,474
|
|
|
|
4,858
|
|
|
|
3,102
|
|
Total Stockholders Equity
|
|
|
1,989,021
|
|
|
|
1,923,453
|
|
|
|
1,660,804
|
|
|
|
1,415,848
|
|
|
|
987,357
|
|
|
|
|
(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 related to the repatriation of foreign
subsidiary earnings back to the U.S. 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. |
|
|
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. We are
experiencing a worldwide data explosion, driven by rapid growth
of broadband Internet access, the proliferation of data devices,
and the need to protect critical data through replication, the
digital footprints of everyday life are growing
exponentially. As the volume of data grows, so does the
complexity of data storage and management. Data ownership and
the burdens of managing data continue to challenge our
enterprise customers. Data growth, greater global demands on
data access, more complex legal requirements, increasing
consequences for data outages, and greater data longevity all
contribute to the growing burden of responsibility on IT
professionals. In response, CIOs and IT professionals are
looking for solutions to help simplify data storage, IT
administration, improve the capabilities of storage systems 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.
We believe that our strategic investments are targeted at some
of the strongest growth areas of the storage market, such as
modular storage, archive and compliance, data protection, data
classification, data discovery, data migration, data permanence,
data security and privacy, iSCSI, and grid computing. However,
if any storage market
35
trends and emerging standards on which we are basing our
assumptions do not materialize as anticipated, our business
could be materially adversely affected.
In fiscal 2007, despite continuous downward pricing pressures
and competitive environments, our revenue continued to grow
faster than that of our competitors. We expect to continue to
experience price declines per petabyte for our hardware
products, which may have an adverse impact on our future gross
margins if not offset by a product mix with higher software
content and higher average selling prices associated with new
products. At the same time, we also expect our future gross
margins may be negatively affected by factors such as global
service investment cost, competition, indirect sales including
OEM, and high disk content, partially offset by new product
introductions and add-on software mix.
While we reported solid fiscal 2007 results with a 36% annual
revenue growth, we were not immune to the macroeconomic spending
slowdown in the U.S. Our fourth quarter fiscal 2007
bookings were back-end loaded and finished lower than our
forecast. In addition, in the last two weeks of the fourth
quarter in fiscal 2007, we experienced a shift in the mix of our
bookings toward more deferred elements. As a result, we did not
build our normal levels of non-deferred backlog at the end of
the fourth quarter, which will impact the first quarter of
fiscal 2008. Without the benefit of normal backlog, we do not
expect our usual level of growth in first quarter revenue, and
as a result, our expense levels as a percentage of our revenue
will be above our targeted business model. We will slow our rate
of hiring and investment spending in order to return to our
targeted business model. Given the lack of growth in our
non-deferred backlog, we lowered our forecasts for the first
quarter of fiscal 2008 in revenues, operating margins and
earnings.
Although we are faced with a first quarter that does not have
the benefit of typical backlog levels, we believe our business
fundamentals remain intact. We remain confident in the
competitiveness of our products and in our ability to grow our
business over the long term. We continue to make progress across
many areas of the organization, including broadening and
enhancing our enterprise solutions, supporting our
channel/partners, and deepening our professional services
coverage. We believe our products continue to offer the best
price-performance value in the industry, and we further extended
our ability to help customers do more with less with
new product introductions.
Fiscal
2007 Highlights
Our fiscal 2007 revenue grew year over year, and the increase
was across all major products categories and geographies. The
net increase in revenues was attributable to increased software
licenses, software upgrade and maintenance arrangements,
increased service revenue, an expanded portfolio with new
products and solutions for the enterprise customers, and was
partially offset by lower
cost-per-megabyte
disks, and a decline in shipments and lower average selling
prices of our older generation products. Some of the key fiscal
2007 highlights included:
Increased our penetration into enterprise data centers and
enhanced data management and data protection
solutions. From a product perspective, we
continued to enhance our data management and data protection
portfolios with a key acquisition and several product
introductions. We extended our data center portfolio with
several additions including new midrange and high-end platforms,
broader Fibre Channel storage area network capabilities,
significant enhancements in the NetApp Manageability Software
Family, and new professional services, all aimed at making
enterprise data center management easier for customers who
demand high-performance SAN solutions and increased application
uptime to meet their business needs. We anticipate the SAN
competitiveness of our new midrange, along with the strength of
our high-end SAN-configured systems, to continue to contribute
to an increase in the block-based protocols component of our
business. We also continued to gain momentum in the SAN market
while maintaining market leadership in both network-attached
storage and iSCSI.
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 2007 channel mix demonstrated increased
expansion through our partner programs, with approximately 59.6%
of our business coming through indirect channels and the
remaining 40.4% coming through direct sales. Higher growth rates
in our indirect channels demonstrated our increasing leverage,
giving us broader market reach and increasing enterprise
penetration.
36
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 2007 was also driven by
increases in professional services. We plan to continue to
invest in 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.
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 our next-generation scale-out
operating system with enhanced storage grid functionality, the
disk-to-disk backup solution in the VTL space, and our entry
into the small to medium-sized business market. 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 in front of their storage from other vendors.
Our acquisition of Topio in December 2006 will also help us
expand our heterogeneous data protection portfolio as part of
our plan to broaden our total addressable market.
Fiscal
2007 Financial Performance
|
|
|
|
|
Our revenues for fiscal 2007 were $2.8 billion, a 35.7%
increase over the same period a year ago. Our revenues for
fiscal 2006 were $2.1 billion, a 29.3% increase compared to
revenues of $1.6 billion in fiscal 2005. Our revenue growth
was driven by the adoption of our products and solutions
targeted at the areas of fastest growth in storage, secondary
storage for compliance applications, and our broadened NetApp
storage solutions that simplify data management.
|
|
|
|
Our overall gross margins were 60.8%, 60.8%, and 61.0% in fiscal
2007, 2006 and 2005, respectively. The gross margins remained
relatively flat for both fiscal 2007 and 2006, reflecting
increased software upgrade and maintenance arrangements and
improved service margins, offset by lower margins from our OEM
business. The slight decline in our overall gross margins for
fiscal 2006 compared to fiscal 2005 was primarily due to a shift
in revenue mix toward services, with an increase in our OEM
business partially offset by improved service gross margins.
|
|
|
|
In fiscal 2007, we generated $864.5 million of cash from
operating activities as compared to $554.3 million in
fiscal 2006. As of April 27, 2007, our cash, cash
equivalents and short-term investments decreased slightly to
$1,308.8 million, compared to $1,322.9 million as of
April 28, 2006. This decrease was due primarily to
$805.7 million used to repurchase our common stock and net
cash paid of $131.2 million in connection with the Topio
acquisition, partially offset by $864.5 million generated
from operations and $23.9 million received from the sale of
certain NetCache assets. Our deferred revenue balance increased
to $1,103.0 million in fiscal 2007 from $681.5 million
reported in fiscal 2006, due to higher software upgrade and
maintenance arrangements and service arrangements attributable
to our continuing shift toward larger enterprise customers who
tend to purchase more comprehensive and longer term
arrangements. Capital purchases of plant, property, and
equipment for fiscal 2007, 2006 and 2005 were
$165.8 million, $132.9 million, and
$93.6 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.
37
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
|
Revenue
Recognition and Allowances
We apply the provisions of Statement of Position
(SOP)
No. 97-2,
Software Revenue Recognition
(SOP No. 97-2),
and related interpretations to our product sales, both hardware
and software, because our software is essential to the
performance of our hardware. 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.
|
|
|
|
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.
|
Our multiple element arrangements include our systems and
generally may also include one or more of the following
undelivered software-related elements: software upgrade and
maintenance arrangements, premium hardware maintenance, and
storage review services. Our software upgrade and maintenance
arrangements entitle our customers to receive unspecified
product upgrades and enhancements on a
when-and-if-available
basis, bug fixes, and patch releases. Premium hardware
maintenance services include contracts for technical support and
minimum response times. Revenues from software upgrade and
maintenance arrangements, premium hardware maintenance services
and storage review services are recognized ratably over the
contractual term, generally from
38
one to three years. Standard hardware warranty costs are
considered an obligation under SFAS No. 5,
Accounting for Contingencies and expensed as a cost of
service when revenue is recognized. We also offer extended
service contracts (which extend our standard parts warranty and
may include premium hardware maintenance) at the end of the
warranty term; revenues from these contracts are recognized
ratably over the contract term. We typically sell technical
consulting services separately from any of our other revenue
elements, either on a time and materials basis or for fixed
price standard projects; we recognize revenue for these services
as they are performed. Revenue from hardware installation
services is recognized at the time of delivery and any remaining
costs are accrued, as the remaining undelivered services are
considered to be inconsequential and perfunctory. For
arrangements with multiple elements, we recognize as revenue the
difference between the total arrangement price and the greater
of fair value or stated price for any undelivered elements
(the residual method).
For our undelivered software-related elements, we apply the
provisions of
SOP No. 97-2
and determine fair value of these undelivered elements based on
vendor-specific objective evidence (VSOE), which for
us consists of the prices charged when these services are sold
separately either alone, in the case of software upgrade and
maintenance arrangements, or as a bundled element which always
includes software upgrade and maintenance arrangements and
premium hardware maintenance, and may also include storage
review services. To determine the fair value of these elements,
we analyze both the selling prices when elements are sold
separately as well as the concentrations of those prices. We
believe those concentrations have been sufficient to enable us
to establish VSOE of fair value for the undelivered elements. If
VSOE cannot be obtained to establish fair value of the
undelivered elements, paragraph 12 of
SOP 97-2
would require that revenue from the entire arrangement be
initially deferred and recognized ratably over the period these
elements are delivered.
For income statement presentation purposes, once fair value has
been determined for our undelivered bundled elements, we
allocate revenue first to software upgrade and maintenance
arrangements based on VSOE of its separate fair value, and then
the residual is allocated to other service revenues.
We record reductions to revenue for estimated sales returns at
the time of shipment. Sales returns are estimated based on
historical sales returns, current trends, and our expectations
regarding future experience. We monitor and analyze the accuracy
of sales returns estimates by reviewing actual returns and
adjust them for future expectations to determine the adequacy of
our current and future reserve needs. Our reserve levels have
been sufficient to cover actual returns and have not required
material changes in subsequent periods. While we currently have
no expectations for significant changes to these reserves, 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 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 current and
future allowance. 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 reserve levels have generally been
sufficient to cover credit losses. Our allowance for doubtful
accounts as of April 27, 2007 was $2.6 million,
compared to $2.4 million as of April 28, 2006. During
the year ended April 28, 2006, we reduced our reserve by
$1.5 million due to overall improvement in our collections
history. However, 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
39
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. In addition, 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. We currently do not foresee
changes to useful lives or write-downs to these assets.
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
2007 we performed such evaluation and found no impairment.
However, any future write-downs of goodwill would adversely
affect our operating margins. As of April 27, 2007, our
assets included $601.1 million in goodwill. See
Note 14, Goodwill and Purchased Intangible
Assets, to our Consolidated Financial Statements.
During fiscal 2007, we recorded goodwill of $114.7 million
in connection with our Topio acquisition and a reduction of
goodwill for $1.2 million in connection with the
divestiture of certain NetCache assets.
Accounting
for Income Taxes
The determination of our tax provision is subject to judgments
and estimates due to the complexity of the tax law that we are
subject to in several tax jurisdictions. Earnings derived from
our international business are generally taxed at rates that are
lower than U.S. rates, resulting in a lower effective tax
rate than the U.S. statutory tax rate of 35.0%. 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. In addition, a decrease in the percentage
of our total earnings from our international business or a
change in the mix of international business among particular tax
jurisdictions could increase our overall effective tax rate.
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires that deferred
tax assets and liabilities be recognized for the effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. SFAS No. 109 also
requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some or all of the
deferred tax asset will not be realized. We have provided a
valuation allowance of $21.0 million as of April 27,
2007, compared to $431.2 million as of April 28, 2006
on certain of our deferred tax assets. We adopted
SFAS No. 123R effective the beginning of our fiscal
year ended April 27, 2007. Under SFAS No. 123R,
tax attributes related to the exercise of employee stock options
should not be realized until they result in a reduction of taxes
payable. Pursuant to Footnote 82 of SFAS No. 123R, on
a prospective basis we no longer include unrealized stock option
attributes as components of our gross deferred tax assets and
corresponding valuation allowance disclosures. The tax effected
amounts of gross unrealized net operating loss and business tax
credit carryforwards, and their corresponding valuation
allowance excluded under Footnote 82 for the year ended
April 27, 2007 are $363.3 million. The valuation
allowance at April 28, 2006 related to net operating loss
carryforwards, conditional royalty carryforwards, and tax credit
carryforwards attributable to the exercise of employee stock
options.
We are currently undergoing federal income tax audits in the
U.S. and several foreign tax jurisdictions. The rights to
some of our intellectual property (IP) are owned by
certain of our foreign subsidiaries, and payments are made
between foreign and U.S. 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.
However, if upon the conclusion of these audits the ultimate
determination of our taxes owed in any of these tax
jurisdictions is for an
40
amount in excess of the tax provision we have recorded or
reserved for, our overall effective tax rate may be adversely
impacted in the period of adjustment.
In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48 prescribes a
comprehensive model for how a company should recognize, measure,
present, and disclose in its financial statements uncertain tax
positions that the Company has taken or expects to take on a tax
return (including a decision whether to file or not to file a
return in a particular jurisdiction). FIN No. 48 is
applicable to all uncertain tax positions for taxes accounted
for under FASB Statement No. 109, Accounting for Income
Taxes (SFAS No. 109), and substantially changes
the applicable accounting model. We are required to adopt
FIN No. 48 for our fiscal year beginning
April 28, 2007. We are currently evaluating the effect that
the adoption of FIN No. 48 will have on our
consolidated results of operations and financial condition.
Inventory
Write-Downs
Our net inventory balance was $54.9 million as of
April 27, 2007, compared to $64.5 million as of
April 28, 2006. 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 on 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. During the past few years, our inventory
reserves have generally been sufficient to cover excess and
obsolete exposure and have not required material changes in
subsequent periods.
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 27,
2007 and April 28, 2006, we did not have purchase
commitment liabilities under such arrangements.
We engage in extensive, ongoing 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 are 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 the facilities
lease restructuring reserve, we make various assumptions,
including the time period over
41
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. We estimated our facility and
severance restructuring reserve to be $2.1 million as of
April 27, 2007. Our fiscal 2006 facility restructuring
reserve included a $1.0 million reduction related to the
execution of a new sublease agreement for our Tewksbury facility
net of related costs.
Impairment
Losses on Investments
As of April 27, 2007, 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 27, 2007. The fair value of our
available-for-sale investments reflected in the Consolidated
Balance Sheets were $935.7 million and
$1,102.8 million as of April 27, 2007 and
April 28, 2006, respectively. Included in these balances
were short-term restricted investments of $116.0 million,
as of April 27, 2007, and short-term and long-term
restricted investments of $136.7 million and
$104.4 million, respectively, as of April 28, 2006. In
addition, our available-for-sale investments also included an
investment in a publicly held company of $12.9 million,
which was based on quoted market prices on April 27, 2007.
We had no investments in publicly held companies as of
April 28, 2006. 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 and
intent to hold these investments until maturity, we would not
expect any significant decline in value of our investments
caused by market interest rate changes.
All of our available-for-sale investments and nonmarketable
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 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
and intent 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. For investments in publicly held
companies, we recognize an impairment charge when the declines
in the fair values of our investments in these companies are
below their cost basis are judged to be other-than-temporary.
The ultimate value realized on these investments in publicly
held companies is subject to market price volatility until they
are sold. We have no impairment losses on our available-for-sale
investments for fiscal 2007 and 2006.
For nonmarketable 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. Our investments in
privately-held companies were $8.9 million and
$11.0 million as of April 27, 2007 and April 28,
2006, respectively. During fiscal 2007, we recorded impairment
of $2.1 million for investments in privately-held
companies. We had no impairment losses on our investments in
privately-held companies in fiscal 2006.
Accounting
for Stock-Based Compensation
We adopted SFAS No. 123R, Share-Based Payment,
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
42
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 have chosen to base our estimate of future
volatility using the implied volatility of traded options to
purchase the Companys common stock as permitted by Staff
Accounting Bulletin (SAB) No. 107. As of
April 29, 2006, the contractual life of our stock options
was 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 requires us to use estimated
forfeitures, and therefore the adoption of
SFAS No. 123R could have a material impact on the
timing of and, based on the accuracy of estimates of future
actual forfeitures, the amount of stock-based compensation
expense. Any changes in these highly subjective assumptions may
significantly impact the stock-based compensation expense for
the future. Likewise, the shortening of the contractual life of
our options could change the estimated exercise behavior in a
manner other than currently expected.
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 2007, 2006, and
2005, 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 February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value
Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115. SFAS No. 159 allows measurement at
fair value of eligible financial assets and liabilities that are
not otherwise measured at fair value. If the fair value option
for an eligible item is elected, unrealized gains and losses for
that item shall be reported in current earnings at each
subsequent reporting date. SFAS No. 159 also
establishes presentation and disclosure requirements designed to
draw comparison between the different measurement attributes the
company elects for similar types of assets and liabilities. This
statement is effective for our fiscal year beginning
April 27, 2008. We are currently evaluating the effect, if
any, that the adoption of SFAS No. 159 will have on
our consolidated financial statements
In September, 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements. SFAS No. 157 provides a framework
for measuring fair value, clarifies the definition of fair
value, and expands disclosures regarding fair value
measurements. SFAS No. 157 does not require any new
fair value measurements and eliminates inconsistencies in
guidance found in various prior accounting pronouncements. We
are required to adopt SFAS No. 157 for our fiscal year
beginning April 27, 2008. We are currently evaluating the
effect that the adoption of SFAS No. 157 will have on
our consolidated results of operations and financial condition,
but do not expect it to have a material impact.
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements. SAB No. 108
provides guidance on how prior year misstatements should be
taken into consideration when quantifying misstatements in
current year financial statements for purposes of determining
whether the current years financial statements are
materially misstated. SAB No. 108 is effective for
fiscal years ending on or after November 15, 2006. We
adopted SAB 108 in the fourth quarter of fiscal 2007 and
its adoption did not have a material impact on our results of
operations or financial condition.
In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes
an Interpretation of FASB Statement
No. 109. FIN No. 48 prescribes a
comprehensive model for how a company should recognize, measure,
present, and disclose in its financial statements uncertain tax
positions that the Company has taken or expects to take on a tax
return (including a decision whether to file or not to file a
return in a particular jurisdiction). FIN No. 48 is
applicable to all uncertain tax
43
positions for taxes accounted for under FASB Statement
No. 109, Accounting for Income Taxes
(SFAS No. 109), and substantially changes the
applicable accounting model. We are required to adopt
FIN No. 48 for our fiscal year beginning
April 28, 2007. We are currently evaluating the effect that
the adoption of FIN No. 48 will have on our
consolidated results of operations and financial condition.
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 27,
|
|
|
April 28,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
74.4
|
%
|
|
|
76.3
|
%
|
|
|
78.9
|
%
|
Software upgrade and maintenance
arrangements
|
|
|
12.2
|
|
|
|
11.6
|
|
|
|
10.6
|
|
Service
|
|
|
13.4
|
|
|
|
12.1
|
|
|
|
10.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
29.0
|
|
|
|
29.8
|
|
|
|
30.2
|
|
Cost of software upgrade and
maintenance arrangements
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.3
|
|
Cost of service
|
|
|
9.8
|
|
|
|
9.0
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
60.8
|
|
|
|
60.8
|
|
|
|
61.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
32.0
|
|
|
|
28.9
|
|
|
|
29.2
|
|
Research and development
|
|
|
13.7
|
|
|
|
12.2
|
|
|
|
11.0
|
|
General and administrative
|
|
|
5.3
|
|
|
|
4.6
|
|
|
|
4.9
|
|
Acquired in process research and
development
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
Restructuring charges (recoveries)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
50.1
|
|
|
|
45.9
|
|
|
|
45.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income From Operations
|
|
|
10.7
|
|
|
|
14.9
|
|
|
|
15.9
|
|
Other Income (Expenses), Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2.5
|
|
|
|
2.1
|
|
|
|
1.5
|
|
Interest expense
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
Net loss on investments
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income, Net
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
12.8
|
|
|
|
17.0
|
|
|
|
17.3
|
|
Provision for Income Taxes
|
|
|
2.2
|
|
|
|
4.1
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
10.6
|
%
|
|
|
12.9
|
%
|
|
|
14.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2007 Compared to Fiscal 2006
Product Revenues Product revenues increased
by 32.2% to $2,085.9 million in fiscal 2007, from
$1,577.4 million in fiscal 2006. Product revenues growth
was across all geographies.
44
Product revenues were favorably affected by the following
factors:
|
|
|
|
|
Increased revenues from our current product portfolio. Product
revenue grew $686.9 million in fiscal 2007 as compared to
fiscal 2006, with a $669.7 million increase due to unit
volume and an increase of $17.2 million due to price and
configuration on existing products. 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.
|
|
|
|
Units shipped of the FAS3000 enterprise storage systems
increased 85.5% for fiscal 2007, compared to the prior fiscal
year. The average capacity on revenue units of the FAS3000
series increased 180.5% for fiscal 2007, compared to the prior
fiscal year.
|
|
|
|
Increased sales through indirect channels in absolute dollars,
including sales through our resellers, distributors, and OEM
partners, represented 59.6% and 55.5% of total revenues for
fiscal 2007 and 2006, respectively.
|
|
|
|
Our petabytes shipped increased 107.7% year over year to a
record 536 petabytes due to increased enterprise penetration in
primary and secondary storage, i.e., enterprise data centers,
data protection, disaster recovery, archival, and compliance
requirements. This increase in petabytes shipped was
attributable to an increase in petabytes from 500 gigabyte ATA
drives. ATA drives accounted for 55.7% of our total petabytes
shipped in fiscal 2007 compared to 47.1% in fiscal 2006. Fibre
Channel petabytes were up 148.3% year over year, to 44.3% of our
total shipped.
|
Product revenues were negatively affected by the following
factors:
|
|
|
|
|
Price declines per petabyte for our hardware products as disks
are a significant component of our storage systems. As
performance has improved on our devices, the related price we
can charge per petabyte of storage has decreased as well.
|
|
|
|
Revenues for our older products declined by $376.3 million
in fiscal 2007 compared to fiscal 2006, primarily due to a 72.0%
and a 63.3% decrease in revenue generated by FAS900 series
systems and NearStore R200 systems, respectively. In addition,
revenue also declined by $2.2 million in fiscal 2007
compared to fiscal 2006 due to products that we no longer ship,
including our NetCache products.
|
Our systems are highly configurable to respond to customer
requirements in the open systems storage markets that 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.
Software Upgrade and Maintenance Arrangements
Revenues Software upgrade and maintenance
arrangements revenues increased by 42.7% to $341.3 million
in fiscal 2007, from $239.1 million in fiscal 2006 due
primarily to a larger installed base of customers who have
purchased or renewed software upgrade and maintenance
arrangements, and an increased number of new enterprise
customers. Software upgrade and maintenance arrangements
revenues represented 12.2% and 11.6% of total revenues for
fiscal 2007 and 2006, respectively.
Service Revenues Service revenues, which
include hardware support, professional services, and educational
services, increased by 50.9% to $377.1 million in fiscal
2007, from $249.9 million in fiscal 2006.
The increase in absolute dollars was due to the following
factors:
|
|
|
|
|
Professional service revenue increased by 56.4% in fiscal 2007
compared to fiscal 2006, due to an increasing number of
enterprise customers, which typically have extremely complex IT
environments and require professional services to integrate our
solution into their environments.
|
|
|
|
Service maintenance contracts increased by 48.3% in fiscal 2007
compared to fiscal 2006, due to a growing installed base,
resulting in new customer support contracts in addition to
support contract renewals by existing customers.
|
45
While it is an element of our strategy to expand and offer more
comprehensive global enterprise support and service solutions,
we cannot assure you that service revenue will grow at the
current rate in fiscal 2008 or beyond.
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. Service revenues
represented 13.4% and 12.1% of total revenues for fiscal years
2007 and 2006, respectively.
International total revenues International
total revenues (including U.S. exports) increased by 32.9%
in fiscal year 2007 compared to fiscal 2006. International total
revenues were $1,254.0 million, or 44.7% of total revenues
for fiscal 2007, compared to $943.8 million, or 45.7% of
total revenues for fiscal 2006. The increase in international
sales was primarily driven by the same factors outlined under
the Total Revenue discussion, as compared to the same periods in
the prior fiscal year. We cannot assure you that we will be able
to maintain or increase international revenues in fiscal 2008.
Product Gross Margins Product gross margins
were 60.9% for both fiscal 2007 and fiscal 2006.
Product gross margins for both fiscal 2007 and 2006 were
affected by the following factors:
|
|
|
|
|
SFAS 123R stock compensation expenses recorded in fiscal
2007 and none in fiscal 2006
|
|
|
|
Sales price reductions due to competitive pricing pressure and
selective pricing discounts
|
|
|
|
Increased sales through certain indirect channels, which
generate lower gross margins than our direct sales in certain
geographic regions
|
|
|
|
Higher disk content with an expanded storage capacity for the
higher-end storage systems, as resale of disk drives generates
lower gross margins
|
We expect higher disk content associated with high-end storage
systems will negatively affect our gross margins in the future
if not offset by increases in software revenue and new
higher-margin products.
Stock-based compensation expense included in cost of product
revenues was $3.7 million for fiscal 2007. Amortization of
existing technology included in cost of product revenues was
$17.6 million and $11.8 million for fiscal 2007 and
2006, respectively. Estimated future amortization of existing
technology to cost of product revenues will be
$21.1 million for fiscal year 2008, $20.4 million for
fiscal year 2009, $15.9 million for fiscal year 2010,
$6.3 million for fiscal year 2011, and none thereafter.
Software Upgrade and Maintenance Arrangements Gross
Margins Software upgrade and maintenance
arrangements gross margins was 97.0% and 96.5% for fiscal 2007
and 2006, respectively, due primarily to improved productivity
and a larger installed base renewals, upgrades, and an
increasing number of new enterprise customers.
Service Gross Margins Service gross margins
increased to 27.4% in fiscal 2007 compared to 25.9% in fiscal
2006. Cost of service revenue increased by 47.9% to
$273.6 million in fiscal 2007, from $185.0 million in
fiscal 2006. Stock-based compensation expense of
$10.1 million was included in the cost of service revenue
for fiscal 2007.
The change in service gross margins year over year was primarily
impacted by an increase in services revenue, improved
productivity, and 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 be impacted by factors such as timing of technical
support service initiations and renewals and additional
investments in our customer support infrastructure. In fiscal
2008, we expect service margins to experience some variability
over time as we continue to build out our service capability and
capacity to support our growing enterprise customers and new
products.
Sales and Marketing Sales and marketing
expenses consist primarily of salaries, commissions, advertising
and promotional expenses, stock-based compensation expense, and
certain customer service and support costs. Sales and marketing
expenses increased 49.5% to $895.8 million for fiscal 2007,
from $599.1 million for fiscal 2006. These expenses were
32.0% and 28.9% of total revenues for fiscal 2007 and fiscal
2006, respectively. The
46
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, the continued worldwide
investment in our sales and global service organizations
associated with selling complete enterprise solutions, and
stock-based compensation expenses recognized under adoption of
SFAS No. 123R.
The stock-based compensation expenses included in sales and
marketing expenses for fiscal 2007 was $71.7 million
compared to $4.0 million in fiscal 2006. The increase in
stock-based compensation was due to adoption of
SFAS No. 123R. Amortization of acquisitions-related
trademarks/tradenames and customer contracts and relationships
included in sales and marketing expenses was $2.9 million
and $2.1 million for fiscal 2007 and fiscal 2006,
respectively. Based on identified intangibles related to our
acquisitions recorded at April 27, 2007, estimated future
amortization such as trademarks and customer relationships
included in sales and marketing expenses will be
$3.9 million for fiscal 2008, $3.8 million for fiscal
2009, $3.7 million for fiscal 2010, $2.7 million for
fiscal 2011, $1.6 million for fiscal 2012, and
$0.9 million thereafter.
We expect to continue to selectively add sales capacity in an
effort to expand domestic and international markets, introduce
new products, and establish and expand new distribution
channels. 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,
stock-based compensation, prototype expenses, nonrecurring
engineering charges, fees paid to outside consultants, and
amortization of capitalized patents.
Research and development expenses increased 53.3% to
$385.4 million for fiscal 2007 from $251.3 million for
fiscal 2006. These expenses represented 13.7% and 12.2% of total
revenues for fiscal 2007 and 2006, 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, higher performance-based
payroll expenses due to higher profitability, and stock-based
compensation expense recognized under adoption of
SFAS No. 123R. For both fiscal 2007 and 2006, no
software development costs were capitalized.
The stock-based compensation expenses included in research and
development expenses for fiscal 2007 was $51.3 million
compared to $8.3 million in fiscal 2006. The increase in
stock-based compensation was due to adoption of
SFAS No. 123R. Included in research and development
expenses are capitalized patents amortization of
$2.0 million and $2.0 million for fiscal 2007 and
2006, respectively. Based on capitalized patents recorded at
April 27, 2007, estimated future capitalized patents
amortization expenses will be $2.0 million for fiscal year
2008, $0.5 million in fiscal 2009, $0.2 million in
fiscal 2010, and none thereafter.
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 to
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 to introduce new products that expand our
solutions portfolio.
We believe that our research and development expenses will
increase in absolute dollars for fiscal 2008, primarily due to
ongoing costs associated with the development of new products
and technologies, increased headcount, and the operating impact
of potential future acquisitions.
General and Administrative General and
administrative expenses increased 58.9% to $147.5 million
for fiscal 2007, from $92.8 million for fiscal 2006. These
expenses represented 5.3% and 4.6% of total revenues for fiscal
2007 and 2006, respectively. This increase in absolute dollars
was primarily due to higher performance-based payroll expenses
due to higher profitability and increased headcount, higher
stock-based compensation expense recognized under
SFAS No. 123R, and higher legal expenses and
professional fees for general corporate matters.
We believe that our general and administrative expenses will
increase in absolute dollars for fiscal 2008 due to increased
general and administrative headcount. The stock-based
compensation expenses included in general and administrative
expenses for fiscal 2007 was $26.2 million compared to
$1.0 million in fiscal 2006. The increase in
47
stock-based compensation was due to adoption of
SFAS No. 123R. Amortization of covenants not to
compete included in general and administrative expenses was
$1.0 million and $2.2 million for fiscal 2007 and
2006, respectively. Based on identified intangibles related to
our acquisitions recorded at January 26, 2007, estimated
future amortization of covenants not to compete relating to our
acquisitions will be $0.2 million for fiscal year 2008, and
none thereafter.
Restructuring Charges In fiscal 2002, as a
result of continuing unfavorable economic conditions and a
reduction in information technology (IT) spending
rates, we implemented two restructuring plans, which included
reductions in our workforce and consolidations of our
facilities. As of April 27, 2007, 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. In 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 2007, we did not
record any reduction in restructuring reserve resulting from a
change in estimate for our third restructuring plan. 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 also
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 27, 2007, $0.5 million
was included in other accrued liabilities, and the remaining
$1.6 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 restructuring reserve at April 27, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance-
|
|
|
|
|
|
|
|
|
|
Related
|
|
|
|
|
|
|
Facility
|
|
|
Amounts
|
|
|
Total
|
|
|
Reserve balance at April 30,
2004
|
|
$
|
5,208
|
|
|
$
|
|
|
|
$
|
5,208
|
|
Cash payments and other
|
|
|
(705
|
)
|
|
|
|
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at April 29,
2005
|
|
$
|
4,503
|
|
|
$
|
|
|
|
$
|
4,503
|
|
Restructuring charges
|
|
|
281
|
|
|
|
859
|
|
|
|
1,140
|
|
Recoveries
|
|
|
(1,256
|
)
|
|
|
|
|
|
|
(1,256
|
)
|
Cash payments and other
|
|
|
(862
|
)
|
|
|
(521
|
)
|
|
|
(1,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at April 28,
2006
|
|
$
|
2,666
|
|
|
$
|
338
|
|
|
$
|
3,004
|
|
Recoveries
|
|
|
|
|
|
|
(74
|
)
|
|
|
(74
|
)
|
Cash payments and other
|
|
|
(582
|
)
|
|
|
(264
|
)
|
|
|
(846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve balance at April 27,
2007
|
|
$
|
2,084
|
|
|
$
|
|
|
|
$
|
2,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Sale of Assets We recorded a gain of
$25.3 million in fiscal 2007 as a result of the sale of
certain assets to Blue Coat Systems, Inc (Blue
Coat). (see Note 16 of the Consolidated Financial
Statements). We recorded revenues of $57.4 million,
$71.1 million and $75.5 million from NetCache products
for fiscal 2007, 2006, and 2005 respectively. The contribution
to operating income from these products was not significant.
Interest Income Interest income was
$68.8 million and $41.5 million for fiscal 2007 and
2006, respectively. The increase in interest income was
primarily driven by higher average interest rates on our
investment portfolio. We expect interest income to increase
compared to fiscal 2008 as a result of our cash and invested
balances being reinvested in a higher interest rate portfolio
environment.
48
Interest Expense Interest expense was
$11.6 million and $1.3 million in fiscal 2007 and
2006, respectively. The increase in fiscal 2007 was primarily
due to interest incurred in connection with our debt.
Net Gain (Loss) on Investments Net gain
(loss) on investments included a net write-down of
$2.1 million related to the impairment of our investment in
privately-held companies in fiscal 2007.
Other Income (Expense), Net Other income was
$2.8 million for fiscal 2007. Other income for fiscal 2007
included net exchange gains from foreign currency of
$2.4 million and other income of $0.4 million. Other
income included net exchange gains from foreign currency of
$1.7 million for fiscal 2006. We believe that
period-to-period changes in foreign exchange gains or losses
will continue to be impacted by hedging costs associated with
our forward and option activities and forecast variance.
Provision for Income Taxes For fiscal 2007,
our annual effective tax rate was 17.2% versus 23.9% for fiscal
2006, 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 decrease to the
effective tax rate for fiscal year 2007 is primarily
attributable to the absence of this one-time item and the impact
of income taxed at lower tax rates in foreign jurisdiction. The
effective tax rate for fiscal 2007 differed from the
U.S. statutory rate primarily due to reductions in the rate
derived from 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,
offset partially by an increase in the rate due to the tax
effect of stock compensation under SFAS No. 123R.
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.
This tax raised our 2006 effective tax rate by 6.4% 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.
The 2006 Tax Relief and Health Care Act was signed into law on
December 20, 2006. One of the provisions of this law was
the retroactive reinstatement of the research and development
credit from January 1, 2006 and its extension through
December 31, 2007. The effective tax rates for the fiscal
2007 reflected the benefits attributable to the extension of the
research and development tax credit provisions.
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.
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.
|
49
The Decru acquisition and the IBM OEM relationship did not have
a significant impact on the revenue for fiscal 2006.
Software Upgrade and Maintenance Arrangements
Revenues Software upgrade and maintenance
arrangements 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 upgrade
and maintenance arrangements 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 due to an increasing number of enterprise customers,
which typically have extremely complex IT environments and
require professional services to integrate our solution into
their environments.
|
|
|
|
A growing installed base resulting in new customer support
contracts in addition to support contract renewals by existing
customers
|
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.
Product Gross Margins Product gross margins
decreased to 60.9% for fiscal 2006, from 61.7% for fiscal 2005.
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.
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
|
|
|
|
Higher average selling prices for our newer products
|
Software Upgrade and Maintenance Arrangements Gross
Margins Software upgrade and maintenance
arrangements gross margins increased slightly to 96.5% for
fiscal 2006, from 97.0% for fiscal 2005 due primarily to
improved productivity and a larger installed base renewals,
upgrades, and an increasing number of new enterprise customers.
50
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 productivity 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.
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 28.0% to
$599.1 million for fiscal 2006, from $468.2 million
for fiscal 2005. These expenses were 28.9% and 29.2% 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.
Compensation expenses related to stock options and restricted
stock assumed in acquisitions were $4.0 million and
$2.2 million for fiscal 2006 and fiscal 2005, respectively.
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.
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 42.6% to
$251.3 million for fiscal 2006 from $176.3 million for
fiscal 2005. These expenses represented 12.2% and 11.0% 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.
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.
Compensation expenses related to stock options and restricted
stock assumed in acquisitions was $8.3 million and
$5.2 million for fiscal 2006 and fiscal 2005, respectively.
General and Administrative General and
administrative expenses increased 19.6% to $92.8 million
for fiscal 2006, from $77.6 million for fiscal 2005. These
expenses represented 4.6% and 4.9% 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.
Compensation expenses related to stock options and restricted
stock assumed in acquisitions were $1.0 million and
$0.7 million for fiscal 2006 and fiscal 2005, respectively.
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.
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
51
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.
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 28, 2006, 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. 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.
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 28, 2006, $0.9 million was included
in other accrued liabilities, and the remaining
$2.1 million was classified as long-term obligations.
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 $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.
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.
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%.
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 27, 2007, as compared to April 28, 2006,
our cash, cash equivalents, and short-term investments decreased
by $14.1 million to $1,308.8 million. We derive our
liquidity and capital resources primarily from our cash flows
from operations and from working capital. Working capital
decreased by $62.8 million to $1,053.3 million as of
April 27, 2007, compared to $1,116.0 million as of
April 28, 2006.
52
During fiscal 2007, we generated cash flows from operating
activities of $864.5 million, as compared with
$554.3 million and $462.1 million for fiscal 2006 and
fiscal 2005, respectively. We reported net income of
$297.7 million for fiscal 2007, as compared to
$266.5 million and $225.8 million in fiscal 2006 and
fiscal 2005, respectively. A summary of the significant changes
in noncash adjustments affecting net income is as follows:
|
|
|
|
|
Stock-based compensation expense was $163.0 million in
fiscal 2007, compared to $13.3 million and
$8.1 million in fiscal 2006 and 2005, respectively. The
increase was the result of adopting SFAS No. 123R.
|
|
|
|
Depreciation expense was $87.4 million, $63.7 million,
and $54.5 million in fiscal 2007, 2006 and 2005,
respectively. The increase was due to continued capital
expansion to meet our business growth.
|
|
|
|
Gain on sale of NetCache to Blue Coat was $25.3 million in
fiscal 2007.
|
|
|
|
Amortization of intangibles was $21.4 million,
$16.1 million, and $9.3 million in fiscal 2007, 2006
and 2005, respectively. The increase was attributed to the Topio
and Decru acquisitions.
|
|
|
|
An increase in net deferred tax assets of $19.5 million in
fiscal 2007 compared to a decrease of $1.5 million in
fiscal 2006 and decrease of $6.3 million in fiscal 2005,
primarily attributable to an increase in deferred revenue
relating to higher software upgrade and maintenance arrangements
and service revenues.
|
In addition to net income and noncash adjustments in fiscal 2007
compared to fiscal 2006 and fiscal 2005, 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 of $421.3 million in
fiscal 2007, compared to increase in deferred revenue of
$233.2 million and $169.4 million in fiscal 2006 and
2005, respectively, was due to higher software upgrade and
maintenance arrangements and service billings attributable to
the increase in larger enterprise customers, as well as renewals
of existing maintenance agreements in fiscal 2007.
|
A decrease in income taxes payable in fiscal 2007 compared to
fiscal 2006 primarily attributable to income taxes payment of
the one-time repatriation incentive under the Jobs Act. During
fiscal 2007, we remitted $19.6 million of income taxes
relating to the foreign dividend repatriation in connection with
the filing of our fiscal 2006 federal income tax return.
Increased income taxes payable in fiscal 2006 compared to fiscal
2005, primarily reflecting the $22.5 million of federal and
state tax liability relating to repatriation of accumulated
foreign earnings under the Jobs Act and higher profitability in
fiscal 2006 compared to fiscal 2005.
|
|
|
|
|
Increase in accounts payable of $36.6 million,
$17.4 million and $30.5 million in fiscal 2007, 2006,
and 2005, respectively, was primarily attributable to elevated
purchasing activity required to support our business growth and
facilities expansion projects.
|
|
|
|
Accrued compensation and related benefits increased by
$43.6 million, $28.4 million and $33.8 million in
fiscal 2007, 2006 and 2005, respectively, reflecting the timing
of payroll accruals and payment.
|
|
|
|
Net inventory decreased $9.9 million for fiscal 2007,
primarily due to higher inventory at fiscal 2006 year end
associated with the new FAS 6000 launch. The increase of
$46.2 million in fiscal 2006 was due primarily to ramping
up of purchased components in anticipation of revenue growth.
The increase of $15.0 million in fiscal 2005 was primarily
due to end-of-life buys for certain products.
|
The above factors were partially offset by the effects of:
|
|
|
|
|
Increase in accounts receivable of $175.2 million in fiscal
2007 was due to higher revenue volume. Increase in accounts
receivable of $116.8 million in fiscal 2006 was due
primarily to a shipping profile weighted toward the second half
of the fourth quarter of fiscal 2006. Increase of
$103.4 million in fiscal 2005 was due to increased sales in
fiscal 2005.
|
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.
53
Cash
Flows from Investing Activities
Capital expenditures for fiscal 2007 were $165.8 million as
compared to $132.9 million and $93.6 million in fiscal
2006 and 2005, respectively. We received net proceeds of
$60.0 million in fiscal 2007, and used net proceeds of
$128.5 million and $266.8 million in fiscal 2006 and
2005, respectively, for net purchases/redemptions of short-term
investments. We redeemed $127.9 million of restricted
investments and its interest income pledged with JP Morgan Chase
in fiscal 2007 to repay the Tranche A term loan with JP
Morgan Chase (See Note 6 to the Consolidated Financial
Statements) Investing activities in fiscal 2007, 2006, and 2005
also included new investments in privately-held companies of
$1.6 million, $9.3 million, and $0.4 million,
respectively. In fiscal 2007, we acquired Topio, Inc. for a
purchase price of approximately $146.1 million, which
consisted of the value of the assumed options, cash payments of
$131.2 million, and related transaction costs. In fiscal
2006, we acquired Alacritus and Decru and incurred total cash
payments including related transactions costs totaling
$53.7 million. In fiscal 2005, we acquired additional
patents for a purchase price of approximately $0.9 million.
In fiscal 2007, we received $23.9 million in cash in
connection with the sale of certain assets to Blue Coat. We
received $2.8 million, $0.1 million, and
$0.3 million in proceeds from the sale of investments in
privately-held companies in fiscal 2007, 2006, and 2005,
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 for fiscal year
2005. In April 2005, our CEO reimbursed us $10.2 million
for these premiums.
Cash
Flows from Financing Activities
We used $747.3 million and $12.1 million in fiscal
2007 and 2005, respectively, as compared to cash provided by
financing activities of $42.8 million in fiscal 2006.
During fiscal 2006, we borrowed $300.0 million to fund the
repatriation in cash from foreign earnings and investments under
the American Jobs Creation Act of 2004 (the Jobs
Act). We made a repayment of $214.9 million for our
debt in fiscal 2007. During fiscal 2007, 2006, and 2005, we
repurchased 22.6 million, 17.4 million, and
7.7 million shares of common stock at a total of
$805.7 million, $488.9 million, and
$192.9 million, respectively. Other financing activities
provided $215.5 million, $232.7 million, and
$181.9 million in fiscal 2007, 2006, and 2005,
respectively, from sales of common stock related to employee
stock option exercises and employee stock purchases. Tax
benefits, related to tax deductions in excess of the stock-based
compensation expense recognized, of $63.2 million were
presented as financing cash flows for fiscal 2007 in accordance
with SFAS No. 123R. During fiscal 2007, 2006 and 2005,
we withheld $5.3 million, $1.1 million, and
$1.1 million in shares, respectively, from certain
employees exercised shares of their restricted stock to
reimburse for federal, state, and local withholding taxes
obligations. The increase in the amounts withheld year over year
was due to the release of the Decru assumed restricted stock
units.
The change in cash flow from financing was primarily due to the
effects of higher common stock repurchases partially offset by
proceeds from the issuance of common stock under employee equity
programs compared to the same period 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 flow resulting from the
issuance of common stock related to employee participation in
employee stock programs will vary.
Other
Factors Affecting Liquidity and Capital Resources
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.
Primarily as a result of this one-time repatriation incentive,
we remitted $19.6 million of income taxes with the filing
of our fiscal year 2006 federal income tax return.
For fiscal 2007, 2006, and 2005, the income tax benefit
associated with dispositions of employee stock transactions was
$175.0 million, $36.6 million, and $27.8 million,
respectively. 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.
54
Stock
Repurchase Program
On November 15, 2006, the Board of Directors approved a new
stock repurchase program in which up to $800.0 million of
additional shares may be purchased. At April 27, 2007,
$399.9 million remained available for future repurchase.
The stock repurchase program may be suspended or discontinued at
any time.
Debt
In March 2006, we received proceeds from the term loans totaling
$300.0 million to finance a dividend under the Jobs Act.
(See Note 6 to the Consolidated Financial Statements). Loan
payments of $85.1 million are due in fiscal 2008. This debt
was collateralized by restricted investments totaling
$116.0 million as of April 27, 2007. In accordance
with the payment terms of the loan agreement, interest payments
will be approximately $2.7 million in fiscal 2008. As of
April 27, 2007, we are in compliance with the liquidity and
leverage ratio as required by the Loan Agreement with the
lenders.
Contractual
Cash Obligations and Other Commercial Commitments
The following summarizes our contractual cash obligations and
commercial commitments at April 27, 2007, and the effect
such obligations are expected to have on our liquidity and cash
flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office operating lease payments(1)
|
|
$
|
21,771
|
|
|
$
|
20,855
|
|
|
$
|
17,557
|
|
|
$
|
14,561
|
|
|
$
|
10,501
|
|
|
$
|
28,809
|
|
|
$
|
114,054
|
|
Real estate lease payments(2)
|
|
|
1,296
|
|
|
|
4,722
|
|
|
|
5,972
|
|
|
|
5,972
|
|
|
|
5,972
|
|
|
|
93,901
|
|
|
|
117,835
|
|
Equipment operating lease
payments(3)
|
|
|
10,358
|
|
|
|
8,102
|
|
|
|
2,207
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
20,676
|
|
Venture capital funding
commitments(4)
|
|
|
290
|
|
|
|
278
|
|
|
|
265
|
|
|
|
253
|
|
|
|
21
|
|
|
|
|
|
|
|
1,107
|
|
Capital expenditures(5)
|
|
|
5,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,027
|
|
Communications and maintenance(6)
|
|
|
17,688
|
|
|
|
12,242
|
|
|
|
5,315
|
|
|
|
595
|
|
|
|
17
|
|
|
|
|
|
|
|
35,857
|
|
Restructuring charges(7)
|
|
|
579
|
|
|
|
603
|
|
|
|
594
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
2,084
|
|
Debt(8)
|
|
|
87,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Cash
Obligations
|
|
$
|
144,844
|
|
|
$
|
46,802
|
|
|
$
|
31,910
|
|
|
$
|
21,698
|
|
|
$
|
16,511
|
|
|
$
|
122,710
|
|
|
$
|
384,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Other Commercial
Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit(9)
|
|
$
|
2,685
|
|
|
$
|
310
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
369
|
|
|
$
|
3,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We lease sales offices, research and development facilities, and
other property under operating leases throughout the U.S. and
internationally, which expire through fiscal 2016. 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 |
55
|
|
|
|
|
would change if we were to exercise these options or if we were
to enter into additional operating lease agreements. Facilities
operating leases impacted by the 2002 restructurings are
included in subparagraph (7) below. The net increase in the
office operating lease payments was primarily due to a domestic
lease extension and two new European leases during fiscal 2007. |
|
(2) |
|
Included in the above contractual cash obligations pursuant to
the two financing arrangements with BNP Paribas LLC
(BNP) are (a) lease commitments of
$1.3 million in fiscal 2008; $4.7 million in fiscal
2009, $6.0 million in each of the fiscal years 2010, 2011,
and 2012, $4.7 million in fiscal 2013; and
$1.3 million in fiscal 2014, which are based on the London
Interbank Offered Rate (LIBOR) rate at
April 27, 2007 for a term of five years, and (b) at
the expiration or termination of the lease, a supplemental
payment obligation equal to our minimum guarantee of
$88.0 million in the event that we elect not to purchase or
arrange for sale of the buildings, see Note 4 to the
Consolidated Financial Statements. |
|
(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 Long-term Obligations and Other Accrued Liabilities, which
is comprised of committed lease payments and operating expenses
net of committed and estimated sublease income. |
|
(8) |
|
Included in these amounts are the JP Morgan Chase loan (see
Note 6 to the Consolidated Financial Statements) on our
Consolidated Balance Sheets under Current Portion of Long-Term
Debt and Long-Term Debt. This amount also includes estimated
interest payments of $2.7 million for fiscal 2008. The
decrease from April 28, 2006 represented a loan repayment
of $214.9 million, plus interest of $10.6 million for
fiscal 2007. |
|
(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 27, 2007, our financial guarantees of
$3.4 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 rent guarantee.
As of April 27, 2007, our notional fair values of foreign
exchange forward and foreign currency option contracts totaled
$368.8 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 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.
56
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 two lease arrangements with BNP
for approximately 380,000 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 nonrecourse
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, 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 $117.8 million reported under our
Note 4, Commitments and Contingencies.
As of April 27, 2007, 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 for
at least the next twelve months.
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 speculative
or trading purposes. All financial instruments are used in
accordance with management-approved policies.
57
Market
Risk and Market Interest Risk
Investment and Interest Income As of
April 27, 2007, we had available-for-sale investments of
$935.7 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 investments, consisting
primarily of corporate bonds, corporate securities, government,
municipal debt securities, 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 percent increase in market interest rates
from levels at April 27, 2007, would cause the fair value
of these available-for-sale investments to decline by
approximately $4.1 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.
Our investment policy is to limit the amount of credit exposure
through diversification and investment in highly rated
securities. We further mitigate concentrations of credit risk in
our investments by limiting our investments in the debt
securities of a single issuer and by diversifying risk across
geographies and type of issuer. We have not experienced any
material losses on our available-for-sale investments.
Our investment portfolio also includes common stock holdings in
Blue Coat (see Note 16 of the Consolidated Financial
Statements). We are exposed to fluctuations in the market price
of our investment in this company. At the same time, we are
precluded from selling these shares until September 2007. As a
result of these factors, the amount of income and cash flow that
we ultimately realize from this investment may vary materially
from the current unrealized amount. A hypothetical
10 percent decrease in the fair market value from fair
market value at April 27, 2007 would cause the fair value
of this investment to decrease by approximately
$1.3 million.
Lease Commitments As of April 27, 2007,
we have two arrangements with BNP to lease our land for a period
of 50 years to construct approximately 380,000 square
feet of office space and a parking structure costing up to
$103.5 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 first lease in October 2007 for a term of
five years, and the second lease in September 2008 for a term of
five years. We have the option to renew both leases for two
consecutive five-year periods upon approval by BNP. A
hypothetical 10 percent increase in market interest rates
from levels at April 27, 2007 would increase our total
lease payments under the initial five-year term by approximately
$2.8 million. We do not currently hedge against market
interest rate increases. As cash from operating cash flows is
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 $85.1 million as of
April 27, 2007. Under terms of these arrangements, we
expect to pay interest payments at LIBOR plus a spread. A
hypothetical 10 percent increase in market interest rates
from levels at April 27, 2007 would increase our total
interest payments by approximately $0.4 million. We do not
currently use derivatives to manage interest rate risk.
Non-Marketable 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 nonmarketable 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 nonmarketable 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. We do not currently engage in any hedging activities
to reduce or eliminate equity price risk with respect to such
nonmarketable investment. Accordingly, we could lose all or part
of this investment if there is an adverse change in the market
price of the company we invest in. Our investments in
nonmarketable securities had a carrying amount of
$8.9 million as of April 27, 2007 and
$11.0 million as of April 28, 2006. If we determine
that an other-than-temporary decline in fair value exists for a
nonmarketable 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. In
fiscal 2007, we recorded a noncash,
58
other-than-temporary write-down of $2.1 million related to
impairment of our investment in two privately-held companies.
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 27, 2007, the gains or losses were included in other
comprehensive income.
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 27, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Notional
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
Contract Value
|
|
|
Fair Value
|
|
|
|
|
Currency
|
|
Buy/Sell
|
|
|
Currency Amount
|
|
|
USD
|
|
|
in USD
|
|
|
|
|
|
Forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
156,155
|
|
|
$
|
211,846
|
|
|
$
|
212,838
|
|
|
|
|
|
GBP
|
|
|
Sell
|
|
|
|
33,418
|
|
|
$
|
66,507
|
|
|
$
|
66,698
|
|
|
|
|
|
CAD
|
|
|
Sell
|
|
|
|
24,186
|
|
|
$
|
21,670
|
|
|
$
|
21,672
|
|
|
|
|
|
Other
|
|
|
Sell
|
|
|
|
N/A
|
|
|
$
|
20,190
|
|
|
$
|
20,194
|
|
|
|
|
|
AUD
|
|
|
Buy
|
|
|
|
23,654
|
|
|
$
|
19,582
|
|
|
$
|
19,581
|
|
|
|
|
|
Other
|
|
|
Buy
|
|
|
|
N/A
|
|
|
$
|
5,981
|
|
|
$
|
5,981
|
|
|
|
|
|
Option contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
13,000
|
|
|
$
|
17,711
|
|
|
$
|
17,823
|
|
|
|
|
|
GBP
|
|
|
Sell
|
|
|
|
2,000
|
|
|
$
|
3,992
|
|
|
$
|
4,020
|
|
|
|
|
|
The following table provides information about our foreign
exchange forward contracts and currency options contracts
outstanding on April 28, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Notional
|
|
|
|
|
|
|
Foreign
|
|
|
Contract Value
|
|
|
Fair Value
|
|
Currency
|
|
Buy/Sell
|
|
|
Currency Amount
|
|
|
USD
|
|
|
in USD
|
|
|
Forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
145,804
|
|
|
$
|
183,852
|
|
|
$
|
184,716
|
|
GBP
|
|
|
Sell
|
|
|
|
45,292
|
|
|
$
|
82,258
|
|
|
$
|
82,614
|
|
CAD
|
|
|
Sell
|
|
|
|
13,493
|
|
|
$
|
12,072
|
|
|
$
|
12,065
|
|
Other
|
|
|
Sell
|
|
|
|
N/A
|
|
|
$
|
10,191
|
|
|
$
|
10,190
|
|
AUD
|
|
|
Buy
|
|
|
|
13,866
|
|
|
$
|
10,509
|
|
|
$
|
10,508
|
|
EUR
|
|
|
Buy
|
|
|
|
12,092
|
|
|
$
|
15,156
|
|
|
$
|
15,322
|
|
GBP
|
|
|
Buy
|
|
|
|
2,851
|
|
|
$
|
5,129
|
|
|
$
|
5,201
|
|
Other
|
|
|
Buy
|
|
|
|
N/A
|
|
|
$
|
7,073
|
|
|
$
|
7,075
|
|
Option contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EUR
|
|
|
Sell
|
|
|
|
10,000
|
|
|
$
|
12,655
|
|
|
$
|
12,778
|
|
GBP
|
|
|
Sell
|
|
|
|
2,500
|
|
|
$
|
4,559
|
|
|
$
|
4,598
|
|
59
|
|
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 subsidiaries (the
Company) as of April 27, 2007 and
April 28, 2006, and the related consolidated statements of
income, cash flows and stockholders equity and
comprehensive income (loss) for the years ended April 27,
2007, April 28, 2006, and April 29, 2005. Our audits
also included the consolidated financial statement schedule
listed in the Index at 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 the 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 subsidiaries as of April 27,
2007 and April 28, 2006, and the results of their
operations and their cash flows for the years ended
April 27, 2007, April 28, 2006, and April 29,
2005 in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set
forth therein.
As discussed in Note 1 to the consolidated financial
statements, in fiscal year 2007, the Company changed its method
of accounting for stock-based compensation in accordance with
guidance provided in Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment.
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 27, 2007, 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
June 25, 2007 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
June 25, 2007
60
NETWORK
APPLIANCE, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
April 27,
|
|
|
April 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per
|
|
|
|
share amounts)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
489,079
|
|
|
$
|
461,256
|
|
Short-term investments
|
|
|
819,702
|
|
|
|
861,636
|
|
Accounts receivable, net of
allowances of $2,572 in 2007 and $2,380 in 2006
|
|
|
591,324
|
|
|
|
415,295
|
|
Inventories
|
|
|
54,880
|
|
|
|
64,452
|
|
Prepaid expenses and other assets
|
|
|
56,765
|
|
|
|
43,536
|
|
Short-term restricted cash and
investments
|
|
|
118,312
|
|
|
|
138,539
|
|
Short-term deferred income taxes
|
|
|
110,741
|
|
|
|
48,496
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,240,803
|
|
|
|
2,033,210
|
|
Property and Equipment,
net
|
|
|
603,523
|
|
|
|
513,193
|
|
Goodwill
|
|
|
601,056
|
|
|
|
487,535
|
|
Intangible Assets,
net
|
|
|
83,009
|
|
|
|
75,051
|
|
Long-Term Restricted Cash and
Investments
|
|
|
3,639
|
|
|
|
108,371
|
|
Long-Term Deferred Income Taxes
and Other Assets
|
|
|
126,448
|
|
|
|
43,605
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,658,478
|
|
|
$
|
3,260,965
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
85,110
|
|
|
$
|
166,211
|
|
Accounts payable
|
|
|
144,112
|
|
|
|
101,278
|
|
Income taxes payable
|
|
|
53,371
|
|
|
|
51,577
|
|
Accrued compensation and related
benefits
|
|
|
177,327
|
|
|
|
129,636
|
|
Other accrued liabilities
|
|
|
97,017
|
|
|
|
69,073
|
|
Deferred revenue
|
|
|
630,610
|
|
|
|
399,388
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,187,547
|
|
|
|
917,163
|
|
Long-Term Debt
|
|
|
|
|
|
|
133,789
|
|
Long-Term Deferred
Revenue
|
|
|
472,423
|
|
|
|
282,149
|
|
Other Long-Term
Obligations
|
|
|
9,487
|
|
|
|
4,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,669,457
|
|
|
|
1,337,512
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
(Note 4)
|
|
|
|
|
|
|
|
|
Stockholders
Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value, 5,000 shares authorized; shares outstanding: none in
2007 and 2006
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par
value; 885,000 shares authorized: shares issued: 421,623 in
2007 and 407,994 in 2006
|
|
|
422
|
|
|
|
408
|
|
Additional paid-in capital
|
|
|
2,380,623
|
|
|
|
1,872,962
|
|
Deferred stock compensation
|
|
|
|
|
|
|
(49,266
|
)
|
Treasury stock at cost
(54,593 shares in 2007, and 31,996 shares in 2006)
|
|
|
(1,623,691
|
)
|
|
|
(817,983
|
)
|
Retained earnings
|
|
|
1,226,165
|
|
|
|
928,430
|
|
Accumulated other comprehensive
income (loss)
|
|
|
5,502
|
|
|
|
(11,098
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,989,021
|
|
|
|
1,923,453
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,658,478
|
|
|
$
|
3,260,965
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
61
NETWORK
APPLIANCE, INC.
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
April 27,
|
|
|
April 28,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
2,085,898
|
|
|
$
|
1,577,435
|
|
|
$
|
1,260,611
|
|
Software upgrade and maintenance
arrangements
|
|
|
341,258
|
|
|
|
239,139
|
|
|
|
169,726
|
|
Service
|
|
|
377,126
|
|
|
|
249,882
|
|
|
|
167,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,804,282
|
|
|
|
2,066,456
|
|
|
|
1,598,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
815,928
|
|
|
|
616,576
|
|
|
|
482,704
|
|
Cost of software upgrade and
maintenance arrangements
|
|
|
10,210
|
|
|
|
8,370
|
|
|
|
5,176
|
|
Cost of service
|
|
|
273,644
|
|
|
|
185,049
|
|
|
|
135,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
1,099,782
|
|
|
|
809,995
|
|
|
|
623,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
1,704,500
|
|
|
|
1,256,461
|
|
|
|
975,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
895,813
|
|
|
|
599,140
|
|
|
|
468,200
|
|
Research and development
|
|
|
385,357
|
|
|
|
251,330
|
|
|
|
176,300
|
|
General and administrative
|
|
|
147,501
|
|
|
|
92,817
|
|
|
|
77,632
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
Restructuring recoveries
|
|
|
(74
|
)
|
|
|
(117
|
)
|
|
|
(271
|
)
|
Gain on sale of assets
|
|
|
(25,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,403,258
|
|
|
|
948,170
|
|
|
|
721,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
Operations
|
|
|
301,242
|
|
|
|
308,291
|
|
|
|
253,187
|
|
Other Income (Expenses),
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
68,837
|
|
|
|
41,519
|
|
|
|
24,249
|
|
Interest expense
|
|
|
(11,642
|
)
|
|
|
(1,283
|
)
|
|
|
(97
|
)
|
Net (loss) gain on investments
|
|
|
(1,538
|
)
|
|
|
101
|
|
|
|
41
|
|
Other income (expenses), net
|
|
|
2,829
|
|
|
|
1,644
|
|
|
|
(1,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
58,486
|
|
|
|
41,981
|
|
|
|
23,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income
Taxes
|
|
|
359,728
|
|
|
|
350,272
|
|
|
|
276,228
|
|
Provision for Income
Taxes
|
|
|
61,993
|
|
|
|
83,820
|
|
|
|
50,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
297,735
|
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.77
|
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Used in Net Income per
Share Calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
371,204
|
|
|
|
371,061
|
|
|
|
361,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
388,454
|
|
|
|
388,381
|
|
|
|
380,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
62
NETWORK
APPLIANCE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
April 27,
|
|
|
April 28,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
297,735
|
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
87,391
|
|
|
|
63,679
|
|
|
|
54,459
|
|
Acquired in-process research and
development
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
21,460
|
|
|
|
16,136
|
|
|
|
9,332
|
|
Amortization of patents
|
|
|
1,982
|
|
|
|
1,982
|
|
|
|
1,833
|
|
Stock-based compensation
|
|
|
163,033
|
|
|
|
13,293
|
|
|
|
8,148
|
|
Net loss (gain) on investments
|
|
|
1,538
|
|
|
|
(101
|
)
|
|
|
(70
|
)
|
Gain on sale of assets
|
|
|
(25,339
|
)
|
|
|
|
|
|
|
|
|
Loss on disposal of equipment
|
|
|
773
|
|
|
|
1,381
|
|
|
|
1,990
|
|
Allowance for doubtful accounts
|
|
|
928
|
|
|
|
46
|
|
|
|
1,110
|
|
Deferred income taxes
|
|
|
(19,523
|
)
|
|
|
1,545
|
|
|
|
6,321
|
|
Deferred rent
|
|
|
1,033
|
|
|
|
669
|
|
|
|
294
|
|
Excess tax benefit from stock-based
compensation
|
|
|
(63,159
|
)
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(175,231
|
)
|
|
|
(116,816
|
)
|
|
|
(103,352
|
)
|
Inventories
|
|
|
9,908
|
|
|
|
(46,247
|
)
|
|
|
(14,996
|
)
|
Prepaid expenses and other assets
|
|
|
(6,366
|
)
|
|
|
(12,964
|
)
|
|
|
(2,336
|
)
|
Accounts payable
|
|
|
36,589
|
|
|
|
17,405
|
|
|
|
30,460
|
|
Income taxes payable
|
|
|
50,126
|
|
|
|
72,669
|
|
|
|
32,541
|
|
Accrued compensation and related
benefits
|
|
|
43,612
|
|
|
|
28,353
|
|
|
|
33,828
|
|
Other accrued liabilities
|
|
|
16,638
|
|
|
|
8,571
|
|
|
|
7,369
|
|
Deferred revenue
|
|
|
421,328
|
|
|
|
233,229
|
|
|
|
169,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
864,456
|
|
|
|
554,282
|
|
|
|
462,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(2,630,350
|
)
|
|
|
(1,029,412
|
)
|
|
|
(872,237
|
)
|
Redemptions of investments
|
|
|
2,690,326
|
|
|
|
900,863
|
|
|
|
605,426
|
|
Redemptions of restricted
investments
|
|
|
127,881
|
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
290
|
|
|
|
(1,678
|
)
|
|
|
|
|
Purchase of patents
|
|
|
|
|
|
|
|
|
|
|
(895
|
)
|
Proceeds from sale of assets
|
|
|
23,914
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(165,828
|
)
|
|
|
(132,915
|
)
|
|
|
(93,568
|
)
|
Purchases of nonmarketable
securities
|
|
|
(1,583
|
)
|
|
|
(9,275
|
)
|
|
|
(425
|
)
|
Proceeds from sales of
nonmarketable securities
|
|
|
2,813
|
|
|
|
130
|
|
|
|
347
|
|
Proceeds from disposal of property
and equipment
|
|
|
|
|
|
|
32
|
|
|
|
|
|
Payments for split-dollar insurance
premiums
|
|
|
|
|
|
|
|
|
|
|
(183
|
)
|
Reimbursements for split-dollar
insurance premiums
|
|
|
|
|
|
|
|
|
|
|
10,227
|
|
Purchase of businesses, net of cash
acquired
|
|
|
(131,241
|
)
|
|
|
(53,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(83,778
|
)
|
|
|
(326,002
|
)
|
|
|
(351,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
related to employee stock transactions
|
|
|
215,453
|
|
|
|
232,745
|
|
|
|
181,922
|
|
Excess tax benefit from stock-based
compensation
|
|
|
63,159
|
|
|
|
|
|
|
|
|
|
Proceeds from debt
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
Repayment of debt
|
|
|
(214,890
|
)
|
|
|
|
|
|
|
|
|
Tax withholding payments reimbursed
by restricted stock
|
|
|
(5,272
|
)
|
|
|
(1,062
|
)
|
|
|
(1,122
|
)
|
Repurchases of common stock
|
|
|
(805,708
|
)
|
|
|
(488,908
|
)
|
|
|
(192,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
(747,258
|
)
|
|
|
42,775
|
|
|
|
(12,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes
on Cash and Cash Equivalents
|
|
|
(5,597
|
)
|
|
|
(3,341
|
)
|
|
|
2,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash
Equivalents
|
|
|
27,823
|
|
|
|
267,714
|
|
|
|
101,214
|
|
Cash and Cash
Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
461,256
|
|
|
|
193,542
|
|
|
|
92,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
489,079
|
|
|
$
|
461,256
|
|
|
$
|
193,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
63
NETWORK
APPLIANCE, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
|
|
|
Treasury
|
|
|
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
|
|
|
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 29,
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 28,
2006
|
|
|
407,994
|
|
|
$
|
408
|
|
|
$
|
1,872,962
|
|
|
|
(31,996
|
)
|
|
$
|
(817,983
|
)
|
|
$
|
(49,266
|
)
|
|
$
|
928,430
|
|
|
$
|
(11,098
|
)
|
|
$
|
1,923,453
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297,735
|
|
|
|
|
|
|
|
297,735
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,954
|
|
|
|
2,954
|
|
Unrealized gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,183
|
|
|
|
15,183
|
|
Unrealized gain on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,537
|
)
|
|
|
(1,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,335
|
|
Issuance of common stock related to
employee transactions
|
|
|
13,308
|
|
|
|
14
|
|
|
|
215,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,453
|
|
Restricted stock awards issued
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards cancelled
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units vested
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decru NQ auto exercises
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units exercises
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock withheld for taxes
|
|
|
(150
|
)
|
|
|
|
|
|
|
(5,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,272
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,597
|
)
|
|
|
(805,708
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(805,708
|
)
|
Repurchase of restricted
stock Decru
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Assumption of options in connection
with Topio
|
|
|
|
|
|
|
|
|
|
|
8,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,369
|
|
Deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
(49,266
|
)
|
|
|
|
|
|
|
|
|
|
|
49,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
expense employee
|
|
|
|
|
|
|
|
|
|
|
163,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,356
|
|
Income tax benefit from employee
stock transactions
|
|
|
|
|
|
|
|
|
|
|
175,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, April 27,
2007
|
|
|
421,623
|
|
|
$
|
422
|
|
|
$
|
2,380,623
|
|
|
|
(54,593
|
)
|
|
$
|
(1,623,691
|
)
|
|
$
|
|
|
|
$
|
1,226,165
|
|
|
$
|
5,502
|
|
|
$
|
1,989,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
64
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 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. Fiscal 2007,
2006, and 2005 were all 52-week fiscal years.
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 investments was $935,762 and $1,102,787 as of
April 27, 2007, and April 28, 2006, 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 27,
2007 and April 28, 2006, $8,932 and $11,020 of these
investments are included in other long-term assets on the
balance sheet. We perform periodic reviews of our investments
for impairment.
Other-than-temporary Impairment All of our
available-for-sale investments and nonmarketable 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 traded investments,
impairment is determined based upon the specific facts and
circumstances present at the time,
65
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 nonmarketable 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 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
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 as of February 23, 2007,
and February 24, 2006, 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 range from 18 months to six
years. See Note 14, Goodwill and Purchased Intangible
Assets.
Revenue Recognition We apply the provisions
of Statement of Position (SOP)
No. 97-2,
Software Revenue Recognition, and related
interpretations to our product sales, both hardware and
software, because our software is essential to the performance
of our hardware. 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.
|
66
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.
|
Our multiple element arrangements include our systems and
generally may also include one or more of the following
undelivered software-related elements: software upgrade and
maintenance arrangements, premium hardware maintenance, and
storage review services. Our software upgrade and maintenance
arrangements entitle our customers to receive unspecified
product upgrades and enhancements on a
when-and-if-available
basis, bug fixes, and patch releases. Premium hardware
maintenance services include contracts for technical support and
minimum response times. Revenues from software upgrade and
maintenance arrangements, premium hardware maintenance services
and storage review services are recognized ratably over the
contractual term, generally from one to three years. Standard
hardware warranty costs are considered an obligation under
SFAS No. 5, Accounting for Contingencies and
expensed as a cost of service when revenue is recognized. We
also offer extended service contracts (which extend our standard
parts warranty and may include premium hardware maintenance) at
the end of the warranty term; revenues from these contracts are
recognized ratably over the contract term. We typically sell
technical consulting services separately from any of our other
revenue elements, either on a time and materials basis or for
fixed price standard projects; we recognize revenue for these
services as they are performed. Revenue from hardware
installation services is recognized at the time of delivery and
any remaining costs are accrued, as the remaining undelivered
services are considered to be inconsequential and perfunctory.
For arrangements with multiple elements, we recognize as revenue
the difference between the total arrangement price and the
greater of fair value or stated price for any undelivered
elements (the residual method).
For our undelivered software-related elements, we apply the
provisions of
SOP No. 97-2
and determine fair value of these undelivered elements based on
vendor-specific objective evidence (VSOE), which for
us consists of the prices charged when these services are sold
separately either alone, in the case of software upgrade and
maintenance arrangements, or as a bundled element which always
includes software upgrade and maintenance arrangements and
premium hardware maintenance, and may also include storage
review services. To determine the fair value of these elements,
we analyze both the selling prices when elements are sold
separately as well as the concentrations of those prices. We
believe those concentrations have been sufficient to enable us
to establish VSOE of fair value for the undelivered elements. If
VSOE cannot be obtained to establish fair value of the
undelivered elements, paragraph 12 of SOP
No. 97-2
would require that revenue from the entire arrangement be
initially deferred and recognized ratably over the period these
elements are delivered.
For income statement presentation purposes, once fair value has
been determined for our undelivered bundled elements, we
allocate revenue first to software upgrade and maintenance
arrangements based on VSOE of its separate fair value, and then
the residual is allocated to other service revenues.
We record reductions to revenue for estimated sales returns at
the time of shipment. Sales returns are estimated based on
historical sales returns, current trends, and our expectations
regarding future experience. We monitor and analyze the accuracy
of sales returns estimates by reviewing actual returns and
adjust them for future expectations to
67
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determine the adequacy of our current and future reserve needs.
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 27, 2007, was $2,572, compared to
$2,380 as of April 28, 2006. If the financial condition of
our customers deteriorates, resulting in an impairment of their
ability to make payments, additional allowances may be required.
Deferred Revenues Deferred revenues consist
primarily of amounts related to the software upgrade and
maintenance arrangements and other service arrangements
described in revenue recognition above.
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 2007 and 2006.
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
$405,500 of accumulated foreign earnings and recorded a $22,500
federal and state income tax liability upon the remittance of
those foreign earnings. As of our fiscal year ended
April 27, 2007, the amount of accumulated unremitted
earnings from our foreign subsidiaries under APB No. 23 is
approximately $330,000.
In addition, we record liabilities related to uncertain income
tax positions. Determining these liabilities requires us to make
significant estimates and judgments as to whether, and the
extent to which, additional taxes may be due based on potential
tax audit issues in the U.S. and other tax jurisdictions
throughout the world. Our estimates are based on the outcomes of
previous audits, as well as the precedents set in cases in which
others have taken similar tax positions to those taken by us. If
we later determine that our exposure is lower or that the
liability is not sufficient to cover our revised expectations,
we adjust the liability and effect a related change in our tax
provision during the period in which we make such a
determination.
68
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the ineffective portion of our
hedges 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.
Currently, we do not enter into any foreign exchange forward
contracts to hedge exposures related to firm commitments or
nonmarketable 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 2007, net gains generated by
hedged assets and liabilities totaled $5,180, which were offset
by losses on the related derivative instruments of $2,829. 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.
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 2007, 2006, and 2005, 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 2007, 2006, and 2005.
69
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of April 27, 2007, the notional fair values of foreign
exchange forward and foreign currency option contracts totaled
$368,807.
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 is in
conformity with accounting principles generally accepted in the
United States of America and 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, foreign exchange
contracts and accounts receivable. Cash, cash equivalents,
short-term investments consist primarily of corporate bonds,
U.S. government agencies, and money market funds, all of
which are high investment grade. Our policy is to limit the
amount of credit exposure through diversification and investment
in highly rated securities. We further mitigate concentrations
of credit risk in our investments by limiting our investments in
the debt securities of a single issuer and by diversifying risk
across geographies and type of issuer. 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 to these contracts
are major multinational commercial banks, and we do not expect
any losses as a result of counterparty defaults. 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.
Comprehensive Income Comprehensive income is
defined as the change in equity during a period from nonowner
sources. Comprehensive income for the fiscal years 2007, 2006,
and 2005 has been disclosed within the consolidated statement of
stockholders equity and comprehensive income (loss).
The components of accumulated other comprehensive income (loss)
at the end of each fiscal year, were as follows (net of related
tax effects):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Accumulated translation adjustments
|
|
$
|
3,321
|
|
|
$
|
367
|
|
|
$
|
1,283
|
|
Accumulated unrealized gain (loss)
on available-for-sale investments
|
|
|
5,469
|
|
|
|
(9,714
|
)
|
|
|
(5,444
|
)
|
Accumulated unrealized gain (loss)
on derivatives
|
|
|
(3,288
|
)
|
|
|
(1,751
|
)
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive income (loss)
|
|
$
|
5,502
|
|
|
$
|
(11,098
|
)
|
|
$
|
(4,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
70
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 27,
|
|
|
April 28,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net Income
|
|
$
|
297,735
|
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (Denominator):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
371,628
|
|
|
|
371,544
|
|
|
|
361,514
|
|
Weighted average common shares
outstanding subject to repurchase
|
|
|
(424
|
)
|
|
|
(483
|
)
|
|
|
(505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic computation
|
|
|
371,204
|
|
|
|
371,061
|
|
|
|
361,009
|
|
Weighted average common shares
outstanding subject to repurchase
|
|
|
424
|
|
|
|
483
|
|
|
|
505
|
|
Diluted effect of stock options
|
|
|
16,826
|
|
|
|
16,837
|
|
|
|
18,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted computation
|
|
|
388,454
|
|
|
|
388,381
|
|
|
|
380,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.77
|
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At April 27, 2007, April 28, 2006 and April 29,
2005, 22,827, 8,831, and 15,994, shares of common stock options
with a weighted average exercise price of $45.00, $65.34, and
$52.81 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 On April 29,
2006, we adopted SFAS No. 123R,
Share-Based Payment
(SFAS No. 123R), which required us to
measure and recognize compensation expense for all stock-based
payments awards, including employee stock options, restricted
stock units and rights to purchase shares under employee stock
purchase plans, based on their estimated fair value and to
recognize the costs in our financial statements over the
employees requisite service period. Total stock-based
compensation expense recognized in fiscal 2007 was $163,033.
The fair value of employee restricted stock units are equal to
the market value of our common stock on the date the award is
granted. Calculating the fair value of employee stock options
and the rights to purchase shares under the employee stock
purchase plans requires estimates and significant judgment. We
use the Black-Scholes option pricing model to estimate the fair
value of these awards, consistent with the provisions of
SFAS No. 123R. 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
term of options, the expected price volatility of the stock
underlying such options and forfeiture rate. Our expected term
assumption is based primarily on historical exercise and
post-vesting forfeiture experience. As of April 29, 2006,
the contractual life of our stock options was 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. Our stock price volatility assumption is based on
an implied volatility of call options and dealer quotes on call
options, generally having a term of greater than twelve months.
Changes in the subjective assumptions required in the valuation
models may significantly affect the estimated value of our
stock-based awards, the related stock-based compensation expense
and, consequently, our results of operations. Likewise, the
shortening of the contractual life of our options could change
the estimated exercise behavior in a manner other than currently
expected.
71
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In addition, SFAS 123R requires that we estimate the number
of stock-based awards that will be forfeited due to employee
turnover. Our forfeiture assumption is based primarily on
historical experience. Changes in the estimated forfeiture rate
can have a significant effect on reported stock-based
compensation expense, as the effect of adjusting the rate for
all expense amortization after April 28, 2006 is recognized
in the period the forfeiture estimate is changed. If the actual
forfeiture rate is higher than the estimated forfeiture rate,
then an adjustment will be made to increase the estimated
forfeiture rate, which will result in a decrease to the expense
recognized in the financial statements. If the actual forfeiture
rate is lower than the estimated forfeiture rate, then an
adjustment will be made to lower the estimated forfeiture rate,
which will result in an increase to the expense recognized in
our financial statements. The expense we recognize in future
periods will be affected by changes in the estimated forfeiture
rate and may differ significantly from amounts recognized in the
current period
and/or our
forecasts.
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 and pro forma
net income per share for fiscal 2006 and 2005, would be as
follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
April 28,
|
|
|
April 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
Net income as reported
|
|
$
|
266,452
|
|
|
$
|
225,754
|
|
Add: stock based employee
compensation expense included in reported net income under APB
No. 25, net of related tax effects
|
|
|
7,976
|
|
|
|
4,607
|
|
Deduct: total stock based
compensation determined under fair value based method for all
awards, net of related tax effects
|
|
|
(98,762
|
)
|
|
|
(81,745
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
175,666
|
|
|
$
|
148,616
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, as
reported
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, as
reported
|
|
$
|
0.69
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share, pro
forma
|
|
$
|
0.47
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share, pro
forma
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123R requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In
our pro forma information required under SFAS No. 123
for the periods prior to fiscal 2007, we reflect cancellations
and forfeitures due to employee terminations as they occurred.
72
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 27,
|
|
|
April 28,
|
|
|
April 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Supplemental Cash Flow
Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
38,941
|
|
|
$
|
13,730
|
|
|
$
|
13,284
|
|
Income tax refund
|
|
|
4,237
|
|
|
|
4,262
|
|
|
|
12,399
|
|
Interest expense paid
|
|
|
10,584
|
|
|
|
1,239
|
|
|
|
97
|
|
Noncash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of evaluation inventory
to equipment
|
|
|
|
|
|
|
21,918
|
|
|
|
10,122
|
|
Deferred stock compensation, net
of reversals
|
|
|
|
|
|
|
26,968
|
|
|
|
154
|
|
Income tax benefit from employee
stock transactions
|
|
|
111,877
|
|
|
|
36,596
|
|
|
|
27,829
|
|
Acquisition of property and
equipment on account
|
|
|
11,226
|
|
|
|
4,618
|
|
|
|
|
|
Reclassification of restricted
investments
|
|
|
|
|
|
|
241,152
|
|
|
|
|
|
Stock issued for acquisition
|
|
|
|
|
|
|
191,874
|
|
|
|
|
|
Options assumed for acquired
business
|
|
|
8,369
|
|
|
|
38,456
|
|
|
|
|
|
Interest accrued for debt
|
|
|
373
|
|
|
|
44
|
|
|
|
|
|
Goodwill adjustment related to
acquisitions/divestiture
|
|
|
1,179
|
|
|
|
3,553
|
|
|
|
|
|
Common stocks received from sale
of assets
|
|
|
4,637
|
|
|
|
|
|
|
|
|
|
Recently Issued Accounting Standards In
February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement
No. 115. SFAS No. 159 allows
measurement at fair value of eligible financial assets and
liabilities that are not otherwise measured at fair value. If
the fair value option for an eligible item is elected,
unrealized gains and losses for that item shall be reported in
current earnings at each subsequent reporting date.
SFAS No. 159 also establishes presentation and
disclosure requirements designed to draw comparison between the
different measurement attributes the company elects for similar
types of assets and liabilities. This statement is effective for
our fiscal year beginning April 27, 2008. We are currently
evaluating the effect, if any, that the adoption of
SFAS No. 159 will have on our consolidated financial
statements
In September, 2006, the FASB issued SFAS No. 157,
Fair Value Measurements.
SFAS No. 157 provides a framework for measuring
fair value, clarifies the definition of fair value, and expands
disclosures regarding fair value measurements.
SFAS No. 157 does not require any new fair value
measurements and eliminates inconsistencies in guidance found in
various prior accounting pronouncements. We are required to
adopt SFAS No. 157 for our fiscal year beginning
April 27, 2008. We are currently evaluating the effect that
the adoption of SFAS No. 157 will have on our
consolidated results of operations and financial condition, but
do not expect it to have a material impact.
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB No. 108 provides guidance on how prior year
misstatements should be taken into consideration when
quantifying misstatements in current year financial statements
for purposes of determining whether the current years
financial statements are materially misstated.
SAB No. 108 is effective for fiscal years ending on or
after November 15, 2006. We adopted SAB 108 in the
fourth quarter of fiscal 2007 and its adoption did not have an
impact on our results of operations or financial condition.
73
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an Interpretation of FASB Statement No. 109
(FIN No. 48). FIN No. 48
prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial
statements uncertain tax positions that the Company has taken or
expects to take on a tax return (including a decision whether to
file or not to file a return in a particular jurisdiction).
FIN No. 48 is applicable to all uncertain tax
positions for taxes accounted for under FASB Statement
No. 109, Accounting for Income Taxes
(SFAS No. 109), and substantially changes the
applicable accounting model. We are required to adopt
FIN No. 48 for our fiscal year beginning
April 28, 2007. We are currently evaluating the effect that
the adoption of FIN No. 48 will have on our
consolidated results of operations and financial condition.
|
|
3.
|
Balance
Sheet Components
|
Short-Term
Investments
The following is a summary of investments at April 27, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Corporate bonds
|
|
$
|
544,334
|
|
|
$
|
398
|
|
|
$
|
1,484
|
|
|
$
|
543,248
|
|
Auction rate securities
|
|
|
114,415
|
|
|
|
|
|
|
|
|
|
|
|
114,415
|
|
Corporate securities
|
|
|
113,084
|
|
|
|
24
|
|
|
|
7
|
|
|
|
113,101
|
|
U.S. government agencies
|
|
|
218,492
|
|
|
|
12
|
|
|
|
753
|
|
|
|
217,751
|
|
U.S. Treasuries
|
|
|
10,097
|
|
|
|
|
|
|
|
112
|
|
|
|
9,985
|
|
Municipal bonds
|
|
|
3,769
|
|
|
|
|
|
|
|
11
|
|
|
|
3,758
|
|
Marketable equity securities
|
|
|
4,637
|
|
|
|
8,276
|
|
|
|
|
|
|
|
12,913
|
|
Money market funds
|
|
|
84,961
|
|
|
|
|
|
|
|
|
|
|
|
84,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and equity securities
|
|
|
1,093,789
|
|
|
|
8,710
|
|
|
|
2,367
|
|
|
|
1,100,132
|
|
Less cash equivalents
|
|
|
164,347
|
|
|
|
23
|
|
|
|
|
|
|
|
164,370
|
|
Less short-term restricted
investments
|
|
|
116,950
|
|
|
|
|
|
|
|
890
|
|
|
|
116,060
|
(1)
|
Less long-term restricted
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
812,492
|
|
|
$
|
8,687
|
|
|
$
|
1,477
|
|
|
$
|
819,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities consist of shares of common stock
in Blue Coat Systems, Inc. received in connection with the sale
of assets of NetCache (See Note 16.)
74
NETWORK
APPLIANCE, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of investments at April 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Corporate bonds
|
|
$
|
469,135
|
|
|
$
|
9
|
|
|
$
|
5,339
|
|
|
$
|
463,805
|
|
Auction rate securities
|
|
|
325,608
|
|
|
|
1
|
|
|
|
|
|
|
|
325,609
|
|
Corporate securities
|
|
|
4,945
|
|
|
|
|
|
|
|
3
|
|
|
|
4,942
|
|
U.S. government agencies
|
|
|
286,983
|
|
|
|
|
|
|
|
3,812
|
|
|
|
283,171
|
|
U.S. Treasuries
|
|
|
20,189
|
|
|
|
|
|
|
|
386
|
|
|
|
19,803
|
|
Municipal bonds
|
|
|
5,024
|
|
|
|
|
|
|
|
65
|
|
|
|
4,959
|
|
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
|
(2)
|
Less long-term restricted
investments
|
|
|
106,616
|
|
|
|
|
|
|
|
2,173
|
|
|
|
104,443
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
867,551
|
|
|
$
|
10
|
|
|
$
|
5,925
|
|
|
$
|
861,636
|
&nb |