Network Appliance Announces Results for Second Quarter Fiscal Year 2007

Network Appliance, Inc. (NASDAQ:NTAP), the leader in advanced networked storage solutions, today reported results for the second quarter of fiscal year 2007. Revenues for the second fiscal quarter were $652.5 million, an increase of 35% compared to revenues of $483.1 million for the same period a year ago and an increase of 5% compared to $621.3 million in the prior quarter. For the second fiscal quarter, GAAP net income was $86.9 million, or $0.22 per share1 compared to GAAP net income of $70.7 million, or $0.18 per share for the same period in the prior year. Non-GAAP2 net income for the second fiscal quarter increased 38% to $108.9 million, or $0.28 per share, compared to non-GAAP net income of $79.1 million, or $0.21 per share for the same period a year ago. Revenues for the first six months of the current fiscal year totaled $1.27 billion, compared to revenues of $931.5 million for the first six months of the prior year, an increase of 37% year over year. For the first six months of the current fiscal year, GAAP net income increased 8% to $141.6 million, or $0.36 per share, compared with GAAP net income of $130.8 million, or $0.34 per share for the same period in the prior year. Non-GAAP net income for the first six months of the current fiscal year totaled $205.4 million, or $0.53 per share, compared to non-GAAP net income of $141.3 million, or $0.37 per share for the first six months of the prior fiscal year. "NetApp continues to gain momentum in enterprise data centers because we provide customers with the best value in the storage industry,” said Dan Warmenhoven, CEO. "Our performance this quarter highlights our success around the world as we increase our market share and expand our reach.” Outlook Network Appliance estimates that sequential growth in revenue for the third quarter of fiscal year 2007 will be in the range of 7% to 8%, which translates to 30% to 31% growth year over year. Including the implementation of SFAS123R and with current information and assumptions, the company expects third quarter GAAP earnings per share to finish between $0.17 and $0.18 per share. Network Appliance expects third quarter non-GAAP earnings per share to be about $0.28 per share. For the full fiscal year 2007, Network Appliance estimates that revenues will finish in the range of 33% to 34% higher than fiscal year 2006. Including the implementation of SFAS123R and with current information and assumptions, the company expects GAAP earnings per share for fiscal year 2007 to be in the target range of $0.73 to $0.76 per share. Network Appliance estimates that full-year non-GAAP earnings per share will finish between $1.10 to $1.11 per share. Quarterly Highlights During the second quarter of fiscal year 2007, Network Appliance demonstrated growth in several key areas including market share, customer deployments, product lines, and functionality in archive and compliance, VTL, data migration and data retention. The company also continued its leadership position in the iSCSI and network-attached storage markets and showed strong growth in the Fibre Channel SAN market. In the second quarter, NetApp outlined its comprehensive strategy for a unified approach to both archive and compliance, offering a product and service portfolio to help customers solve their growing and changing data challenges. The NetApp announcement challenged the industry’s conventional approach of forcing customers to deploy separate storage silos for their backup, archive, compliance, and primary storage needs and urged customers to save time, money, and manpower with a unified archive and compliance solution. The NetApp approach offers solutions to five standard storage needs to satisfy data management regulations including data classification, data discovery, data migration, data permanence, and data security and privacy. Evolving corporate governance policies and a heightened emphasis on storage efficiency demand that today’s enterprise deploy archival solutions that will easily scale and adapt with changing business needs. E-mail leads the list of applications that are being archived in data centers around the world. This quarter, a study commissioned by NetApp and conducted by VeriTest found that Symantec® Enterprise Vault™ software for e-mail archival environments running on NetApp storage delivers customers up to twice the performance of EMC Centera Gen4 storage. The VeriTest study compared the performance of the NetApp® FAS3050 and NearStore® R200 storage systems to that of EMC Centera Gen4 storage. The results are further proof that NetApp storage provides customers with a fast, flexible, and cost-effective solution for e-mail archival and various compliance needs. Also on the product front, NetApp introduced three Virtual Tape Library (VTL) solutions designed for demanding data center backup environments. NearStore VTL300, VTL700, and VTL1400 provide customers with the ability to substantially increase backup and recovery service levels by doubling to tripling the amount of backup data that can be stored on disk while also increasing VTL write performance by over 50% compared to the industry-leading performance of existing NetApp VTL systems. From a market perspective, according to IDC’s Worldwide Quarterly Disk Storage Systems Tracker Q2 20063, NetApp led the networked storage market in capacity share, growing to 21%, which is a statistical tie with EMC. NetApp also grew faster than the market in capacity shipped in networked storage, growing at 111% year over year while the market grew at 59%. In terms of revenue, NetApp grew faster than the market from Q2 2005 to Q2 2006 at 21%, while the market grew at 11%. NetApp demonstrated continued leadership in the iSCSI market in terms of revenue and capacity in both Q2 2006 and the first half of 2006, with first-place market share for Q2 2006 in capacity shipped (44%) and in revenue (28%). In its core NAS market, NetApp was number one in Q2 2006 for capacity shipped, with 47% market share. Year over year, the NAS market grew 77% in terms of capacity shipped while NetApp grew 85%. Sequentially, the NAS market grew at 11.3% while NetApp grew at 13.5%. Of all the vendors tracked by IDC in Fibre Channel (FC) SAN, NetApp continues to grow faster than the market in both revenue and capacity, sequentially and year over year. For capacity shipped, NetApp grew at 240% year over year while the market grew at 47%. In terms of revenue, NetApp grew at 66% year over year while the market grew at 8%. In the SAN market, NetApp announced a new milestone this quarter with 10,000 production deployments of NetApp storage area network (SAN) solutions, including 3,000 FC SANs and 7,000 IP SANs. The NetApp SAN growth is the result of the company’s innovative solutions which enable the easiest provisioning and management, affordable business continuity, and nondisruptive backups with instant data recovery in all data center environments — central, departmental, and distributed. On the partner front, NetApp joined the Microsoft Technology Center (MTC) Alliance Member Program. As part of this program, NetApp storage has been installed in Microsoft Technology Centers worldwide. Additionally, NetApp announced that more than 5,000 enterprises worldwide use the Oracle® on NetApp solution to help simplify the management of their backup/recovery, archiving, data protection, compliance, and primary storage processes. In corporate news, Dan Warmenhoven received a CEO Ambassador Award from Boardroom Bound, a nonprofit organization that helps corporations identify and prequalify women and minority director candidates for corporate board service. Warmenhoven was honored for instilling the value of diversity at NetApp and on the company’s board. NetApp was also honored for the third year in a row by the Triangle Business Journal as a "Best Place to Work” in Research Triangle Park (RTP) for 2006. NetApp earned first place honors in the large company category, which included companies with 150 employees or more. NetApp employees based in RTP who responded to a survey from the publication gave the company high marks for its team-oriented work environment, exceptional people practices, strong executive leadership, and effective manager relationships. Webcast and Conference Call Information The NetApp quarterly results conference call will be broadcast live via the Internet at http://investors.netapp.com on Wednesday, November 15, 2006, at 2:00 p.m. Pacific Time. This press release and any other information related to the call will also be posted to the Web site at that location. The conference call will also be available live in a listen-only format at (800) 260-8140 in the United States and (617) 614-3672 outside the United States. The passcode for both numbers is 51700684. A replay will be available for 72 hours following the completion of the live call by dialing (888) 286-8010 in the United States and (617) 801-6888 outside the United States, with replay code 38201788. The Webcast replay will be posted on our Web site for at least one year. About Network Appliance Network Appliance is a world leader in unified storage solutions for today's data-intensive enterprise. Since its inception in 1992, Network Appliance has delivered technology, product, and partner firsts that simplify data management. Information about Network Appliance™ solutions and services is available at www.netapp.com. This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include all of the statements under the Outlook section relating to our forecasted operating results and metrics for the third quarter of fiscal 2007 and for all of fiscal 2007; statements regarding our optimism for our 2007 fiscal year generally; statements regarding the anticipated benefits of our products, technologies, and services relative to the offerings of our competitors; and statements regarding anticipated benefits from partner offerings. These forward-looking statements involve risks and uncertainties, and actual results could vary. Important factors that could cause actual results to differ materially from those in the forward-looking statements include general economic and industry conditions, including expenditure trends for storage-related products; risks associated with the anticipated growth in network storage and content delivery markets; our ability to deliver new product architectures and enterprise service offerings; competition risks, including our ability to design products and services that compete effectively from a price and performance perspective; risks with new product introductions; our reliance on a limited number of suppliers; our ability to accurately forecast demand for our products and successfully manage our relationships with our contract manufacturers; our ability to expand our direct sales operations and reseller distribution channels; our ability to develop, maintain, and strengthen our relationships and product offerings with strategic partners; risks associated with international operations; our ability to successfully acquire and integrate complementary businesses and technologies; foreign currency exchange rate fluctuations; and other important factors as described in Network Appliance, Inc. reports and documents filed from time to time with the Securities and Exchange Commission, including the factors described under the sections captioned "Risk Factors” in our most recently submitted 10-K and 10-Q. We disclaim any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise. 1 Earnings per share represents the diluted number of shares for all periods presented. 2 Non-GAAP results of operations exclude amortization of intangible assets, stock-based compensation, in process research and development, restructuring charges/recoveries, gain/loss on sale of assets and investments, specified nonrecurring discrete events, and the related effects on income taxes. 3 IDC’s Worldwide Quarterly Disk Storage Systems Tracker Q2 2006. NetApp and NearStore are registered trademarks and Network Appliance is a trademark of Network Appliance, Inc. in the United States and other countries. All other brands or products are trademarks or registered trademarks of their respective holders and should be treated as such. Network Appliance Usage of Non-GAAP Financials The Company refers to the non-GAAP financial measures cited above in making operating decisions because they provide meaningful supplemental information regarding the Company's operational performance. These non-GAAP financial measures exclude amortization of intangible assets, in-process research and development, stock compensation, restructuring charges/recoveries, net gain/loss on investments, and the related effects on income taxes as well as certain discrete GAAP provision for income tax matters recognized ratably for non-GAAP purposes. We have excluded these items in order to enhance investors’ understanding of our ongoing operations. The use of these non-GAAP financial measures has material limitations because they should not be used to evaluate our company without reference to their corresponding GAAP financial measures. As such, we compensate for these material limitations by using these non-GAAP financial measures in conjunction with GAAP financial measures. These non-GAAP financial measures facilitate management's internal comparisons to the Company's historical operating results and comparisons to competitors' operating results. We include these non-GAAP financial measures in our earnings announcement because we believe they are useful to investors in allowing for greater transparency with respect to supplemental information used by management in its financial and operational decision making, such as employee compensation planning. In addition, we have historically reported similar non-GAAP financial measures to our investors and believe that the inclusion of comparative numbers provides consistency in our financial reporting at this time. NETWORK APPLIANCE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)   October 27, 2006 April 30, 2006   ASSETS   CURRENT ASSETS: Cash and cash equivalents $523,338  $461,256  Short-term investments 856,068  861,636  Accounts receivable, net 399,657  415,295  Inventories 56,778  64,452  Prepaid expenses and other assets 42,761  43,536  Short-term restricted cash and investments 124,748  138,539  Deferred income taxes 47,187  48,496  Total current assets 2,050,537  2,033,210    PROPERTY AND EQUIPMENT, net 555,815  513,193    GOODWILL 486,355  487,535  INTANGIBLE ASSETS, net 64,687  75,051  LONG-TERM RESTRICTED CASH AND INVESTMENTS 70,390  108,371  OTHER ASSETS 92,424  43,605  $3,320,208  $3,260,965        LIABILITIES AND STOCKHOLDERS' EQUITY   CURRENT LIABILITIES: Current portion of long-term debt $122,918  $166,211  Accounts payable 109,392  101,278  Income taxes payable 34,454  51,577  Accrued compensation and related benefits 123,916  129,636  Other accrued liabilities 70,832  69,073  Deferred revenue 472,761  399,388  Total current liabilities 934,273  917,163    LONG-TERM DEBT 70,510  133,789  LONG-TERM DEFERRED REVENUE 345,821  282,149  LONG-TERM OBLIGATIONS 7,052  4,411  1,357,656  1,337,512    STOCKHOLDERS' EQUITY 1,962,552  1,923,453  $3,320,208  $3,260,965  NETWORK APPLIANCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)     Three Months Ended Six Months Ended October 27, 2006 October 28, 2005 October 27, 2006 October 28, 2005   REVENUES: Product $481,284  367,721  $946,895  708,646  Software subscriptions 82,253  57,055  157,083  110,759  Service 88,986  58,286  169,833  112,059  Total revenues 652,523  483,062  1,273,811  931,464    COST OF REVENUES: Cost of product 186,261  139,284  374,226  270,782  Cost of software subscriptions 2,456  1,820  4,748  4,076  Cost of service 62,499  42,866  120,460  84,028  Total cost of revenues 251,216  183,970  499,434  358,886  GROSS MARGIN 401,307  299,092  774,377  572,578    OPERATING EXPENSES: Sales and marketing 204,264  139,229  399,782  277,043  Research and development 90,360  58,143  179,038  110,303  General and administrative 35,217  21,793  67,613  42,989  In process research and development -  5,000  -  5,000  Restructuring charges (recoveries) -  645  (74) (611) Gain on sale of assets (25,339) -  (25,339) -  Total operating expenses 304,502  224,810  621,020  434,724    INCOME FROM OPERATIONS 96,805  74,282  153,357  137,854    OTHER INCOME (EXPENSES), net: Interest income 17,478  9,651  34,134  18,699  Interest expense (5,170) (3) (9,042) (51) Other income (expense), net 1,878  (274) 2,657  (498) Net gain (loss) on investments (2,000) 68  (2,000) 101          Total other income, net 12,186  9,442  25,749  18,251    INCOME BEFORE INCOME TAXES 108,991  83,724  179,106  156,105    PROVISION FOR INCOME TAXES 22,060  13,006  37,506  25,267    NET INCOME $86,931  $70,718  $141,600  $130,838    NET INCOME PER SHARE: BASIC $ 0.23  $ 0.19  $ 0.38  $ 0.35    DILUTED $ 0.22  $ 0.18  $ 0.36  $ 0.34    SHARES USED IN PER SHARE CALCULATION: BASIC 370,659  371,002  372,264  369,220    DILUTED 388,226  385,442  389,773  385,912  NETWORK APPLIANCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (In thousands) (Unaudited)   Three Months Ended Six Months Ended October 27, 2006 October 28, 2005 October 27, 2006 October 28, 2005 Cash Flows from Operating Activities: Net income $ 86,931  $ 70,718  $ 141,600  $ 130,838  Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 20,666  15,328  39,380  30,084  In process research and development -  5,000  -  5,000  Amortization of intangible assets 4,687  3,852  9,373  6,523  Amortization of patents 496  496  991  991  Stock-based compensation 42,423  3,344  85,445  5,372  Net loss (gain) on investments 2,000  (68) 2,000  (101) Gain on sale of assets (25,339) -  (25,339) -  Net loss on disposal of equipment 221  756  302  1,160  Allowance for doubtful accounts 50  725  194  346  Deferred income taxes (22,634) -  (22,634) -  Deferred rent 541  321  740  369  Excess tax benefit from stock-based compensation (19,356) -  (23,845) -  Changes in assets and liabilities: Accounts receivable (22,807) (86,163) 15,380  (28,271) Inventories (513) (8,567) 8,195  (13,565) Prepaid expenses and other assets (2,249) 932  3,142  (3,065) Accounts payable 8,344  12,463  7,205  9,772  Income taxes payable 41,849  14,496  34,935  24,144  Accrued compensation and related benefits 32,637  21,360  (6,327) (11,058) Other accrued liabilities 5,963  (1,577) (5,017) (2,879) Deferred revenue 75,700  49,059  137,682  85,775  Net cash provided by operating activities 229,610  102,475  403,402  241,435  Cash Flows from Investing Activities: Purchases of short-term investments (653,152) (111,010) (1,527,568) (333,797) Redemptions of short-term investments 638,134  204,596  1,544,557  418,573  Redemptions of restricted investments 36,316  -  52,638  Increase (decrease) in restricted cash 153  (562) 405  (2,066) Proceeds from sale of assets 23,914  -  23,914  -  Purchases of property and equipment (43,729) (29,474) (76,013) (63,012) Proceeds from sales of investments -  68  17  130  Purchases of equity securities (150) (6,675) (1,333) (6,950) Purchase of business, net of cash acquired -  (41,916) -  (53,747) Net cash provided by (used in) investing activities 1,486  15,027  16,617  (40,869) Cash Flows from Financing Activities: Proceeds from sale of common stock related to employee stock transactions 55,629  21,726  92,460  72,489  Excess tax benefit from stock-based compensation 19,356  -  23,845  -  Repayment of debt (78,706) -  (106,572) -  Tax withholding payments reimbursed by restricted stock (3,343) (183) (4,323) (602) Repurchases of common stock (143,908) (149,021) (363,908) (244,564) Net cash used in financing activities (150,972) (127,478) (358,498) (172,677)   Effect of Exchange Rate Changes on Cash 885  104  561  282    Net Increase (Decrease) in Cash and Cash Equivalents 81,009  (9,872) 62,082  28,171  Cash and Cash Equivalents: Beginning of period 442,329  231,585  461,256  193,542  End of period $ 523,338  $ 221,713  $ 523,338  $ 221,713  NETWORK APPLIANCE, INC. SUPPLEMENTAL INFORMATION (In thousands) (Unaudited)   THREE MONTHS ENDED OCTOBER 27, 2006   Amortization of Intangible Assets Stock-based Compensation Expenses In process research and development Restructuring (recoveries) charges Gain on Sale of Assets Net (Gain) Loss on Investments Total   Cost of product revenues $3,866  $1,069  -  -  -  -  $4,935  Cost of service revenues -  2,489  -  -  -  -  2,489  Sales and marketing expense 583  18,715  -  -  -  -  19,298  Research and development expense -  13,022  -  -  -  -  13,022  General and administrative expense 238  7,128  -  -  -  -  7,366  In process research and development -  -  -  -  -  -  -  Restructuring (recoveries) charges -  -  -  -  -  -  -  Gain on sale of assets -  -  -  -  (25,339) -  (25,339) Net (gain) loss on investments -  -  -  -  -  2,000  2,000                Effect on pre-tax income $4,687  $42,423  -  -  ($25,339) $2,000  $23,771  SIX MONTHS ENDED OCTOBER 27, 2006   Amortization of Intangible Assets Stock-based Compensation Expenses In process research and development Restructuring (recoveries) charges Gain on Sale of Assets Net (Gain) Loss on Investments Total   Cost of product revenues $7,731  $1,739  -  -  -  -  $9,470  Cost of service revenues -  5,124  -  -  -  -  5,124  Sales and marketing expense 1,167  37,431  -  -  -  -  38,598  Research and development expense -  26,891  -  -  -  -  26,891  General and administrative expense 475  14,260  -  -  -  -  14,735  In process research and development -  -  -  -  -  -  -  Restructuring (recoveries) charges -  -  -  (74) -  -  (74) Gain on sale of assets -  -  -  -  (25,339) -  (25,339) Net (gain) loss on investments -  -  -  -  -  2,000  2,000                Effect on pre-tax income $9,373  $85,445  -  ($74) ($25,339) $2,000  $71,405  THREE MONTHS ENDED OCTOBER 28, 2005   Amortization of Intangible Assets Stock-based Compensation Expenses In process research and development Restructuring (recoveries) charges Gain on Sale of Assets Net (Gain) Loss on Investments Total   Cost of product revenues $2,946  -  -  -  -  -  $2,946  Cost of service revenues -  -  -  -  -  -  -  Sales and marketing expense 507  1,011  -  -  -  -  1,518  Research and development expense -  2,106  -  -  -  -  2,106  General and administrative expense 399  227  -  -  -  -  626  In process research and development -  -  5,000  -  -  -  5,000  Restructuring (recoveries) charges -  -  -  645  -  -  645  Net (gain) loss on investments -  -  -  -  -  (68) (68)               Effect on pre-tax income $3,852  $3,344  $5,000  $645  -  ($68) $12,773  SIX MONTHS ENDED OCTOBER 28, 2005   Amortization of Intangible Assets Stock-based Compensation Expenses In process research and development Restructuring (recoveries) charges Gain on Sale of Assets Net (Gain) Loss on Investments Total   Cost of product revenues $4,054  -  -  -  -  -  $4,054  Cost of service revenues -  -  -  -  -  -  -  Sales and marketing expense 714  1,526  -  -  -  -  2,240  Research and development expense -  3,464  -  -  -  -  3,464  General and administrative expense 1,755  382  -  -  -  -  2,137  In process research and development -  -  5,000  -  -  -  5,000  Restructuring (recoveries) charges -  -  -  (611) -  -  (611) Net (gain) loss on investments -  -  -  -  -  (101) (101)               Effect on pre-tax income $6,523  $5,372  $5,000  ($611) -  ($101) $16,183  NETWORK APPLIANCE, INC. RECONCILIATION OF NON-GAAP AND GAAP IN THE CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands) (Unaudited)   Three Months Ended Six Months Ended October 27, 2006 October 28, 2005 October 27, 2006 October 28, 2005   SUMMARY RECONCILIATION OF NET INCOME NET INCOME $86,931  $70,718  $141,600  $130,838    Adjustments: Amortization of intangible assets 4,687  3,852  9,373  6,523  Stock-based compensation expenses 42,423  3,344  85,445  5,372  In process research and development -  5,000  -  5,000  Restructuring (recoveries) charges -  645  (74) (611) Gain on sale of assets (25,339) -  (25,339) -  Net (gain) loss on investments 2,000  (68) 2,000  (101) Discrete GAAP tax provision items ratably for non-GAAP purposes -  (2,437) -  (2,437) Tax effect on sale of assets 4,606  -  4,606  -  Discrete GAAP tax provision item (2,159) -  (2,159) -  Income tax effect (4,284) (1,927) (10,033) (3,308)         NON-GAAP NET INCOME $108,865  $79,127  $205,419  $141,276      EARNINGS PER SHARE $0.224  $0.183  $0.363  $0.339    Adjustments: Amortization of intangible assets 0.012  0.010  0.024  0.017  Stock-based compensation expenses 0.109  0.009  0.219  0.014  In process research and development -  0.013  -  0.013  Restructuring (recoveries) charges -  0.002  -  (0.002) Gain on sale of assets (0.065) -  (0.065) -  Net (gain) loss on investments 0.005  -  0.005  -  Discrete GAAP tax provision items ratably for non-GAAP purposes -  (0.006) -  (0.006) Tax effect on sale of assets 0.012  -  0.012  -  Discrete GAAP tax provision item (0.006) -  (0.006) -  Income tax effect (0.011) (0.005) (0.026) (0.009)         NON-GAAP EARNINGS PER SHARE $0.280  $0.206  $0.526  $0.366  NETWORK APPLIANCE, INC. RECONCILIATION OF NON GAAP GUIDANCE TO GAAP EXPRESSED AS EARNINGS PER SHARE THIRD QUARTER and FULL YEAR FISCAL 2007 (Unaudited)     Third Quarter Full Year 2007  2007    Non-GAAP Guidance $0.28  $1.10 - $1.11    Adjustments of Specific Items to Earnings Per Share for the Third Quarter and Full Year Fiscal 2007:       Amortization of intangible assets (0.01) (0.05) Stock based compensation expense (0.11 - 0.12) (0.42 - 0.44) Restructuring recoveries -  -  Gain on sale of assets -  0.07  Loss on investment -  (0.01) Income tax effect 0.02  0.06      Total Adjustments (0.10 - 0.11) (0.35 - 0.37)   GAAP Guidance - Earnings Per Share $0.17 - $0.18  $0.73 - $0.76