UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 26, 2018October 25, 2019

or

TRANSITION QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 000-27130

NetApp, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0307520

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

1395 Crossman Avenue,

Sunnyvale, California 94089

(Address of principal executive offices, including zip code)

(408) 822-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common Stock, $0.001 Par Value

NTAP

The NASDAQ Stock Market LLC

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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of February 14, 2018,November 13, 2019, there were 267,922,708228,226,206 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

 

 

 

 


TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

Item 1

  

Condensed Consolidated Financial Statements (Unaudited)

  

3

 

  

Condensed Consolidated Balance Sheets as of January 26, 2018October 25, 2019 and April 28, 201726, 2019

  

3

 

  

Condensed Consolidated Statements of Operations for the Three and NineSix Months Ended JanuaryOctober 25, 2019 and October 26, 2018 and January 27, 2017

  

4

 

  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and NineSix Months Ended JanuaryOctober 25, 2019 and October 26, 2018 and January 27, 2017

  

5

 

  

Condensed Consolidated Statements of Cash Flows for the NineSix Months Ended JanuaryOctober 25, 2019 and October 26, 2018 and January 27, 2017

  

6

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended October 25, 2019 and October 26, 2018

7

Notes to Condensed Consolidated Financial Statements

  

79

Item 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

2427

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

  

3942

Item 4

  

Controls and Procedures

  

4043

 

 

 

PART II — OTHER INFORMATION

  

 

 

 

 

 

 

Item 1

  

Legal Proceedings

  

4144

Item 1A

  

Risk Factors

  

4144

Item 2

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

5156

Item 3

  

Defaults upon Senior Securities

  

5156

Item 4

  

Mine Safety Disclosures

  

5156

Item 5

  

Other Information

  

5156

Item 6

  

Exhibits

  

5257

SIGNATURE

  

5358

 

 

TRADEMARKS

© 20182019 NetApp, Inc. All Rights Reserved. No portions of this document may be reproduced without prior written consent of NetApp, Inc. NetApp, the NetApp logo, and the marks listed at http://www.netapp.com/TM are trademarks of NetApp, Inc. Other company and product names may be trademarks of their respective owners.

 

 

 

2


PARTPART I — FINANCIAL INFORMATION

 

 

Item 1. Condensed Consolidated Financial Statements (Unaudited)

NETAPP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except par value)

(Unaudited)

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

ASSETS

ASSETS

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,974

 

 

$

2,444

 

 

$

2,545

 

 

$

2,325

 

Short-term investments

 

 

2,645

 

 

 

2,477

 

 

 

442

 

 

 

1,574

 

Accounts receivable

 

 

754

 

 

 

731

 

 

 

780

 

 

 

1,216

 

Inventories

 

 

98

 

 

 

163

 

 

 

111

 

 

 

131

 

Other current assets

 

 

295

 

 

 

383

 

 

 

313

 

 

 

364

 

Total current assets

 

 

6,766

 

 

 

6,198

 

 

 

4,191

 

 

 

5,610

 

Property and equipment, net

 

 

741

 

 

 

799

 

 

 

746

 

 

 

759

 

Goodwill

 

 

1,739

 

 

 

1,684

 

 

 

1,770

 

 

 

1,735

 

Other intangible assets, net

 

 

106

 

 

 

131

 

 

 

51

 

 

 

47

 

Other non-current assets

 

 

435

 

 

 

681

 

 

 

714

 

 

 

590

 

Total assets

 

$

9,787

 

 

$

9,493

 

 

$

7,472

 

 

$

8,741

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES AND STOCKHOLDERS' EQUITY

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

458

 

 

$

347

 

 

$

382

 

 

$

542

 

Accrued expenses

 

 

739

 

 

 

782

 

 

 

606

 

 

 

851

 

Commercial paper notes

 

 

632

 

 

 

500

 

 

 

498

 

 

 

249

 

Current portion of long-term debt

 

 

 

 

 

749

 

 

 

 

 

 

400

 

Short-term deferred revenue and financed unearned services revenue

 

 

1,719

 

 

 

1,744

 

 

 

1,718

 

 

 

1,825

 

Total current liabilities

 

 

3,548

 

 

 

4,122

 

 

 

3,204

 

 

 

3,867

 

Long-term debt

 

 

1,540

 

 

 

744

 

 

 

1,145

 

 

 

1,144

 

Other long-term liabilities

 

 

973

 

 

 

249

 

 

 

837

 

 

 

797

 

Long-term deferred revenue and financed unearned services revenue

 

 

1,550

 

 

 

1,598

 

 

 

1,750

 

 

 

1,843

 

Total liabilities

 

 

7,611

 

 

 

6,713

 

 

 

6,936

 

 

 

7,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and additional paid-in capital, $0.001 par value; 268 and 269 shares issued and outstanding as of January 26, 2018 and April 28, 2017, respectively

 

 

2,707

 

 

 

2,769

 

Retained earnings (accumulated deficit)

 

 

(489

)

 

 

40

 

Common stock and additional paid-in capital, $0.001 par value; 229 and 240 shares issued and outstanding as of October 25, 2019 and April 26, 2019, respectively

 

 

572

 

 

 

1,133

 

Retained earnings

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

(42

)

 

 

(29

)

 

 

(36

)

 

 

(43

)

Total stockholders' equity

 

 

2,176

 

 

 

2,780

 

 

 

536

 

 

 

1,090

 

Total liabilities and stockholders' equity

 

$

9,787

 

 

$

9,493

 

 

$

7,472

 

 

$

8,741

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

920

 

 

$

784

 

 

$

2,450

 

 

$

2,154

 

 

$

771

 

 

$

913

 

 

$

1,415

 

 

$

1,788

 

Software maintenance

 

 

237

 

 

 

240

 

 

 

711

 

 

 

723

 

 

 

254

 

 

 

236

 

 

 

504

 

 

 

465

 

Hardware maintenance and other services

 

 

366

 

 

 

380

 

 

 

1,109

 

 

 

1,161

 

 

 

346

 

 

 

368

 

 

 

688

 

 

 

738

 

Net revenues

 

 

1,523

 

 

 

1,404

 

 

 

4,270

 

 

 

4,038

 

 

 

1,371

 

 

 

1,517

 

 

 

2,607

 

 

 

2,991

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product

 

 

468

 

 

 

435

 

 

 

1,238

 

 

 

1,170

 

 

 

341

 

 

 

428

 

 

 

653

 

 

 

826

 

Cost of software maintenance

 

 

6

 

 

 

7

 

 

 

19

 

 

 

22

 

 

 

11

 

 

 

8

 

 

 

21

 

 

 

15

 

Cost of hardware maintenance and other services

 

 

108

 

 

 

111

 

 

 

336

 

 

 

369

 

 

 

94

 

 

 

107

 

 

 

192

 

 

 

213

 

Total cost of revenues

 

 

582

 

 

 

553

 

 

 

1,593

 

 

 

1,561

 

 

 

446

 

 

 

543

 

 

 

866

 

 

 

1,054

 

Gross profit

 

 

941

 

 

 

851

 

 

 

2,677

 

 

 

2,477

 

 

 

925

 

 

 

974

 

 

 

1,741

 

 

 

1,937

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

423

 

 

 

381

 

 

 

1,268

 

 

 

1,228

 

 

 

389

 

 

 

408

 

 

 

794

 

 

 

817

 

Research and development

 

 

193

 

 

 

181

 

 

 

580

 

 

 

588

 

 

 

209

 

 

 

211

 

 

 

424

 

 

 

419

 

General and administrative

 

 

72

 

 

 

64

 

 

 

209

 

 

 

201

 

 

 

69

 

 

 

69

 

 

 

140

 

 

 

142

 

Restructuring charges

 

 

 

 

 

52

 

 

 

 

 

 

52

 

 

 

 

 

 

 

 

 

21

 

 

 

19

 

Gain on sale of properties

 

 

(218

)

 

 

(10

)

 

 

(218

)

 

 

(10

)

Gain on sale or derecognition of assets

 

 

(38

)

 

 

 

 

 

(38

)

 

 

 

Total operating expenses

 

 

470

 

 

 

668

 

 

 

1,839

 

 

 

2,059

 

 

 

629

 

 

 

688

 

 

 

1,341

 

 

 

1,397

 

Income from operations

 

 

471

 

 

 

183

 

 

 

838

 

 

 

418

 

 

 

296

 

 

 

286

 

 

 

400

 

 

 

540

 

Other income (expense), net

 

 

14

 

 

 

 

 

 

25

 

 

 

(1

)

Other income, net

 

 

3

 

 

 

7

 

 

 

18

 

 

 

25

 

Income before income taxes

 

 

485

 

 

 

183

 

 

 

863

 

 

 

417

 

 

 

299

 

 

 

293

 

 

 

418

 

 

 

565

 

Provision for income taxes

 

 

991

 

 

 

37

 

 

 

1,058

 

 

 

98

 

 

 

56

 

 

 

52

 

 

 

72

 

 

 

41

 

Net income (loss)

 

$

(506

)

 

$

146

 

 

$

(195

)

 

$

319

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

243

 

 

$

241

 

 

$

346

 

 

$

524

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.89

)

 

$

0.53

 

 

$

(0.72

)

 

$

1.15

 

 

$

1.03

 

 

$

0.93

 

 

$

1.46

 

 

$

2.02

 

Diluted

 

$

(1.89

)

 

$

0.52

 

 

$

(0.72

)

 

$

1.13

 

 

$

1.03

 

 

$

0.91

 

 

$

1.44

 

 

$

1.96

 

Shares used in net income (loss) per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in net income per share calculations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

268

 

 

 

274

 

 

 

269

 

 

 

277

 

 

 

235

 

 

 

258

 

 

 

237

 

 

 

260

 

Diluted

 

 

268

 

 

 

281

 

 

 

269

 

 

 

282

 

 

 

236

 

 

 

264

 

 

 

240

 

 

 

267

 

Cash dividends declared per share

 

$

0.20

 

 

$

0.19

 

 

$

0.60

 

 

$

0.57

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)

 

.

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Net income (loss)

 

$

(506

)

 

$

146

 

 

$

(195

)

 

$

319

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

243

 

 

$

241

 

 

$

346

 

 

$

524

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(5

)

 

 

(3

)

 

 

3

 

 

 

(14

)

 

 

(1

)

 

 

(3

)

 

 

(2

)

 

 

(3

)

Defined benefit obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Defined benefit obligation adjustments

 

 

 

 

 

25

 

 

 

 

 

 

25

 

Reclassification adjustments related to defined

benefit obligations

 

 

(1

)

 

 

 

 

 

(2

)

 

 

1

 

 

 

(1

)

 

 

(1

)

 

 

(1

)

 

 

(1

)

Income tax effect

 

 

 

 

 

(10

)

 

 

1

 

 

 

(10

)

 

 

1

 

 

 

 

 

 

1

 

 

 

 

Unrealized gains (losses) on available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(17

)

 

 

(8

)

 

 

(15

)

 

 

(10

)

 

 

2

 

 

 

(1

)

 

 

22

 

 

 

(1

)

Unrealized gains (losses) on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustments for gains included in

net income

 

 

 

 

 

 

 

 

(14

)

 

 

 

Unrealized gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

 

 

 

5

 

 

 

 

 

 

8

 

 

 

2

 

 

 

 

 

 

1

 

 

 

 

Reclassification adjustments for gains included in

net income

 

 

 

 

 

(5

)

 

 

 

 

 

(6

)

Other comprehensive income (loss)

 

 

(23

)

 

 

4

 

 

 

(13

)

 

 

(6

)

 

 

3

 

 

 

(5

)

 

 

7

 

 

 

(5

)

Comprehensive income (loss)

 

$

(529

)

 

$

150

 

 

$

(208

)

 

$

313

 

Comprehensive income

 

$

246

 

 

$

236

 

 

$

353

 

 

$

519

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

Nine Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(195

)

 

$

319

 

Adjustments to reconcile net income (loss) to net cash provided by

operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

346

 

 

$

524

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

150

 

 

 

173

 

 

 

99

 

 

 

98

 

Stock-based compensation

 

 

125

 

 

 

149

 

 

 

82

 

 

 

78

 

Deferred income taxes

 

 

258

 

 

 

73

 

 

 

(23

)

 

 

(25

)

Gain on sale of properties

 

 

(218

)

 

 

(10

)

Gain on sale or derecognition of assets

 

 

(38

)

 

 

 

Other items, net

 

 

(8

)

 

 

(8

)

 

 

13

 

 

 

11

 

Changes in assets and liabilities, net of acquisitions of businesses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(8

)

 

 

208

 

 

 

435

 

 

 

269

 

Inventories

 

 

65

 

 

 

(27

)

 

 

20

 

 

 

36

 

Other operating assets

 

 

28

 

 

 

16

 

 

 

41

 

 

 

(19

)

Accounts payable

 

 

115

 

 

 

13

 

 

 

(157

)

 

 

(127

)

Accrued expenses

 

 

58

 

 

 

(121

)

 

 

(315

)

 

 

(162

)

Deferred revenue and financed unearned services revenue

 

 

(102

)

 

 

(148

)

 

 

(197

)

 

 

(129

)

Long-term taxes payable

 

 

723

 

 

 

(16

)

 

 

(49

)

 

 

(63

)

Other operating liabilities

 

 

(7

)

 

 

-

 

Net cash provided by operating activities

 

 

984

 

 

 

621

 

 

 

257

 

 

 

491

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of investments

 

 

(1,262

)

 

 

(1,383

)

 

 

(9

)

 

 

(20

)

Maturities, sales and collections of investments

 

 

1,084

 

 

 

1,385

 

 

 

1,155

 

 

 

509

 

Purchases of property and equipment

 

 

(97

)

 

 

(137

)

 

 

(68

)

 

 

(107

)

Proceeds from sale of properties

 

 

210

 

 

 

 

 

 

96

 

 

 

 

Acquisitions of businesses, net of cash acquired

 

 

(75

)

 

 

 

 

 

(56

)

 

 

(3

)

Other investing activities, net

 

 

(1

)

 

 

2

 

 

 

(2

)

 

 

2

 

Net cash used in investing activities

 

 

(141

)

 

 

(133

)

Net cash provided by investing activities

 

 

1,116

 

 

 

381

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock under employee stock

award plans

 

 

157

 

 

 

112

 

 

 

55

 

 

 

65

 

Payments for taxes related to net share settlement of stock awards

 

 

(67

)

 

 

(42

)

 

 

(74

)

 

 

(89

)

Repurchase of common stock

 

 

(450

)

 

 

(576

)

 

 

(750

)

 

 

(1,061

)

Proceeds from issuance of commercial paper notes, net

 

 

132

 

 

 

392

 

Issuance of long-term debt, net

 

 

795

 

 

 

 

Repayment of short-term loan

 

 

 

 

 

(850

)

Proceeds from (repayments of) commercial paper notes, net

 

 

249

 

 

 

(135

)

Repayment of long-term debt

 

 

(750

)

 

 

 

 

 

(400

)

 

 

 

Dividends paid

 

 

(161

)

 

 

(157

)

 

 

(226

)

 

 

(207

)

Other financing activities, net

 

 

(6

)

 

 

(7

)

 

 

(2

)

 

 

(2

)

Net cash used in financing activities

 

 

(350

)

 

 

(1,128

)

 

 

(1,148

)

 

 

(1,429

)

Effect of exchange rate changes on cash and cash equivalents

 

 

37

 

 

 

(15

)

Net increase (decrease) in cash and cash equivalents

 

 

530

 

 

 

(655

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(5

)

 

 

(25

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

220

 

 

 

(582

)

Cash, cash equivalents and restricted cash:

 

 

 

 

 

 

 

 

Beginning of period

 

 

2,444

 

 

 

2,868

 

 

 

2,331

 

 

 

2,947

 

End of period

 

$

2,974

 

 

$

2,213

 

 

$

2,551

 

 

$

2,365

 

See accompanying notes to condensed consolidated financial statements.


6


NETAPP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)

(Unaudited)

 

 

Three Months Ended October 25, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock and

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Loss

 

 

Total

 

 

 

(In millions, except per share amounts)

 

Balances, July 26, 2019

 

 

239

 

 

$

902

 

 

$

 

 

$

(39

)

 

$

863

 

Net income

 

 

 

 

 

 

 

 

243

 

 

 

 

 

 

243

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

Issuance of common stock under employee

    stock award plans, net of taxes

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Repurchase of common stock

 

 

(10

)

 

 

(257

)

 

 

(243

)

 

 

 

 

 

(500

)

Stock-based compensation

 

 

 

 

 

40

 

 

 

 

 

 

 

 

 

40

 

Cash dividends declared ($0.48 per

    common share)

 

 

 

 

 

(111

)

 

 

 

 

 

 

 

 

(111

)

Balances, October 25, 2019

 

 

229

 

 

$

572

 

 

$

 

 

$

(36

)

 

$

536

 

 

 

Three Months Ended October 26, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock and

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Loss

 

 

Total

 

 

 

(In millions, except per share amounts)

 

Balances, July 27, 2018

 

 

260

 

 

$

1,992

 

 

$

 

 

$

(70

)

 

$

1,922

 

Net income

 

 

 

 

 

 

 

 

241

 

 

 

 

 

 

241

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

Issuance of common stock under employee

    stock award plans, net of taxes

 

 

1

 

 

 

(3

)

 

 

 

 

 

 

 

 

(3

)

Repurchase of common stock

 

 

(7

)

 

 

(320

)

 

 

(241

)

 

 

 

 

 

(561

)

Stock-based compensation

 

 

 

 

 

38

 

 

 

 

 

 

 

 

 

38

 

Cash dividends declared ($0.40 per

    common share)

 

 

 

 

 

(102

)

 

 

 

 

 

 

 

 

(102

)

Balances, October 26, 2018

 

 

254

 

 

$

1,605

 

 

$

 

 

$

(75

)

 

$

1,530

 

See accompanying notes to condensed consolidated financial statements.

 


67


 

 

Six Months Ended October 25, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock and

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Loss

 

 

Total

 

 

 

(In millions, except per share amounts)

 

Balances, April 26, 2019

 

 

240

 

 

$

1,133

 

 

$

 

 

$

(43

)

 

$

1,090

 

Cumulative-effect of adoption of ASC 842

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

Net income

 

 

 

 

 

 

 

 

346

 

 

 

 

 

 

346

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

7

 

Issuance of common stock under employee

    stock award plans, net of taxes

 

 

3

 

 

 

(19

)

 

 

 

 

 

 

 

 

(19

)

Repurchase of common stock

 

 

(14

)

 

 

(398

)

 

 

(352

)

 

 

 

 

 

(750

)

Stock-based compensation

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

82

 

Cash dividends declared ($0.96 per

    common share)

 

 

 

 

 

(226

)

 

 

 

 

 

 

 

 

(226

)

Balances, October 25, 2019

 

 

229

 

 

$

572

 

 

$

 

 

$

(36

)

 

$

536

 

 

 

Six Months Ended October 26, 2018

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock and

 

 

Earnings

 

 

Other

 

 

 

 

 

 

 

Additional Paid-in Capital

 

 

(Accumulated

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Deficit)

 

 

Loss

 

 

Total

 

 

 

(In millions, except per share amounts)

 

Balances, April 27, 2018

 

 

263

 

 

$

2,355

 

 

$

(9

)

 

$

(70

)

 

$

2,276

 

Cumulative-effect of adoption of ASU 2016-16

 

 

 

 

 

 

 

 

(51

)

 

 

 

 

 

(51

)

Net income

 

 

 

 

 

 

 

 

524

 

 

 

 

 

 

524

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

(5

)

Issuance of common stock under employee

    stock award plans, net of taxes

 

 

5

 

 

 

(24

)

 

 

 

 

 

 

 

 

(24

)

Repurchase of common stock

 

 

(14

)

 

 

(597

)

 

 

(464

)

 

 

 

 

 

(1,061

)

Stock-based compensation

 

 

 

 

 

78

 

 

 

 

 

 

 

 

 

78

 

Cash dividends declared ($0.80 per

    common share)

 

 

 

 

 

(207

)

 

 

 

 

 

 

 

 

(207

)

Balances, October 26, 2018

 

 

254

 

 

$

1,605

 

 

$

 

 

$

(75

)

 

$

1,530

 

See accompanying notes to condensed consolidated financial statements.

8


NETAPP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Description of Business and Significant Accounting Policies

NetApp, Inc. (we, us, or the Company) provides global organizations the ability to manage and share their data across on-premises, private and public clouds. Together with our partners, we provide a full range of enterprise-class software, systems and services solutions that customers use to modernize their infrastructures, build next generation data centers and harness the power of hybrid clouds.

Basis of Presentation and Preparation

Our fiscal year is reported on a 52- or 53-week year ending on the last Friday in April. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal months with calendar months. Fiscal years 20182020 and 2017,2019, ending on April 27, 2018,24, 2020, and April 28, 2017,26, 2019, respectively, are each 52-week years, with 13 weeks in each of their quarters.

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, and reflect all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, comprehensive income, and cash flows and stockholders’ equity for the interim periods presented. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, these statements do not include all information and footnotes required by GAAP for annual consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the fiscal year ended April 28, 201726, 2019 contained in our Annual Report on Form 10-K. The results of operations for the three and ninesix months ended January 26, 2018October 25, 2019 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, reserves and allowances; inventory valuation and purchase order accruals; valuation of goodwill and intangibles; restructuring reserves; product warranties; employee compensation and benefit accruals; stock-based compensation; loss contingencies; valuation of investment securities;impairments; income taxes and fair value measurements. Actual results could differ materially from those estimates.

There have been no significant changes in our significant accounting policies as of and for the nine months ended January 26, 2018, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 28, 2017.

2. Recent   Accounting Standards Not Yet Effective

Revenue from Contracts with Customers

In May 2014, the FASB issued an accounting standards update related to the recognition and reporting of revenue that establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The guidance allows for the use of either the full or modified retrospective transition method. We will adopt this new standard, as amended, on its effective date in the first quarter of fiscal 2019.

Preliminarily, we plan to adopt the standard using the full retrospective method to restate each prior reporting period presented. Our ability to adopt this standard using the full retrospective method is dependent upon system readiness, for both revenue and commissions, and the completion of the analysis of information necessary to restate prior period financial statements and disclosures. We are continuing to assess the impact of this standard on our financial position, results of operations and related disclosures and have not yet determined whether the effect will be material. We do not expect that the adoption of this standard will have a material impact on our operating cash flows. Additionally, as we continue to assess the new standard along with industry trends and additional interpretive guidance, we may adjust our implementation plan accordingly.

We believe that the new standard will impact the following policies and disclosures:

in arrangements containing software, revenue deferred for the undelivered elements will be based on a relative fair value allocation, generally resulting in more software arrangement revenue being recognized earlier;

7


removal of the current limitation on contingent revenue for multiple element arrangements, such as that related to the delivery of additional items or meeting other specified performance conditions, may result in revenue being recognized earlier;

estimation of variable consideration for arrangements with contract terms such as rights of return, potential penalties and acceptance clauses;

required disclosures, including information about the transaction price allocated to remaining performance obligations and expected timing of revenue recognition; and

accounting for deferred commissions, including costs that qualify for deferral and the amortization period.

We do not expect that the new standard will result in substantive changes in our deliverables or the amounts of revenue allocated between multiple deliverables, with the exception of the items discussed above.

LeasesChanges

In February 2016, the FASB issued an accounting standards update on financial reporting for leasing arrangements, including requiring lessees to recognize an operating lease with a term greater than one year on their balance sheets as a right-of-use (ROU) asset and corresponding lease liability, measured at the present value of the lease payments. This new standard will be effective for us in ourIn the first quarter of fiscal 2020, although early adoption is permitted. Upon adoption, lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We are currently in the assessment phase to determine the adoption methodology and are evaluating the impact ofwe adopted this new standard onusing the modified retrospective approach, electing the optional transition approach of not adjusting our consolidatedcomparative period financial statements for the impacts of adoption. We also elected the package of practical expedients that did not require us to reassess existing leases under the new guidance, and disclosures. We expect that mostthe practical expedient to not separate lease and non-lease components for all leases. Adoption of our operating lease commitments will be subject to the new standard on April 27, 2019 resulted in the recognition of approximately $149 million of operating lease ROU assets, net of deferred rent and recognized aslease restructuring liabilities, $158 million of lease liabilities, and right-of-usea cumulative-effect adjustment to retained earnings of $6 million on our condensed consolidated balance sheets. Adoption of the standard did not have a material impact on our condensed consolidated statements of operations or condensed consolidated statements of cash flows. Additional information is presented below and in Note 9 – Leases.

Leases − We determine if an arrangement is or contains a lease at inception, and we classify leases as operating or finance leases at commencement. In our condensed consolidated balance sheets, operating lease ROU assets upon adoption, which will increaseare included in other non-current assets, while finance lease ROU assets are included in property and equipment, net. Lease liabilities for both types of leases are included in accrued expenses and other long-term liabilities. ROU assets represent our right to use an underlying asset for the totallease term and lease liabilities represent our obligation to make lease payments over that term.

Operating and finance lease ROU assets and total liabilities are recognized at commencement based on the present value of lease payments over the lease term. ROU assets also include any lease payments made prior to lease commencement and exclude lease incentives. The lease term is the noncancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised. As the rate implicit in our leases is typically not readily determinable, in computing the present value of lease payments we report.generally use our incremental borrowing rate based on information available at the commencement date. Variable lease payments not dependent on an index or rate are expensed as incurred and not included within the calculation of ROU assets and lease liabilities. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

9


We do not separate non-lease components from lease components for any class of leases, and we do not recognize ROU assets and lease liabilities for leases with a lease term of twelve months or less.

There have been no other significant changes in our significant accounting policies as of and for the six months ended October 25, 2019, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 26, 2019.

2. Recent Accounting Standards Not Yet Effective

Credit Losses on Financial Instruments

In June 2016, the FASB issued an accounting standards update on the measurement of credit losses on financial instruments. The standard introduces a new model for measuring and recognizing credit losses on financial instruments, requiring financial assets measured at amortized cost basis to be presented at the net amount expected to be collected.It also requires that credit losses be recorded through an allowance for credit losses. This new standard will be effective for us in our first quarter of fiscal 2021, although early adoption is permitted. Upon adoption, companies must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings, though a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Based on the composition of our investment portfolio, current market conditions, and historical credit loss activity, the adoption of this standard is not expected to have a material impact on our consolidated financial statements.

Income Taxes on Intra-Entity Transfers

3.Business Combination

On May 23, 2019, we acquired all the outstanding shares of Assetsprivately-held Cognigo Research Ltd., a provider of data discovery classification software designed to manage and protect critical data, for $58 million in cash.

In October 2016, the FASB issued an accounting standards update that requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amends current GAAP which prohibits recognition of current and deferred income taxes for all types of intra-entity asset transfers until the asset has been sold to an outside party. This new standard will be effective for us in our first quarter of fiscal 2019, although early adoption is permitted. Upon adoption, companies must apply a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as

The preliminary acquisition date fair values of the beginning of the period of adoption. We are currently evaluating the impact of this new standard on our consolidated financial statements.

Derecognition of Non-Financial Assets

In February 2017, the FASB issued an accounting standards update that amends guidance on how entities account for the derecognition of a nonfinancial asset or an in substance nonfinancial asset that is not a business. The guidance allows for the use of either the full or modified retrospective transition method. This new standard will be effective for us in our first quarter of fiscal 2019, although early adoption is permitted. We are currently evaluating the impact of this new standard on our consolidated financial statements.

Although there are several other new accounting pronouncements issued or proposed by the FASB that we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had or will have a material impact on our consolidated financial position, operating results or disclosures.

8


3. Statements of Cash Flows Additional Information

Non-cash investingassets acquired and financing activities and supplemental cash flow informationliabilities assumed are as follows (in millions):

 

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

Non-cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Capital expenditures incurred but not paid

 

$

19

 

 

$

13

 

Non-cash extinguishment of sale-leaseback financing obligations

 

$

130

 

 

$

19

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

51

 

 

$

90

 

Interest paid

 

$

45

 

 

$

43

 

Cash

 

$

2

 

Developed technology intangible asset

 

 

26

 

Goodwill

 

 

35

 

Total assets acquired

 

 

63

 

Liabilities assumed

 

 

(5

)

Total purchase price

 

$

58

 

 

4. Business Combinations

On August 4, 2017, we acquired allThe results of operations related to this acquisition have been included in our condensed consolidated statements of operations from the outstanding sharesacquisition date. Pro forma results of Greenqloud ehf., a privately-held provideroperations have not been presented because the acquisition was not material to our results of cloud management software based in Iceland, for $51 million in cash, of which we preliminarily allocated $10 million to developed technology, $38 million to goodwill, and the remainder to other assets.

On June 15, 2017, we acquired all of the outstanding shares of Plexistor Ltd., a privately-held provider of software defined memory architecture based in Israel, for $24 million in cash, of which we allocated $6 million to developed technology, $17 million to goodwill, and the remainder to other assets.operations.

 

5.4. Goodwill and Purchased Intangible Assets, Net

Goodwill activity is summarized as follows (in millions):

 

Balance as of April 28, 2017

 

$

1,684

 

Additions

 

 

55

 

Balance as of January 26, 2018

 

$

1,739

 

Balance as of April 26, 2019

 

$

1,735

 

Additions

 

 

35

 

Balance as of October 25, 2019

 

$

1,770

 

Purchased intangible assets, net are summarized below (in millions):

 

 

January 26, 2018

 

 

April 28, 2017

 

 

October 25, 2019

 

 

April 26, 2019

 

 

Gross

 

 

Accumulated

 

 

Net

 

 

Gross

 

 

Accumulated

 

 

Net

 

 

Gross

 

 

Accumulated

 

 

Net

 

 

Gross

 

 

Accumulated

 

 

Net

 

 

Assets

 

 

Amortization

 

 

Assets

 

 

Assets

 

 

Amortization

 

 

Assets

 

 

Assets

 

 

Amortization

 

 

Assets

 

 

Assets

 

 

Amortization

 

 

Assets

 

Developed technology

 

$

164

 

 

$

(71

)

 

$

93

 

 

$

148

 

 

$

(44

)

 

$

104

 

 

$

186

 

 

$

(135

)

 

$

51

 

 

$

160

 

 

$

(113

)

 

$

47

 

Customer contracts/relationships

 

 

43

 

 

 

(30

)

 

 

13

 

 

 

43

 

 

 

(19

)

 

 

24

 

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

(41

)

 

 

 

Other purchased intangibles

 

 

9

 

 

 

(9

)

 

 

 

 

 

9

 

 

 

(6

)

 

 

3

 

Total purchased intangible assets

 

$

216

 

 

$

(110

)

 

$

106

 

 

$

200

 

 

$

(69

)

 

$

131

 

 

$

186

 

 

$

(135

)

 

$

51

 

 

$

201

 

 

$

(154

)

 

$

47

 

10


Amortization expense for purchased intangible assets is summarized below (in millions):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Statements of

 

Three Months Ended

 

 

Six Months Ended

 

 

Statements of

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

Operations

Classification

 

October 25, 2019

 

 

October 26,

2018

 

 

October 25, 2019

 

 

October 26,

2018

 

 

Operations

Classification

Developed technology

 

$

10

 

 

$

8

 

 

$

27

 

 

$

21

 

 

Cost of revenues

 

$

11

 

 

$

9

 

 

$

22

 

 

$

18

 

 

Cost of revenues

Customer contracts/relationships

 

 

3

 

 

 

4

 

 

 

11

 

 

 

11

 

 

Operating expenses

 

 

 

 

 

3

 

 

 

 

 

 

7

 

 

Operating expenses

Other purchased intangibles

 

 

1

 

 

 

1

 

 

 

3

 

 

 

3

 

 

Operating expenses

Total

 

$

14

 

 

$

13

 

 

$

41

 

 

$

35

 

 

 

 

$

11

 

 

$

12

 

 

$

22

 

 

$

25

 

 

 

9


As of January 26, 2018,October 25, 2019, future amortization expense related to purchased intangible assets is as follows (in millions):

 

Fiscal Year

 

Amount

 

 

Amount

 

Remainder of 2018

 

$

12

 

2019

 

 

47

 

2020

 

 

31

 

Remainder of 2020

 

$

16

 

2021

 

 

16

 

 

 

25

 

2022

 

 

9

 

2023

 

 

1

 

Total

 

$

106

 

 

$

51

 

 

 

6. Balance Sheet Details5. Supplemental Financial Information

Cash, and cash equivalents and restricted cash (in millions):

 

The following table presents cash and cash equivalents as reported in our condensed consolidated balance sheets, as well as the sum of cash, cash equivalents and restricted cash as reported on our condensed consolidated statements of cash flows:

 

 

January 26,

2018

 

 

April 28,

2017

 

Cash

 

$

2,563

 

 

$

2,275

 

Cash equivalents

 

 

411

 

 

 

169

 

Cash and cash equivalents

 

$

2,974

 

 

$

2,444

 

 

 

October 25,

2019

 

 

April 26,

2019

 

Cash and cash equivalents

 

$

2,545

 

 

$

2,325

 

Restricted cash

 

 

6

 

 

 

6

 

Cash, cash equivalents and restricted cash

 

$

2,551

 

 

$

2,331

 

 

Inventories (in millions):

 

 

October 25,

2019

 

 

April 26,

2019

 

 

January 26,

2018

 

 

April 28,

2017

 

 

 

 

 

 

 

 

 

Purchased components

 

$

22

 

 

$

28

 

 

$

14

 

 

$

8

 

Finished goods

 

 

76

 

 

 

135

 

 

 

97

 

 

 

123

 

Inventories

 

$

98

 

 

$

163

 

 

$

111

 

 

$

131

 

 

Property and equipment, net (in millions):

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Land

 

$

106

 

 

$

132

 

 

$

104

 

 

$

106

 

Buildings and improvements

 

 

576

 

 

 

612

 

 

 

609

 

 

 

605

 

Leasehold improvements

 

 

94

 

 

 

93

 

 

 

86

 

 

 

86

 

Computer, production, engineering and other equipment

 

 

726

 

 

 

741

 

 

 

841

 

 

 

817

 

Computer software

 

 

358

 

 

 

353

 

 

 

358

 

 

 

357

 

Furniture and fixtures

 

 

99

 

 

 

90

 

 

 

106

 

 

 

105

 

Construction-in-progress

 

 

26

 

 

 

26

 

 

 

21

 

 

 

10

 

 

 

1,985

 

 

 

2,047

 

 

 

2,125

 

 

 

2,086

 

Accumulated depreciation and amortization

 

 

(1,244

)

 

 

(1,248

)

 

 

(1,379

)

 

 

(1,327

)

Property and equipment, net

 

$

741

 

 

$

799

 

 

$

746

 

 

$

759

 

 

As of April 28,In September 2017, we had classifiedentered into an agreement to sell certain land and buildings located in Sunnyvale, California, previously reported as property and equipment as assets held-for-sale and included their book value of $118 million in other current assets in the condensed consolidated balance sheets. On September 8, 2017, we entered into an agreement to sell these properties for a total of $306 million, through two separate and independent closings.closings, the first of which was completed in the third quarter of fiscal 2018. The remaining properties, consisting of land, were classified as assets held for sale, and included as other current assets in our condensed consolidated balance sheets as of April 26, 2019. On December 7, 2017,August 29, 2019, the firstsecond closing occurred and we consummated the sale of propertiesthe land, with a net book value of $66$53 million, forand received cash proceeds of $210$96 million, resulting in a gain, net of direct selling costs, of $142$38 million.

11


 

The remaining properties, consisting of land with a net book value of $52 million, continue to be classified as assets held-for-sale as of January 26, 2018. We will consummate the sale of these properties, and receive cash proceeds of $96 million, upon the occurrence of the second closing, which is expected to occur within the next 12 months. That closing is subject to due diligence, certain termination rights and customary closing conditions, including local governmental approval of the subdivision of a land parcel.

10


Other non-current assets (in millions):

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Deferred tax assets

 

$

289

 

 

$

525

 

 

$

223

 

 

$

201

 

Operating lease ROU assets

 

 

143

 

 

 

 

Other assets

 

 

146

 

 

 

156

 

 

 

348

 

 

 

389

 

Other non-current assets

 

$

435

 

 

$

681

 

 

$

714

 

 

$

590

 

Other non-current assets as of October 25, 2019 and April 26, 2019 includes $77 million and $78 million, respectively, for our 49% non-controlling equity interest in Lenovo NetApp Technology Limited, a China-based entity that we formed with Lenovo (Beijing) Information Technology Ltd. in fiscal 2019.

 

Accrued expenses (in millions):

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Accrued compensation and benefits

 

$

347

 

 

$

340

 

 

$

279

 

 

$

433

 

Sale-leaseback financing obligations

 

 

 

 

 

130

 

Product warranty liabilities

 

 

26

 

 

 

33

 

 

 

26

 

 

 

25

 

Operating lease liabilities

 

 

49

 

 

 

 

Other current liabilities

 

 

366

 

 

 

279

 

 

 

252

 

 

 

393

 

Accrued expenses

 

$

739

 

 

$

782

 

 

$

606

 

 

$

851

 

 

Product warranty liabilities:

Equipment and software systems sales include a standard product warranty. The following tables summarize the activity related to product warranty liabilities and their balances as reported in our condensed consolidated balance sheets (in millions):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Balance at beginning of period

 

$

44

 

 

$

54

 

 

$

50

 

 

$

70

 

 

$

39

 

 

$

38

 

 

$

40

 

 

$

40

 

Expense accrued during the period

 

 

3

 

 

 

4

 

 

 

11

 

 

 

9

 

 

 

7

 

 

 

6

 

 

 

12

 

 

 

10

 

Warranty costs incurred

 

 

(6

)

 

 

(8

)

 

 

(20

)

 

 

(29

)

 

 

(6

)

 

 

(5

)

 

 

(12

)

 

 

(11

)

Balance at end of period

 

$

41

 

 

$

50

 

 

$

41

 

 

$

50

 

 

$

40

 

 

$

39

 

 

$

40

 

 

$

39

 

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Accrued expenses

 

$

26

 

 

$

33

 

 

$

26

 

 

$

25

 

Other long-term liabilities

 

 

15

 

 

 

17

 

 

 

14

 

 

 

15

 

Total warranty liabilities

 

$

41

 

 

$

50

 

 

$

40

 

 

$

40

 

 

Warranty expense accrued during the period includes amounts accrued for systems at the time of shipment, adjustments for changes in estimated costs for warranties on systems shipped in the period and changes in estimated costs for warranties on systems shipped in prior periods.

 

 

Other long-term liabilities (in millions):

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Liability for uncertain tax positions

 

$

303

 

 

$

148

 

 

$

251

 

 

$

252

 

Income taxes payable

 

 

569

 

 

 

 

 

 

399

 

 

 

447

 

Product warranty liabilities

 

 

15

 

 

 

17

 

 

 

14

 

 

 

15

 

Operating lease liabilities

 

 

102

 

 

 

 

Other liabilities

 

 

86

 

 

 

84

 

 

 

71

 

 

 

83

 

Other long-term liabilities

 

$

973

 

 

$

249

 

 

$

837

 

 

$

797

 

12


Other income, net (in millions):


 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Interest income

 

$

12

 

 

$

21

 

 

$

31

 

 

$

46

 

Interest expense

 

 

(12

)

 

 

(14

)

 

 

(27

)

 

 

(28

)

Other income, net

 

 

3

 

 

 

 

 

 

14

 

 

 

7

 

Total other income, net

 

$

3

 

 

$

7

 

 

$

18

 

 

$

25

 

Statements of cash flows additional information (in millions):

Supplemental cash flow information related to our operating leases is included in Note 9 ─ Leases. Non-cash investing activities and other supplemental cash flow information are presented below:

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

Non-cash Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures incurred but not paid

 

$

6

 

 

$

7

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Income taxes paid, net of refunds

 

$

260

 

 

$

104

 

Interest paid

 

$

25

 

 

$

26

 

6. Revenue

Disaggregation of revenue

      To provide visibility into our transition from older products to our newer, higher growth products and clarity into the dynamics of our product revenue, we group our products by “Strategic” and “Mature” solutions. As our product portfolio evolves, market dynamics change, and management continues to assess of our largest growth opportunities, we periodically change how we group certain products. Beginning in fiscal 2020, Strategic includes All-flash FAS (AFF) products, including all related add-on hardware and operating system (OS) software, private cloud solutions (including SolidFire, converged and hyper-converged infrastructure products, StorageGrid), enterprise software license agreements (ELAs) and other optional add-on software products. Mature now includes Hybrid FAS products, including all related add-on hardware and OS software, original equipment manufacturers (OEM) products, and branded E-Series. Prior to this grouping change, Hybrid FAS products and branded E-Series were included in Strategic, while all add-on hardware and OS software were included in Mature. For comparability, Strategic and Mature revenues presented for the prior year periods have been recast based on the revised groupings.

In addition to the sale of our products and solutions, we provide a variety of services to our customers, including software maintenance, hardware maintenance and other services including professional services, global support solutions, and customer education and training.

The following table depicts the disaggregation of revenue by our products and services (in millions):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Product revenues

 

$

771

 

 

$

913

 

 

$

1,415

 

 

$

1,788

 

Strategic

 

442

 

 

485

 

 

 

779

 

 

 

960

 

Mature

 

329

 

 

428

 

 

 

636

 

 

 

828

 

Software maintenance revenues

 

254

 

 

236

 

 

 

504

 

 

465

 

Hardware maintenance and other services revenues

 

346

 

 

368

 

 

 

688

 

 

 

738

 

Hardware maintenance support contracts

 

286

 

 

303

 

 

 

570

 

 

 

606

 

Professional and other services

 

60

 

 

65

 

 

 

118

 

 

 

132

 

Net revenues

 

$

1,371

 

 

$

1,517

 

 

$

2,607

 

 

$

2,991

 

Revenues by geographic region are presented in Note 15 – Segment, Geographic, and Significant Customer Information.

13


 

Deferred revenue and financed unearned services revenue

The following table summarizes the components of our deferred revenue and financed unearned services balance as reported in our condensed consolidated balance sheets (in millions):

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Deferred product revenue

 

$

113

 

 

$

124

 

 

$

85

 

 

$

84

 

Deferred services revenue

 

 

3,014

 

 

 

2,999

 

 

 

3,314

 

 

 

3,502

 

Financed unearned services revenue

 

 

142

 

 

 

219

 

 

 

69

 

 

 

82

 

Total

 

$

3,269

 

 

$

3,342

 

 

$

3,468

 

 

$

3,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

$

1,719

 

 

$

1,744

 

 

$

1,718

 

 

$

1,825

 

Long-term

 

 

1,550

 

 

 

1,598

 

 

 

1,750

 

 

 

1,843

 

Total

 

$

3,269

 

 

$

3,342

 

 

$

3,468

 

 

$

3,668

 

 

Deferred product revenue represents unrecognized revenue related to undelivered product commitments and other product deliveries that have not met all revenue recognition criteria. Deferred services revenue represents customer payments made in advance for services, which include software and hardware maintenance contracts and other services. Financed unearned services revenue represents undelivered services for which cash has been received under certain third-party financing arrangements. See Note 16 – Commitments and Contingencies for additional information related to these arrangements.

7. Other income (expense), net

Other income (expense), net consists ofThe following tables summarize the followingactivity related to deferred revenue and financed unearned services revenue (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

Interest income

 

$

20

 

 

$

10

 

 

$

55

 

 

$

31

 

Interest expense

 

 

(17

)

 

 

(12

)

 

 

(47

)

 

 

(39

)

Other income, net

 

 

11

 

 

 

2

 

 

 

17

 

 

 

7

 

Total other income (expense), net

 

$

14

 

 

$

 

 

$

25

 

 

$

(1

)

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

Balance at beginning of period

 

$

3,668

 

 

$

3,363

 

Additions

 

 

1,011

 

 

 

1,067

 

Revenue recognized during the period

 

 

(1,211

)

 

 

(1,224

)

Balance at end of period

 

$

3,468

 

 

$

3,206

 

During the six months ended October 25, 2019 and October 26, 2018, we recognized $1,045 million and $1,019 million, respectively, that was included in the deferred revenue and financed unearned services revenue balance at the beginning of the respective periods.

As of October 25, 2019, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that are unsatisfied or partially unsatisfied was $3,468 million, which is equivalent to our deferred revenue and unearned services revenue balance. Because customer orders are typically placed on an as-needed basis, and cancellable without penalty prior to shipment, orders in backlog may not be a meaningful indicator of future revenue and have not been included in this amount. We expect to recognize as revenue approximately 49% of our deferred revenue and financed unearned services revenue balance in the next 12 months, approximately 26% in the next 13 to 24 months, and the remainder thereafter.

Deferred commissions

The following tables summarize the activity related to deferred commissions and their balances as reported in our condensed consolidated balance sheets (in millions):

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

Balance at beginning of period

 

$

172

 

 

$

137

 

Additions

 

 

32

 

 

 

35

 

Expense recognized during the period

 

 

(50

)

 

 

(41

)

Balance at end of period

 

$

154

 

 

$

131

 

14


 

 

October 25,

2019

 

 

April 26,

2019

 

Other current assets

 

$

66

 

 

$

75

 

Other non-current assets

 

 

88

 

 

 

97

 

Total deferred commissions

 

$

154

 

 

$

172

 

 

 

8.

7. Financial Instruments and Fair Value Measurements

The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis, whereby the inputs used in valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our own or the counterparty’s non-performance risk is considered in measuring the fair values of liabilities and assets, respectively.

12


Investments

The following is a summary of our investments (in millions):

 

 

January 26, 2018

 

 

April 28, 2017

 

 

October 25, 2019

 

 

April 26, 2019

 

 

Cost or

 

 

 

 

 

Estimated

 

 

Cost or

 

 

 

 

 

Estimated

 

 

Cost or

 

 

 

 

 

Estimated

 

 

Cost or

 

 

 

 

 

Estimated

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

Amortized

 

 

Gross Unrealized

 

 

Fair

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

Corporate bonds

 

$

1,888

 

 

$

3

 

 

$

(14

)

 

$

1,877

 

 

$

1,535

 

 

$

3

 

 

$

(2

)

 

$

1,536

 

 

$

319

 

 

$

1

 

 

$

 

 

$

320

 

 

$

1,359

 

 

$

2

 

 

$

(8

)

 

$

1,353

 

U.S. Treasury and government debt

securities

 

 

520

 

 

 

 

 

 

(4

)

 

 

516

 

 

 

629

 

 

 

1

 

 

 

(2

)

 

 

628

 

 

 

122

 

 

 

 

 

 

 

 

 

122

 

 

 

214

 

 

 

 

 

 

(1

)

 

 

213

 

Foreign government debt securities

 

 

12

 

 

 

 

 

 

 

 

 

12

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

Commercial paper

 

 

544

 

 

 

 

 

 

 

 

 

544

 

 

 

362

 

 

 

 

 

 

 

 

 

362

 

Certificates of deposit

 

 

107

 

 

 

 

 

 

 

 

 

107

 

 

 

99

 

 

 

 

 

 

 

 

 

99

 

 

 

150

 

 

 

 

 

 

 

 

 

150

 

 

 

117

 

 

 

 

 

 

 

 

 

117

 

Mutual funds

 

 

33

 

 

 

 

 

 

 

 

 

33

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

 

 

40

 

 

 

 

 

 

 

 

 

40

 

 

 

35

 

 

 

 

 

 

 

 

 

35

 

Total debt and equity securities

 

$

3,104

 

 

$

3

 

 

$

(18

)

 

$

3,089

 

 

$

2,677

 

 

$

4

 

 

$

(4

)

 

$

2,677

 

 

$

631

 

 

$

1

 

 

$

 

 

$

632

 

 

$

1,725

 

 

$

2

 

 

$

(9

)

 

$

1,718

 

 

AsDuring the six months ended October 25, 2019, we sold approximately $1.0 billion of January 26, 2018corporate bonds held by foreign subsidiaries and April 28, 2017, gross unrealized losses related to individual securities were not significant.recognized a gain on sale of $14 million, which is presented in other income, net on our condensed consolidated statement of operations.

The following table presents the contractual maturities of our debt investments as of January 26, 2018October 25, 2019 (in millions):

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$

1,215

 

 

$

1,215

 

 

$

464

 

 

$

464

 

Due after one year through five years

 

 

1,195

 

 

 

1,185

 

 

 

122

 

 

 

123

 

Due after five years through ten years

 

 

661

 

 

 

656

 

 

 

5

 

 

 

5

 

 

$

3,071

 

 

$

3,056

 

 

$

591

 

 

$

592

 

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

15


Fair Value of Financial Instruments

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis (in millions):

 

 

January 26, 2018

 

 

October 25, 2019

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Total

 

 

Level 1

 

 

Level 2

 

Cash

 

$

2,563

 

 

$

2,563

 

 

$

 

 

$

2,395

 

 

$

2,395

 

 

$

 

Corporate bonds

 

 

1,877

 

 

 

 

 

 

1,877

 

 

 

320

 

 

 

 

 

 

320

 

U.S. Treasury and government debt securities

 

 

516

 

 

 

260

 

 

 

256

 

 

 

122

 

 

 

91

 

 

 

31

 

Foreign government debt securities

 

 

12

 

 

 

 

 

 

12

 

Commercial paper

 

 

544

 

 

 

 

 

 

544

 

Certificates of deposit

 

 

107

 

 

 

 

 

 

107

 

 

 

150

 

 

 

 

 

 

150

 

Total cash, cash equivalents and short-term investments

 

$

5,619

 

 

$

2,823

 

 

$

2,796

 

 

$

2,987

 

 

$

2,486

 

 

$

501

 

Other items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds (1)

 

$

7

 

 

$

7

 

 

$

 

 

$

9

 

 

$

9

 

 

$

 

Mutual funds (2)

 

$

26

 

 

$

26

 

 

$

 

 

$

31

 

 

$

31

 

 

$

 

Foreign currency exchange contracts assets (1)

 

$

3

 

 

$

 

 

$

3

 

 

$

3

 

 

$

 

 

$

3

 

Foreign currency exchange contracts liabilities (3)

 

$

(13

)

 

$

 

 

$

(13

)

 

$

(1

)

 

$

 

 

$

(1

)

 

 

(1)

Reported as other current assets in the condensed consolidated balance sheets

(2)

Reported as other non-current assets in the condensed consolidated balance sheets

(3)

Reported as accrued expenses in the condensed consolidated balance sheets

 

Our Level 2 debt instruments are held by a custodian who prices some of the investments using standard inputs in various asset price models or obtains investment prices from third-party pricing providers that incorporate standard inputs in various asset price models. These pricing providers utilize the most recent observable market information in pricing these securities or, if specific prices are not available for these securities, use other observable inputs like market transactions involving identical or comparable securities. We review Level 2 inputs and fair value for reasonableness and the values may be further validated by comparison to multiple independent pricing sources. In addition, we review third-party pricing provider models, key inputs and assumptions and understand the pricing processes at our third-party providers in determining the overall reasonableness of the fair value of our Level 2 debt

13


instruments. As of January 26, 2018October 25, 2019 and April 28, 2017,26, 2019, we have not made any adjustments to the prices obtained from our third-party pricing providers.

Fair Value of Debt

As of January 26, 2018October 25, 2019 and April 28, 2017,26, 2019, the fair value of our long-term debt was approximately $1,551$1,174 million and $1,520$1,553 million, respectively. The fair value of our long-term debt was based on observable market prices in a less active market. The fair value of our commercial paper notes approximated their carrying value. All of our debt obligations are categorized as Level 2 instruments.

 

9.

8. Financing Arrangements

Long-Term Debt

The following table summarizes information relating to our long-term debt, which we collectively refer to as our Senior Notes (in millions, except interest rates):

 

 

January 26, 2018

 

 

April 28, 2017

 

 

October 25, 2019

 

 

April 26, 2019

 

 

 

 

 

 

Effective

 

 

 

 

 

 

Effective

 

 

 

 

 

 

Effective

 

 

 

 

 

 

Effective

 

 

Amount

 

 

Interest Rate

 

 

Amount

 

 

Interest Rate

 

 

Amount

 

 

Interest Rate

 

 

Amount

 

 

Interest Rate

 

2.00% Senior Notes Due December 2017

 

$

 

 

N/A

 

 

$

750

 

 

 

2.25

%

2.00% Senior Notes Due September 2019

 

 

400

 

 

 

2.32

%

 

 

 

 

N/A

 

 

$

 

 

N/A

 

 

$

400

 

 

 

2.32

%

3.375% Senior Notes Due June 2021

 

 

500

 

 

 

3.54

%

 

 

500

 

 

 

3.54

%

 

 

500

 

 

 

3.54

%

 

 

500

 

 

 

3.54

%

3.25% Senior Notes Due December 2022

 

 

250

 

 

 

3.43

%

 

 

250

 

 

 

3.43

%

 

 

250

 

 

 

3.43

%

 

 

250

 

 

 

3.43

%

3.30% Senior Notes Due September 2024

 

 

400

 

 

 

3.42

%

 

 

 

 

N/A

 

 

 

400

 

 

 

3.42

%

 

 

400

 

 

 

3.42

%

Total principal amount

 

 

1,550

 

 

 

 

 

 

 

1,500

 

 

 

 

 

 

 

1,150

 

 

 

 

 

 

 

1,550

 

 

 

 

 

Unamortized discount and issuance costs

 

 

(10

)

 

 

 

 

 

 

(7

)

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

(6

)

 

 

 

 

Total senior notes

 

 

1,540

 

 

 

 

 

 

 

1,493

 

 

 

 

 

 

 

1,145

 

 

 

 

 

 

 

1,544

 

 

 

 

 

Less: Current portion of long-term debt

 

 

 

 

 

 

 

 

 

(749

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(400

)

 

 

 

 

Total long-term debt

 

$

1,540

 

 

 

 

 

 

$

744

 

 

 

 

 

 

$

1,145

 

 

 

 

 

 

$

1,144

 

 

 

 

 

 

__________________

N/A - Not applicableApplicable

16


Senior Notes

In September 2017, we issued $400 million aggregate principal amount of 2.00% Senior Notes due onOn September 27, 2019, andwe made an aggregate cash payment of $400 million aggregate principal amount of 3.30% Senior Notes due on September 29, 2024, for which we received total proceeds of approximately $795 million, net of discount and issuance costs. On November 3, 2017, we extinguishedto extinguish our 2.00% Senior Notes due December 2017 for an aggregate redemption priceat maturity.

Our 3.30% Senior Notes, with a principal amount of $751$400 million, plus accrued and unpaid interest.  

Interest on our Senior Noteswere issued in September 20172017. Interest on these Senior Notes is payablepaid semi-annually in March and September. Our 3.375% Senior Notes and 3.25% Senior Notes, with principal amounts of $500 million and $250 million, respectively, were issued in June 2014 and December 2012, respectively. Interest on these Senior Notes is paid semi-annually in June and December. Our Senior Notes, which are unsecured, unsubordinated obligations, rank equally in right of payment with any existing and future senior unsecured indebtedness.

We may redeem the Senior Notes in whole or in part, at any time at our option at specified redemption prices. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Senior Notes under specified terms. The Senior Notes also include covenants that limit our ability to incur debt secured by liens on assets or on shares of stock or indebtedness of our subsidiaries; to engage in certain sale and lease-back transactions; and to consolidate, merge or sell all or substantially all of our assets. As of January 26, 2018,October 25, 2019, we were in compliance with all covenants associated with the Senior Notes.

As of January 26, 2018,October 25, 2019, our aggregate future principal debt maturities are as follows (in millions):

 

Fiscal Year

 

Amount

 

 

Amount

 

2020

 

$

400

 

2022

 

 

500

 

 

$

500

 

Thereafter

 

 

650

 

2023

 

 

250

 

2025

 

 

400

 

Total

 

$

1,550

 

 

$

1,150

 

14


Commercial Paper Program and Credit Facility

We have a commercial paper program (the Program), under which we may issue unsecured commercial paper notes. Amounts available under the Program, as amended onin July 17, 2017, may be borrowed, repaid and re-borrowed, with the aggregate face or principal amount of the notes outstanding under the Program at any time not to exceed $1.0 billion. The maturities of the notes can vary, but may not exceed 397 days from the date of issue. The notes are sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The proceeds from the issuance of the notes are used for general corporate purposes. As of January 26, 2018,October 25, 2019, we had commercial paper notes outstanding with an aggregate principal amount of $632$499 million, a weighted-average interest rate of 1.81%2.20% and maturities ranging from 177 days to 4691 days. As of April 28, 2017,26, 2019, we had commercial paper notes outstanding with an aggregate principal amount of $500$249 million, a weighted-average interest rate of 1.26%2.73% and maturities ranging from 727 days to 38 days.

In connection with the Program, we have a senior unsecured credit agreement with a syndicated group of lenders that expires on December 10, 2021. The credit agreement, as amended onin July 17, 2017, provides a $1.0 billion revolving unsecured credit facility, with a $50 million letter of credit sub-facility, that serves as a back-up for the Program. Proceeds from the facility may also be used for general corporate purposes to the extent that the credit facility exceeds the outstanding debt issued under the Program. The credit agreement includes options that allow us to request an increase in the facility of up to an additional $300 million and to extend its maturity date for two additional one-year periods, both subject to certain conditions. As of January 26, 2018October 25, 2019 we were in compliance with all associated covenants in this agreement. NoNaN amounts were drawn against this facility during any of the periods presented.

Sale-leaseback Transactions

In fiscal 2016, we entered into a sale-leaseback arrangement of certain9. Leases

We lease real estate, equipment and automobiles in the U.S. and internationally. Our real estate leases, which are responsible for the majority of our landaggregate ROU asset and buildings, under which we leased back certain of our properties rent free overliability balances, include leases for office space, data centers and other facilities, and have remaining lease terms ending at various dates through December 31, 2017. These properties did not qualifyof up to 15 years. Some of these leases contain options that allow us to extend or terminate the lease agreement. Our equipment leases are primarily for sale-leaseback accountingservers and networking equipment and have remaining lease terms of up to 4 years, while our automobile leases have remaining lease terms of up to 5 years. All our leases are classified as a result they were accountedoperating leases except for as financing transactions. In December 2017, we terminated the leases and recorded a non-cash sale of properties with a net book value of $54 million, the extinguishment of $130 million in financing obligations, and a gain of $76 million. As of January 26, 2018, there are no balances remaining on our condensed consolidated balance sheets associated with this sale-leaseback arrangement.certain immaterial equipment finance leases.

 

The components of lease cost related to our operating leases were as follows (in millions):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 25,

2019

 

Operating lease cost

 

$

15

 

 

$

29

 

Variable lease cost

 

 

4

 

 

 

8

 

Total lease cost

 

$

19

 

 

$

37

 

17


Variable lease cost is primarily attributable to amounts paid to lessors for common area maintenance and utility charges under our real estate leases.

The supplemental cash flow information related to our operating leases is as follows (in millions):

 

 

 

 

Six Months Ended

 

 

 

 

 

October 25,

2019

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

 

 

$

29

 

Right-of-use assets obtained in exchange for new operating lease obligations

 

 

 

$

21

 

The supplemental balance sheet information related to our operating leases is as follows (in millions, except lease term and discount rate):

 

 

 

 

 

 

 

 

 

 

October 25,

2019

 

Other non-current assets

 

 

 

$

143

 

Total operating lease ROU assets

 

 

 

$

143

 

 

 

 

 

 

 

 

Accrued expenses

 

 

 

$

49

 

Other long-term liabilities

 

 

 

 

102

 

Total operating lease liabilities

 

 

 

$

151

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

3.9 years

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

2.6

%

Future minimum operating lease payments as of October 25, 2019 are as follows (in millions):

 

 

 

 

Operating Leases

 

Fiscal 2020 (remainder)

 

 

 

$

28

 

Fiscal 2021

 

 

 

 

46

 

Fiscal 2022

 

 

 

 

34

 

Fiscal 2023

 

 

 

 

20

 

Fiscal 2024

 

 

 

 

14

 

Thereafter

 

 

 

 

18

 

Total lease payments

 

 

 

$

160

 

Less: Interest

 

 

 

 

(9

)

Total

 

 

 

$

151

 

Prior to our adoption of the new lease standard, future minimum operating lease payments as of April 26, 2019, which were undiscounted and excluded non-lease components, were as follows (in millions):

 

 

 

 

Operating Leases

 

Fiscal 2020

 

 

 

$

47

 

Fiscal 2021

 

 

 

 

38

 

Fiscal 2022

 

 

 

 

26

 

Fiscal 2023

 

 

 

 

14

 

Fiscal 2024

 

 

 

 

10

 

Thereafter

 

 

 

 

16

 

Total lease payments

 

 

 

$

151

 

18


10. Stockholders’ Equity

Equity Incentive Awards

As of January 26, 2018,October 25, 2019, we have certain equity incentive awards (awards) outstanding, which include stock options and restricted stock units (RSUs), including time-based RSUs and performance-based RSUs (PBRSUs), and. Also outstanding are purchase rights under our Employee Stock Purchase Plan (ESPP) awards.. During the second quarter of fiscal 2020, the 1999 Stock Option Plan, under which stock options and RSUs are granted, was extended for a 10 year term.

Stock Options

The following table summarizes informationLess than 1 million options were outstanding as of October 25, 2019 and April 26, 2019.

Information related to our stock options is summarized below (in millions, except exercise price and contractual term)millions):

 

 

 

Number

of Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual Term

(Years)

 

 

Aggregate

Intrinsic

Value

 

Outstanding as of April 28, 2017

 

 

4

 

 

$

35.76

 

 

 

 

 

 

 

 

 

Exercised

 

 

(2

)

 

$

36.44

 

 

 

 

 

 

 

 

 

Outstanding as of January 26, 2018

 

 

2

 

 

$

33.24

 

 

 

3.35

 

 

$

49

 

Exercisable as of January 26, 2018

 

 

1

 

 

$

37.57

 

 

 

2.62

 

 

$

34

 

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

Intrinsic value of exercises

 

$

3

 

 

$

22

 

Proceeds received from exercises

 

$

2

 

 

$

17

 

Fair value of options vested

 

$

 

 

$

1

 

The aggregate intrinsic value represents the pre-tax difference between the exercise price of stock options and the quoted market price of our stock on that day for all in-the-money options.

Additional information related to our stock options is summarized below (in millions):

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

Intrinsic value of exercises

 

$

29

 

 

$

18

 

Proceeds received from exercises

 

$

72

 

 

$

33

 

Fair value of options vested

 

$

6

 

 

$

12

 

15


Restricted Stock Units

In the ninesix months ended January 26, 2018, October 25, 2019,we granted PBRSUs to certain of our executives. Each PBRSU has performance-based vesting criteria, in addition to the service based vesting criteria, such that the PBRSU cliff-vestsPBRSUs cliff-vest at the end of either an approximate two year or three year performance period, which began on the date specified in the grant agreementagreements and ends the last day of the second or third fiscal year, respectively, following the grant date.2022. The number of shares of common stock that will be issued to settle the PBRSUs at the end of the applicable performance and service period will range from 0% to 200% of a target number of shares originally granted. For half of the PBRSUs granted andin the current year, the number of shares issued will depend upon our Total Stockholder Return (TSR) as compared to an indexthe TSR of a specified group of benchmark peer companies (each expressed as a growth rate percentage) calculated as of the applicable period end date.of fiscal 2022. The fair values of the PBRSUsthese awards were fixed at grant date using a Monte Carlo simulation model andmodel. For the related aggregateremaining PBRSUs granted, the number of shares issued will depend upon our achievement against a cumulative Adjusted Operating Income (AOI) target, as defined in the grant agreements, for the three year period from fiscal 2020 through 2022. The fair values of these awards were established consistent with our methodology for valuing time-based RSUs, while compensation cost of $20 million is being recognized overbased on the shorterprobable outcome of the performance condition. The aggregate grant date fair value of all PBRSUs granted in the current year was $18 million, which is being recognized to compensation expense over the remaining applicable performance or/ service periods.

The following table summarizes information related to our RSUs, including PBRSUs, (in millions, except fair value):

 

 

Number of

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

 

 

Number of

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

 

Outstanding as of April 28, 2017

 

 

11

 

 

$

28.81

 

Outstanding as of April 26, 2019

 

 

8

 

 

$

45.68

 

Granted

 

 

4

 

 

$

38.96

 

 

 

3

 

 

$

52.21

 

Vested

 

 

(5

)

 

$

31.08

 

 

 

(3

)

 

$

37.88

 

Forfeited

 

 

(1

)

 

$

29.06

 

 

 

(1

)

 

$

47.64

 

Outstanding as of January 26, 2018

 

 

9

 

 

$

32.10

 

Outstanding as of October 25, 2019

 

 

7

 

 

$

51.25

 

We primarily use the net share settlement approach upon vesting, where a portion of the shares are withheld as settlement of employee withholding taxes, which decreases the shares issued to the employee by a corresponding value. The number and value of the shares netted for employee taxes are summarized in the table below (in millions):

 

 

Nine Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

Shares withheld for taxes

 

 

2

 

 

 

2

 

 

 

1

 

 

 

1

 

Fair value of shares withheld

 

$

67

 

 

$

42

 

 

$

74

 

 

$

89

 

19


Employee Stock Purchase Plan

The following table summarizes activity related to the purchase rights issued under the ESPP (in millions):

 

 

Nine Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

Shares issued under the ESPP

 

 

4

 

 

 

4

 

 

 

1

 

 

 

2

 

Proceeds from issuance of shares

 

$

85

 

 

$

80

 

 

$

54

 

 

$

49

 

Stock-Based Compensation Expense

Stock-based compensation expense is included in the condensed consolidated statements of operations as follows (in millions):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Cost of product revenues

 

$

 

 

$

1

 

 

$

2

 

 

$

3

 

 

$

1

 

 

$

 

 

$

2

 

 

$

1

 

Cost of hardware maintenance and other services revenues

 

 

3

 

 

 

3

 

 

 

8

 

 

 

10

 

 

 

3

 

 

 

2

 

 

 

5

 

 

 

5

 

Sales and marketing

 

 

16

 

 

 

20

 

 

 

53

 

 

 

64

 

 

 

17

 

 

 

16

 

 

 

35

 

 

 

33

 

Research and development

 

 

11

 

 

 

14

 

 

 

38

 

 

 

46

 

 

 

13

 

 

 

12

 

 

 

28

 

 

 

24

 

General and administrative

 

 

8

 

 

 

8

 

 

 

24

 

 

 

26

 

 

 

6

 

 

 

8

 

 

 

12

 

 

 

15

 

Total stock-based compensation expense

 

$

38

 

 

$

46

 

 

$

125

 

 

$

149

 

 

$

40

 

 

$

38

 

 

$

82

 

 

$

78

 

Income tax benefit for stock-based compensation

 

$

5

 

 

$

10

 

 

$

23

 

 

$

30

 

Income tax benefit for stock-based compensation expense

 

$

4

 

 

$

5

 

 

$

8

 

 

$

10

 

As of January 26, 2018,October 25, 2019, total unrecognized compensation expense related to our equity awards was $239$339 million, which is expected to be recognized on a straight-line basis over a weighted-average remaining service period of 2.22.3 years.

16


Stock Repurchase Program

Our Board of Directors has authorized the repurchase of up to $9.6$13.6 billion of our common stock. Under this program, which we may suspend or discontinue at any time, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, andin privately negotiated transactions, at pricesthrough accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management.

 

The following table summarizes activity related to this program for the ninesix months ended January 26, 2018October 25, 2019 (in millions, except per share amounts):

 

Number of shares repurchased

 

 

10

 

 

 

14

 

Average price per share

 

$

46.37

 

 

$

55.06

 

Aggregate purchase price

 

$

450

 

 

$

750

 

Remaining authorization at end of period

 

$

344

 

 

$

1,139

 

 

The aggregate purchase price of our stock repurchases for the ninesix months ended January 26, 2018October 25, 2019 consisted of $450$750 million of open market purchases, of which $224$398 million and $226$352 million were allocated to additional paid-in capital and retained earnings, respectively.

Since the May 13, 2003 inception of our stock repurchase program through January 26, 2018,October 25, 2019, we repurchased a total of 279327 million shares of our common stock at an average price of $33.31$38.20 per share, for an aggregate purchase price of $9.3$12.5 billion.

Dividends

The following is a summary of our activities related to dividends on our common stock (in millions, except per share amounts):

 

 

Nine Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

Dividends per share declared

 

$

0.60

 

 

$

0.57

 

 

$

0.96

 

 

$

0.80

 

Dividend payments allocated to additional paid-in capital

 

$

53

 

 

$

88

 

 

$

226

 

 

$

207

 

Dividend payments allocated to retained earnings (accumulated deficit)

 

$

108

 

 

$

69

 

Dividend payments allocated to retained earnings

 

$

 

 

$

 

20


On February 14, 2018,November 13, 2019, we declared a cash dividend of $0.20$0.48 per share of common stock, payable on April 25, 2018January 22, 2020 to holders of record as of the close of business on April 6, 2018.January 3, 2020. The timing and amount of future dividends will depend on market conditions, corporate business and financial considerations and regulatory requirements. All dividends declared have been determined by us to be legally authorized under the laws of the state in which we are incorporated.

Retained Earnings (Accumulated Deficit)

A reconciliation of retained earnings (accumulated deficit) is as follows (in millions):

Balance as of April 28, 2017

 

$

40

 

Net loss

 

 

(195

)

Repurchases of common stock

 

 

(226

)

Dividends

 

 

(108

)

Balance as of January 26, 2018

 

$

(489

)

 

Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) (AOCI) by component, net of tax, are summarized below (in millions):

 

 

 

Foreign

Currency

Translation

Adjustments

 

 

Defined

Benefit

Obligation

Adjustments

 

 

Unrealized

Gains

(Losses) on

Available-

for-Sale

Securities

 

 

Total

 

Balance as of April 28, 2017

 

$

(29

)

 

$

 

 

$

 

 

$

(29

)

Other comprehensive income, net of tax

 

 

3

 

 

 

(1

)

 

 

(15

)

 

 

(13

)

Balance as of January 26, 2018

 

$

(26

)

 

$

(1

)

 

$

(15

)

 

$

(42

)

 

 

Foreign

Currency

Translation

Adjustments

 

 

Defined

Benefit

Obligation

Adjustments

 

 

Unrealized

Gains

(Losses) on

Available-

for-Sale

Securities

 

 

Unrealized

Gains

(Losses) on

Derivative

Instruments

 

 

Total

 

Balance as of April 26, 2019

 

$

(34

)

 

$

(3

)

 

$

(7

)

 

$

1

 

 

$

(43

)

Other comprehensive income (loss), net of tax

 

 

(2

)

 

 

 

 

 

22

 

 

 

1

 

 

 

21

 

Amounts reclassified from AOCI, net of tax

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

(14

)

Total other comprehensive income

 

 

(2

)

 

 

 

 

 

8

 

 

 

1

 

 

 

7

 

Balance as of October 25, 2019

 

$

(36

)

 

$

(3

)

 

$

1

 

 

$

2

 

 

$

(36

)

 

17


The amounts reclassified outDuring the first six months of accumulatedfiscal 2020, realized gains of $14 million from the sale of available-for-sale securities were recorded in other comprehensive income, (loss) are as follows (in millions):net on our condensed consolidated statements of operations.

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

 

 

 

Amounts Reclassified from AOCI

 

 

Amounts Reclassified from AOCI

 

 

Statements of

Operations Classification

Recognized (gains) losses on defined benefit

    obligations

 

$

(1

)

 

$

 

 

$

(2

)

 

$

1

 

 

Operating expenses

Realized gains on cash flow hedges

 

 

 

 

 

(5

)

 

 

 

 

 

(6

)

 

Net revenues

Total reclassifications

 

$

(1

)

 

$

(5

)

 

$

(2

)

 

$

(5

)

 

 

 

 

11. Derivatives and Hedging Activities

We use derivative instruments to manage exposures to foreign currency risk. Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. The maximum length of time over which forecasted foreign currency denominated revenues are hedged is six12 months. The program is not designated for trading or speculative purposes. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of our agreements with them. We seek to mitigate such risk by limiting our counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. We also have in place master netting arrangements to mitigate the credit risk of our counterparties and to potentially reduce our losses due to counterparty nonperformance. We present our derivative instruments as net amounts in our condensed consolidated balance sheets. The gross and net fair value amounts of such instruments were not material as of January 26, 2018October 25, 2019 or April 28, 2017. We did not recognize any gains or losses in earnings due to hedge ineffectiveness for any period presented.26, 2019. All contracts have a maturity of less than six12 months.

The notional amount of our outstanding U.S. dollar equivalent foreign currency exchange forward contracts consisted of the following (in millions):

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

Forward contracts purchased

 

$

305

 

 

$

103

 

Balance Sheet Contracts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward contracts sold

 

$

125

 

 

$

165

 

 

$

114

 

 

$

121

 

Forward contracts purchased

 

$

531

 

 

$

257

 

 

$

145

 

 

$

363

 

As of January 26, 2018 and April 28, 2017, there were no instruments designated as cash flow hedges outstanding.

The effect of cash flow hedges recognized in net revenues is presented in theon our condensed consolidated statements of comprehensive income (loss) andoperations was immaterial in Note 10 – Stockholders’ Equity.all periods presented.

The effect of derivative instruments not designated as hedging instruments recognized in other income, (expense), net on our condensed consolidated statements of operations was as follows (in millions):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

 

Gain (Loss) Recognized into Income

 

 

Gain (Loss) Recognized into Income

 

Foreign currency exchange contracts

 

$

(12

)

 

$

2

 

 

$

(13

)

 

$

8

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

 

 

Gain (Loss) Recognized in Income

 

 

Gain (Loss) Recognized in Income

 

Foreign currency exchange contracts

 

$

 

 

$

2

 

 

$

(3

)

 

$

12

 

 

21


 

12. Restructuring Charges

Management has previously approved severalIn the first quarter of fiscal 2020, we announced a restructuring actionsplan (the May 2019 Plan) to streamline our business, eliminatereduce costs and redirect resources to our highest return activities, which included a reduction in our global workforce by approximately 2%. Charges related to the plan consisted primarily of employee severance-related costs. Substantially all activities under the plan have been completed.

Management has previously approved several restructuring actions, including the March 2016May 2018 Plan and the November 2016April 2019 Plan, under which we reduced our global workforce by approximately 11%less than 2%, and 6%approximately 1%, respectively. We completed all workforce related activities under these plans as of the end of fiscal 2017. Charges related to our restructuring plans consisted primarily of employee severance-related costs. The remaining balanceSubstantially all activities under the May 2018 Plan were completed as of January 26, 2018 principally relatesthe end of fiscal 2019. We expect to lease obligations that will be paid over their remaining terms.complete all activities associated with the April 2019 plan by the end of the third quarter of fiscal 2020 with no significant additional charges.

18


Activities related to our restructuring plans are summarized as follows (in millions):

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

 

January 26, 2018

 

 

January 27, 2017

 

 

October 25, 2019

 

 

October 26, 2018

 

 

 

 

November 2016

Plan

 

 

March 2016

Plan

 

 

May 2019

Plan

 

 

April 2019

Plan

 

 

November 2016

Plan

 

 

Total

 

 

May 2018

Plan

 

 

November 2016

Plan

 

 

Total

 

 

 

Balance at beginning of period

 

$

13

 

 

$

45

 

 

$

 

 

$

15

 

 

$

4

 

 

$

19

 

 

$

 

 

$

6

 

 

$

6

 

 

 

Net charges

 

 

21

 

 

 

 

 

 

 

 

 

21

 

 

 

19

 

 

 

 

 

 

19

 

 

 

Cash payments

 

 

(7

)

 

 

(45

)

 

 

(19

)

 

 

(12

)

 

 

 

 

 

(31

)

 

 

(17

)

 

 

(1

)

 

 

(18

)

 

 

Other

 

 

 

 

 

 

 

 

(4

)

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

6

 

 

$

 

 

$

2

 

 

$

3

 

 

$

 

 

$

5

 

 

$

2

 

 

$

5

 

 

$

7

 

 

 

 

Upon adoption of the new lease accounting standard in the first quarter of fiscal 2020, the remaining lease-related liabilities associated with the November 2016 Plan were recognized as a reduction to the lease right-of-use asset recorded at transition.

 

13. Income Taxes

Our effective tax rates for the periods presented were as follows:

 

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

Effective tax rates

 

 

122.6

%

 

 

23.5

%

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

Effective tax rates

 

 

17.2

%

 

 

7.3

%

 

Our effective tax rates reflect the impact of a significant amount of our earnings, primarily income from our European operations, which are headquartered in the Netherlands, being taxed in foreign jurisdictions at rates below the United States (U.S.) statutory tax rate. The differences in effective tax rates for the ninesix months ended JanuaryOctober 25, 2019 and October 26, 2018 and January 27, 2017 were primarily due to discrete tax benefits related to the impactsadoption of recent U.S.the new revenue standard in fiscal 2019, the discrete tax reform andcharge on the sale of certain buildings and land in Sunnyvale, California.California in fiscal 2020 and the differences in discrete benefits for stock-based compensation.

 

On December 22, 2017, the 2017 Tax Reform Reconciliation Act, originally referred to as the Tax Cuts and Jobs Act (“TCJA”) was enacted into law and is effective for the third quarter of our fiscal 2018.law. The TCJA made significant changes to the U.S. corporate income tax system including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, the imposition of a one-time transition tax on deferred foreign earnings, and a shift to a modified territorial tax regime. ASC 740, Income Taxes, requires that the impactcreation of new taxes on income taxes due to a change in legislation be recognized in the period of enactment. Given the timing and pace of regulatory guidance, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 118, which allows for the recording of provisional amounts related to U.S. tax reform and subsequent related adjustments during a measurement period.  

certain foreign-sourced earnings. As of JanuaryApril 26, 2018,2019, we have not fullyhad completed the accounting for the tax impacts of the TCJA, and have recorded provisional tax charges based on reasonable estimates for the transition tax on our total post-1986 foreign earnings and profits (“E&P”), and for the remeasurement of deferred tax assets and liabilities based on the new corporate tax rate. The TCJA also includes provisions for a global minimum tax on intangible low-taxed income (“GMT”) of foreign subsidiaries, a base erosion anti-abuse tax on certain intercompany payments, and beneficial tax treatment for foreign derived intangible income. These provisions will be effective for us beginning in our fiscal 2019. Wehowever, we will continue to refine provisional balances and make adjustments duringassess the measurement period based on the issuanceimpact of further regulatory guidance, changes in interpretations, and the collection and analysis of additional information; these adjustments could be material to our financial statements.  The provisional amounts recorded during the current quarter are explained below.

The TJCA decreased the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018.  For fiscal 2018, this decrease results in a blended statutory tax rate of 30.5%. As a result of the tax rate change, we remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future periods and recorded a $117 million discrete tax expense for the quarter. The final remeasurement impact could vary from the provisional amount if actual future activities impacting deferred tax balances differ from our estimates.  

The TCJA imposes a mandatory, one-time transition tax on accumulated foreign E&P not previously subject to U.S. income tax at a rate of 15.5% on earnings to the extent of foreign cash and other liquid assets, and 8% on the remaining earnings. During the quarter, we recorded a $739 million discrete tax expense for the estimated U.S. federal and state income tax impacts of the transition tax.  Our estimates may change with further guidance from U.S. federal and state tax authorities or other regulatory bodies,on our fourth quarter activities,business and additional analyses that we expect to complete during the measurement period, with respect to various components of the computations. We intend to make the election to pay the one-time transition tax over a period of eight years.

Under the TCJA, the GMT provision taxes foreign income in excess of a deemed return on tangible assets of foreign corporations. Under U.S. GAAP, companies are allowed to make an accounting policy election to either (i) account for GMT as a component of tax expenseconsolidated financial statements, and recognize any adjustments in the period in which they are determined.

During fiscal 2019, we adopted the new revenue accounting standard and for the six months ended October 26, 2018, we recognized a company is subject$34 million discrete tax benefit for adjustments to certain intercompany transactions resulting from the rules (the “period cost method”), or (ii) account for GMT in a company’s measurement of deferred taxes (the “deferred method”). Because of the complexityretrospective application of the new tax rules, we are continuing to evaluate this provision and the application of ASC 740 and have not yet made anrevenue accounting policy election.

19


As a part of the provisional estimates recorded during the quarter, we considered the impacts of the TCJA and reviewed our projected global cash requirements, and have determined that certain historical and future foreign earnings will no longer be indefinitely reinvested.

During the quarter ended January 26, 2018, we also recorded a $72 million discrete tax expense related to the sale of certain buildings and land in Sunnyvale, California. The expense partially relates to gains triggered by the termination of a fiscal 2016 sale-leaseback arrangement.  The remainder of the expense relates to the sale of buildings and land in the current quarter.  standard.

As of January 26, 2018,October 25, 2019, we had $338$294 million of gross unrecognized tax benefits, and $303 million has been recorded in other long-term liabilities inclusivebenefits. Inclusive of penalties, interest and indirect benefits. Unrecognizedcertain income tax benefits, of $284$246 million including penalties, interest and indirect benefits, would affect our provision for income taxes if recognized. As result of the U.S. tax reform, werecognized, and $251 million has been recorded $113 million of gross unrecognized tax benefits.in other long-term liabilities.

We are currently undergoing federalstate income tax audits in the U.S. and audits in several foreign tax jurisdictions. Transfer pricing calculations are key issues under audits in various jurisdictions, and are often subject to dispute and appeals. The IRS has concluded the examination of our tax returns for our fiscal years through 2010. The IRS commenced the examination of our federal income tax returns for our fiscal years 2012 and 2013 in August 2016.2013.

On22


In September 17, 2010, the Danish Tax Authorities issued a decision concluding that distributions declared in 2005 and 2006 fromby our Danish subsidiary were subject to Danish at-source dividend withholding tax. We do not believe that our Danish subsidiary is liable for such withholding tax and filed an appeal with the Danish Tax Tribunal to that effect. OnTribunal. In December 19, 2011, the Danish Tax Tribunal issued a ruling that our Danish subsidiary was not liable for Danish withholding tax.in favor of NetApp. The Danish tax examination agency appealed tothis decision at the Danish High Court (DHC) in March 2012. In February 2016, the Danish High Court referred the case toDHC requested a preliminary ruling from the Court of Justice of the European Union where it was(CJEU). Parties were heard before the court in October 2017. We expectIn March 2018, the court to issue theirAdvocate General issued an opinion and judgmentwhich was largely in favor of NetApp. The CJEU was not bound by the endopinion of fiscal 2018.the Advocate General and issued its preliminary ruling in February 2019. The CJEU ruling did not preclude the Danish Tax Authorities from imposing withholding tax on distributions based on the benefits of certain European Union directives. The preliminary ruling will be reviewed and may be subjected to additional briefing by the DHC. Once complete, the DHC will then issue its final decision. While the timing and outcome of a final decision on this matter is uncertain, we believe it is more likely than not that our distributions were not subject to withholding tax and we intend to vigorously defend any withholding tax claims by the Danish Tax Authorities.

We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude, certain statutes of limitations will lapse, or both. As a result of uncertainties regarding tax audits and their possible outcomes, an estimate of the range of possible impacts to unrecognized tax benefits in the next twelve months cannot be made at this time.

 

14. Net Income (Loss) per Share

The following is a calculation of basic and diluted net income (loss) per share (in millions, except per share amounts):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(506

)

 

$

146

 

 

$

(195

)

 

$

319

 

Net income

 

$

243

 

 

$

241

 

 

$

346

 

 

$

524

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in basic computation

 

 

268

 

 

 

274

 

 

 

269

 

 

 

277

 

 

 

235

 

 

 

258

 

 

 

237

 

 

 

260

 

Dilutive impact of employee equity award plans

 

 

 

 

 

7

 

 

 

 

 

 

5

 

 

 

1

 

 

 

6

 

 

 

3

 

 

 

7

 

Shares used in diluted computation

 

 

268

 

 

 

281

 

 

 

269

 

 

 

282

 

 

 

236

 

 

 

264

 

 

 

240

 

 

 

267

 

Net Income (Loss) per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.89

)

 

$

0.53

 

 

$

(0.72

)

 

$

1.15

 

 

$

1.03

 

 

$

0.93

 

 

$

1.46

 

 

$

2.02

 

Diluted

 

$

(1.89

)

 

$

0.52

 

 

$

(0.72

)

 

$

1.13

 

 

$

1.03

 

 

$

0.91

 

 

$

1.44

 

 

$

1.96

 

PotentialNaN million and 3 million potential shares from outstanding employee equity awards totaling 15 million and 4 million for the three months ended January 26, 2018 and January 27, 2017, respectively, and 17 million and 8 million for the nine months ended January 26, 2018 and January 27, 2017, respectively, were excluded from the diluted net income (loss) per share calculations for the three and six months ended October 25, 2019, respectively, as their inclusion would have been anti-dilutive.anti-dilutive, while 0 potential shares were excluded from the calculation for the three or six months ended October 26, 2018.

 

15. Segment, Geographic, and Significant Customer Information

We operate in one1 industry segment: the design, manufacturing, marketing, and technical support of high-performance storage and data management solutions. We conduct business globally, and our sales and support activities are managed on a geographic basis. Our management reviews financial information presented on a consolidated basis, accompanied by disaggregated information it receives from our internal management system about revenues by geographic region, based on the location from which the customer relationship is managed, for purposes of allocating resources and evaluating financial performance. We do not allocate costs of revenues, research and development, sales and marketing, or general and administrative expenses to our geographic regions in this internal management reporting because management does not review operations or operating results, or make planning decisions, below the consolidated entity level.

2023


Summarized revenues by geographic region based on information from our internal management system and utilized by our Chief Executive Officer, who is considered our Chief Operating Decision Maker, is as follows (in millions):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

United States, Canada and Latin America (Americas)

 

$

823

 

 

$

767

 

 

$

2,345

 

 

$

2,271

 

 

$

771

 

 

$

868

 

 

$

1,406

 

 

$

1,711

 

Europe, Middle East and Africa (EMEA)

 

 

487

 

 

 

460

 

 

 

1,319

 

 

 

1,243

 

 

 

402

 

 

 

429

 

 

 

804

 

 

 

859

 

Asia Pacific (APAC)

 

 

213

 

 

 

177

 

 

 

606

 

 

 

524

 

 

 

198

 

 

 

220

 

 

 

397

 

 

 

421

 

Net revenues

 

$

1,523

 

 

$

1,404

 

 

$

4,270

 

 

$

4,038

 

 

$

1,371

 

 

$

1,517

 

 

$

2,607

 

 

$

2,991

 

Americas revenues consist of sales to Americas commercial and U.S. public sector markets. Sales to customers inside the U.S. were $739$703 million and $684$789 million during the three months ended JanuaryOctober 25, 2019 and October 26, 2018, and January 27, 2017, respectively, and were $2,115$1,277 million and $2,047$1,550 million during the ninesix months ended JanuaryOctober 25, 2019 and October 26, 2018, and January 27, 2017, respectively.

The majority of our assets, excluding cash, cash equivalents, short-term investments and accounts receivable, were attributable to our domestic operations. The following table presents cash, cash equivalents and short-term investments held in the U.S. and internationally in various foreign subsidiaries (in millions):

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

U.S.

 

$

562

 

 

$

425

 

 

$

125

 

 

$

159

 

International

 

 

5,057

 

 

 

4,496

 

 

 

2,862

 

 

 

3,740

 

Total

 

$

5,619

 

 

$

4,921

 

 

$

2,987

 

 

$

3,899

 

With the exception of property and equipment, we do not identify or allocate our long-lived assets by geographic area. The following table presents property and equipment information for geographic areas based on the physical location of the assets (in millions):

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

U.S.

 

$

548

 

 

$

593

 

 

$

559

 

 

$

572

 

International

 

 

193

 

 

 

206

 

 

 

187

 

 

 

187

 

Total

 

$

741

 

 

$

799

 

 

$

746

 

 

$

759

 

The following customers, each of which is a distributor, accounted for 10% or more of our net revenues:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Arrow Electronics, Inc.

 

 

22

%

 

 

22

%

 

 

23

%

 

 

21

%

 

 

24

%

 

 

24

%

 

 

24

%

 

 

23

%

Tech Data Corporation (previously presented as Avnet, Inc.)

 

 

19

%

 

 

20

%

 

 

19

%

 

 

20

%

Tech Data Corporation

 

 

21

%

 

 

21

%

 

 

21

%

 

 

19

%

The following customers accounted for 10% or more of accounts receivable:

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Arrow Electronics, Inc.

 

 

11

%

 

 

15

%

 

 

11

%

 

 

11

%

Tech Data Corporation (previously presented as Avnet, Inc.)

 

 

11

%

 

 

14

%

Tech Data Corporation

 

 

20

%

 

 

24

%

 

 

16. Commitments and Contingencies

Operating Leases

We lease various equipment, vehicles and office space in the U.S. and internationally. Future annual minimum lease payments under non-cancelable operating leases with an initial term in excess of one year totaled $198 million as of January 26, 2018.

21


Purchase Orders and Other Commitments

In the ordinary course of business, we make commitments to third-party contract manufacturers to manage manufacturer lead times and meet product forecasts, and to other parties to purchase various key components used in the manufacturing of our products. A significant portion of our reported purchase commitments arising from these agreements consists of firm, non-cancelable, and unconditional commitments. As of January 26, 2018,October 25, 2019, we had $387$447 million in non-cancelable purchase commitments for inventory. We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. As of January 26, 2018October 25, 2019 and April 28, 2017,26, 2019, such liability amounted to $11$13 million and $10$16 million, respectively, and is included in accrued expenses in our condensed consolidated balance sheets. To the extent that such forecasts are not achieved, our commitments and associated accruals may change.

24


In addition to inventory commitments with contract manufacturers and component suppliers, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not yet received goods or services. As of January 26, 2018,October 25, 2019, we had $15$5 million in construction related obligations and $222$244 million in other purchase obligations.

Financing Guarantees

While most of our arrangements for sales include short-term payment terms, from time to time we provide long-term financing to creditworthy customers. We have generally sold receivables financed through these arrangements on a non-recourse basis to third party financing institutions within 10 days of the contracts’ dates of execution, and we classify the proceeds from these sales as cash flows from operating activities in our condensed consolidated statements of cash flows. We account for the sales of these receivables as “true sales” as defined in the accounting standards on transfers of financial assets, as we are considered to have surrendered control of these financing receivables. Provided all other revenue recognition criteria have been met, we recognize product revenues for these arrangements, net of any payment discounts from financing transactions, upon product acceptance. We sold $62$34 million and $142$43 million of receivables during the ninesix months ended JanuaryOctober 25, 2019 and October 26, 2018, and January 27, 2017, respectively.

In addition, we enter into arrangements with leasing companies for the sale of our hardware systems products. These leasing companies, in turn, lease our products to end-users. The leasing companies generally have no recourse to us in the event of default by the end-user and we recognize revenue upon delivery to the end-user customer, if all other revenue recognition criteria have been met.

Some of the leasing arrangements described above have been financed on a recourse basis through third-party financing institutions. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. Where we provide a guarantee for recourse leases and collectability is probable, we defer revenues subject toaccount for these transactions as sales type leases. If collectability is not probable, the industry-specific softwarecash received is recorded as a deposit liability and revenue recognition guidance and recognize revenues for non-software deliverables in accordance with our multiple deliverable revenue arrangement policy. In connection with certain recourse financing arrangements, we receive advance payments associated with undelivered elements that are subject to customer refund rights. We defer revenue associated with these advance paymentsis deferred until the related refund rights expire andarrangement is deemed collectible. For leases that we perform the services.are not a party to, other than providing recourse, we recognize revenue when control is transferred. As of January 26, 2018October 25, 2019 and April 28, 2017,26, 2019, the aggregate amount by which such contingencies exceeded the associated liabilities was not significant. To date, we have not experienced significant losses under our lease financing programs or other financing arrangements.arrangements.

We have entered into service contracts with certain of our end-user customers that are supported by third-party financing arrangements. If a service contract is terminated as a result of our non-performance under the contract or our failure to comply with the terms of the financing arrangement, we could, under certain circumstances, be required to acquire certain assets related to the service contract or to pay the aggregate unpaid financing payments under such arrangements. As of January 26, 2018,October 25, 2019, we have not been required to make any payments under these arrangements, and we believe the likelihood of having to acquire a material amount of assets or make payments under these arrangements is remote. The portion of the financial arrangement that represents unearned services revenue is included in deferred revenue and financed unearned services revenue in our condensed consolidated balance sheets.

Legal Contingencies

When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency.

On August 14, 2019, a purported securities class action lawsuit was filed in the United States District Court for the Northern District of California, naming as defendants NetApp and certain of our executive officers. The complaint alleges that the defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5, by making materially false or misleading statements with respect to our financial guidance for fiscal 2020, as provided on May 22, 2019. Members of the alleged class are purchasers of the Company’s stock between May 22, 2019 and August 1, 2019, the date we provided revised financial guidance for fiscal 2020. The complaint alleges unspecified damages based on the decline in the market price of our shares following the issuance of the revised guidance on August 1, 2019. We believe the complaint is without merit and intend to defend the case vigorously.

We are subject to various other legal proceedings and claims that arise in the normal course of business. We may, from time to time, receive claims that we are infringing third parties’ intellectual property rights, including claims for alleged patent infringement brought by non-practicing entities. We are currently involved in patent litigations brought by non-practicing entities and other third parties. We believe we have strong arguments that our products do not infringe and/or the asserted patents are invalid, and we intend to vigorously defend against the plaintiffs’ claims. However, there is no guarantee that we will prevail at trial and if a jury were to find that our products infringe, we could be required to pay significant monetary damages, and may cause product shipment delays, require us to redesign our products, or require us to enter into royalty or licensing agreements.

2225


Although management at present believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, results of operations, cash flows, or overall trends, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or other events could occur. Unfavorable resolutions could include significant monetary damages. In addition, in matters for which injunctive relief or other conduct remedies are sought, unfavorable resolutions could include an injunction or other order prohibiting us from selling one or more products at all or in particular ways or requiring other remedies. An unfavorable outcome may result in a material adverse impact on our business, results of operations, financial position, and overall trends. NoNaN material accrual has been recorded as of January 26, 2018October 25, 2019 related to such matters.

 

 

 

 

2326


ItemItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This section and other parts of this Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements also can be identified by words such as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements are not guarantees of future performance and the actual results of NetApp, Inc. (“we,” “us,” or the “Company”) may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with our consolidated financial statements as of and for the fiscal year 2017ended April 26, 2019, and the notes thereto, contained in our Annual Report on Form 10-K, and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

 

 

 

24

27


Overview

Our Company

We areNetApp is the data authority for hybrid cloud environments.cloud. We provide a full range of hybrid cloud data services that simplify management of applications and data across cloud and on-premises environments to accelerate digital transformations.transformation. Together with our partners, we empower global organizations to unleash the full potential of their data to expand customer touchpoints, foster greater innovation and optimize their operations.

NetApp delivers a Data Fabric built for the data-driven world. Our Data Fabric approach simplifies the integration and integratesorchestration of data managementfor applications and analytics in clouds, across cloudclouds and on-premises to accelerate digital transformation, enablingtransformation. We deliver a Data Fabric with consistent data services for data visibility and insights, data access and control, and data protection and security, that unleashes the power of data to achieve a new competitive advantage.

We focus on delivering an exceptional customer experience to become our customers’ preferred data partner. NetApp’s unique approach to data services enables organizations to inspire innovation with the cloud, build clouds to accelerate new services, and modernize IT architecture with cloud-connected flash.

With NetApp products and solutions, customers can:

Continually fuel business growth by delivering data-rich customer experiences through new application deployments that easily use data and services regardless of where they reside or in what form.

Accelerate digital transformation by developing a next-generation, cloud-architected infrastructure that manages data and services as one integrated resource supporting both public and private clouds.

Free the resources necessary to fund transformation by deploying the industry’s leading flash storage solution, which is highly efficient and scales from the edge to the core to the cloud.

Customers are attracted by the speed and scale benefits of the public cloud but need new data management capabilities to keep control of data as it moves beyond the walls of the enterprise. NetApp believes the hybrid cloud is fast becoming the dominant model for enterprise IT. Our Data Fabric approach enables our customers to manage, secure and protect their data from on-premises to public to hybrid clouds, all at the scale needed to accommodate the exponential data growth of the digital world. It delivers consistent

Budget constraints and integrated data management services and applications for data visibility and insights, data access and control, and data protection and security.

We focus on delivering an exceptional customer experience to become their preferred data partner. Our products and solutions portfolio empowersskill imbalances lead our customers to harnessseek help in integrating, deploying and managing the powersolutions they need to stay competitive. This drives demand for converged and hyper-converged infrastructure solutions. FlexPod is the converged infrastructure of choice for many of the hybrid cloud, build a next-generation data center,largest enterprises around the globe. Customers can break free from the limits of first-generation HCI with NetApp HCI and modernize storage through data management. We will continue to extend our cloudattain guaranteed performance with high levels of flexibility, scale, automation, and integration and hybrid cloud leadership by expanding our product offerings and services to match customer needs acrosswith the cloud and on-premises.

Our unified scale-out fabric-attached storage (FAS) platform is designed to meet the demanding requirements of shared infrastructures and cloud environments. Our FAS storage platform uses the NetApp Data ONTAP storage operating system to deliver integrated data protection, comprehensive data management, and built-in efficiency software for virtualized, shared infrastructures, cloud computing, and mixed workload business applications. Our E-Series high-performance storage area network platform is designed to meet demanding performance and capacity requirements of dedicated workloads, while retaining simplicity and an optimized price to performance ratio. Our SolidFire All-Flash Arrays deliver fully automated agility and guaranteed application performance at web scale so customers can achieve the next-generation data center.Fabric.

Flash plays a key role in customers’ digital transformation efforts as they seek to gain advantage through greater speed, responsiveness and value from key business applications - all while lowering total cost of ownership. All-flash array technology is the de facto choice for primary application workloads as customers seek performance and economic benefits byfrom replacing hard disk installations. With oura highly differentiated and broad portfolio of all-flash and hybrid array portfolio, including our AFF-Series, EF-Series and SolidFire SF-Series products, weofferings, NetApp is well positioned to enable customers to modernize storageaccomplish this transition.

To provide visibility into our transition from older products to our newer, higher growth products and data management to boost performance in their traditional data centers, while mapping out their move to a hybrid cloud.

Our hybrid flash storage serves customers who wantclarity into the option to deploy the speeddynamics of flash storage where they need it while using more affordable hard disk drives to address capacity requirements. Our hybrid arrays include the FAS series of unified storage systems and the E-Series of block storage offerings.

Weour product revenue, we group our products by “Strategic” and “Mature” solutions. As our product portfolio evolves, market dynamics change, and management continues to assess our largest growth opportunities, we periodically change how we group certain products. Beginning in fiscal 2020, Strategic includes All-flash FAS (AFF) products, including all related add-on hardware and operating system (OS) software, private cloud solutions include Clustered ONTAP, branded E-Series,(including SolidFire, AltaVaultconverged and hyper-converged infrastructure products, StorageGrid), enterprise software license agreements (ELAs) and other optional add-on software products. Mature solutions include 7-mode OnTap,now includes Hybrid FAS products, including all related add-on hardware and related operating system (OS)OS software, and original equipment manufacturers (OEM) products. Both ourproducts, and branded E-Series. Prior to this grouping change, Hybrid FAS products and branded E-Series were included in Strategic, while all add-on hardware and OS software were included in Mature. For comparability, Strategic and Mature and Strategic product lines include a mix of disk, hybrid and all flash storage media.revenues presented for the prior year periods have been recast based on the revised groupings.

In addition to our products and solutions, we provide a variety of services to our customers, including software maintenance, hardware maintenance and other services including professional services, global support solutions, and customer education and training to help customers most effectively manage their data.training. Revenues generated by our Cloud Data Services offerings are included in software maintenance revenues.


2528


Financial Results and Key Performance Metrics Overview

The following table provides an overview of some of our key financial metrics (in millions, except per share amounts, percentages and cash conversion cycle):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Net revenues

 

$

1,523

 

 

$

1,404

 

 

$

4,270

 

 

$

4,038

 

 

$

1,371

 

 

$

1,517

 

 

$

2,607

 

 

$

2,991

 

Gross profit

 

$

941

 

 

$

851

 

 

$

2,677

 

 

$

2,477

 

 

$

925

 

 

$

974

 

 

$

1,741

 

 

$

1,937

 

Gross profit margin percentage

 

 

62

%

 

 

61

%

 

 

63

%

 

 

61

%

 

 

67

%

 

 

64

%

 

 

67

%

 

 

65

%

Income from operations

 

$

471

 

 

$

183

 

 

$

838

 

 

$

418

 

 

$

296

 

 

$

286

 

 

$

400

 

 

$

540

 

Income from operations as a percentage of net revenues

 

 

31

%

 

 

13

%

 

 

20

%

 

 

10

%

 

 

22

%

 

 

19

%

 

 

15

%

 

 

18

%

Net income (loss)

 

$

(506

)

 

$

146

 

 

$

(195

)

 

$

319

 

Diluted net income (loss) per share

 

$

(1.89

)

 

$

0.52

 

 

$

(0.72

)

 

$

1.13

 

Net income

 

$

243

 

 

$

241

 

 

$

346

 

 

$

524

 

Diluted net income per share

 

$

1.03

 

 

$

0.91

 

 

$

1.44

 

 

$

1.96

 

Operating cash flows

 

$

420

 

 

$

235

 

 

$

984

 

 

$

621

 

 

$

(53

)

 

$

165

 

 

$

257

 

 

$

491

 

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Deferred revenue and financed unearned services revenue

 

$

3,269

 

 

$

3,342

 

 

$

3,468

 

 

$

3,668

 

Cash conversion cycle (days)

 

 

(11

)

 

 

15

 

 

 

(4

)

 

 

3

 

 

Stock Repurchase Program and Dividend Activity

During the first ninesix months of fiscal 2018,2020, we repurchased 1014 million shares of our common stock at an average price of $46.37$55.06 per share, for an aggregate of $450$750 million. We also declared aggregate cash dividends of an aggregate of $0.60$0.96 per share in that period, for which we paid an aggregate of $161$226 million.

Senior Notes RedemptionMaturity

On November 3, 2017,September 27, 2019, we extinguishedmade an aggregate cash payment of $400 million to extinguish our 2.00% Senior Notes due December 2017 for an aggregateat maturity. This repayment was funded through the sale of short-term commercial paper notes issued under our existing program and cash redemption price of $751 million, plus accrued and unpaid interest.on hand.

Real Estate TransactionsTransaction

OnIn September 8, 2017, we entered into an agreement to sell certain land and buildings for a total of $306 million,located in Sunnyvale, California, through two separate and independent closings. On December 7, 2017,closings, the first of which was completed in the third quarter of fiscal 2018. The remaining properties, consisting of land, were classified as assets held for sale, and included as other current assets in our condensed consolidated balance sheets as of April 26, 2019. On August 29, 2019, the second closing date,occurred and we consummated the sale of propertiesthe land, with a net book value of $66$53 million, forand received cash proceeds of $210$96 million, resulting in a gain, net of direct selling costs, of $142$38 million.

In fiscal 2016, we entered into a sale-leaseback arrangement of certain of our land and buildings. The arrangement did not qualify for sale-leaseback accounting and instead was accounted for as a financing transaction. In December 2017, we terminated the leases and recorded a non-cash sale of properties with a net book value of $54 million, the extinguishment of $130 million in financing obligations, and a gain of $76 million.

Tax Reform

On December 22, 2017, the 2017 Tax Reform Reconciliation Act, originally referred to as the Tax Cuts and Jobs Act (TCJA), was enacted into law. This tax reform legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate to 21% effective January 1, 2018, among others. Our GAAP net loss in the third quarter and first nine months of fiscal 2018 includes a one-time tax reform-related provisional charge of $856 million.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.

26


The summary of our significant accounting policies is included under Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our fiscal 20172019 Form 10-K. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. There have been no material changes to the critical accounting policies and estimates as filed in such report, except with respectreport.

New Accounting Standards

See Note 1 – Description of Business and Significant Accounting policies for the impact to Income Taxes. As a partour financial statements of the provisional estimates recorded during the quarter in response to the enactmentadoption of the TCJA, we consideredaccounting standard Leases (ASC 842) in the impactsfirst quarter of the act, reviewed our projected global cash requirements, and determined that certain historical and future foreign earnings will no longer be indefinitely reinvested, in contrast to our previous policy. Refer to Note 13 – Income Taxes of the Notes to Condensed Consolidated Financial Statements for additional details.fiscal 2020.

New Accounting Standards29


See Note 2 – Recent Accounting Standards Not Yet Effective of the Notes to Condensed Consolidated Financial Statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on our financial statements.

Results of Operations

Our fiscal year is reported as a 52- or 53-week year that ends on the last Friday in April. Fiscal years 20182020 and 2017, ending April 27, 2018 and April 28, 2017,2019 are each 52-week years, with 13 weeks in each of their quarters. Unless otherwise stated, references to particular years, quarters, months and periods refer to the Company’s fiscal years ended in April and the associated quarters, months and periods of those fiscal years.

The following table sets forth certain Condensed Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:

 

 

Three Months Ended

 

 

Nine Months Ended

 

Three Months Ended

 

 

Six Months Ended

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product

 

 

60

 

%

 

56

 

%

 

57

 

%

 

53

 

%

 

 

56

 

%

 

60

 

%

 

54

 

%

 

60

 

%

Software maintenance

 

 

16

 

 

 

17

 

 

 

17

 

 

 

18

 

 

 

 

19

 

 

 

16

 

 

 

19

 

 

 

16

 

 

Hardware maintenance and other services

 

 

24

 

 

 

27

 

 

 

26

 

 

 

29

 

 

 

 

25

 

 

 

24

 

 

 

26

 

 

 

25

 

 

Net revenues

 

 

100

 

 

 

100

 

 

 

100

 

 

 

100

 

 

 

 

100

 

 

 

100

 

 

 

100

 

 

 

100

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product

 

 

31

 

 

 

31

 

 

 

29

 

 

 

29

 

 

 

 

25

 

 

 

28

 

 

 

25

 

 

 

28

 

 

Cost of software maintenance

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

1

 

 

 

1

 

 

 

1

 

 

 

1

 

 

Cost of hardware maintenance and other services

 

 

7

 

 

 

8

 

 

 

8

 

 

 

9

 

 

 

 

7

 

 

 

7

 

 

 

7

 

 

 

7

 

 

Gross profit

 

 

62

 

 

 

61

 

 

 

63

 

 

 

61

 

 

 

 

67

 

 

 

64

 

 

 

67

 

 

 

65

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

28

 

 

 

27

 

 

 

30

 

 

 

30

 

 

 

 

28

 

 

 

27

 

 

 

30

 

 

 

27

 

 

Research and development

 

 

13

 

 

 

13

 

 

 

14

 

 

 

15

 

 

 

 

15

 

 

 

14

 

 

 

16

 

 

 

14

 

 

General and administrative

 

 

5

 

 

 

5

 

 

 

5

 

 

 

5

 

 

 

 

5

 

 

 

5

 

 

 

5

 

 

 

5

 

 

Restructuring charges

 

 

 

 

 

4

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

Gain on sale of properties

 

 

(14

)

 

 

(1

)

 

 

(5

)

 

 

 

 

Gain on sale or derecognition of assets

 

 

(3

)

 

 

 

 

 

(1

)

 

 

 

 

Total operating expenses

 

 

31

 

 

 

48

 

 

 

43

 

 

 

51

 

 

 

 

46

 

 

 

45

 

 

 

51

 

 

 

47

 

 

Income from operations

 

 

31

 

 

 

13

 

 

 

20

 

 

 

10

 

 

 

 

22

 

 

 

19

 

 

 

15

 

 

 

18

 

 

Other income (expense), net

 

 

1

 

 

 

 

 

 

1

 

 

 

 

 

Other income, net

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

Income before income taxes

 

 

32

 

 

 

13

 

 

 

20

 

 

 

10

 

 

 

 

22

 

 

 

19

 

 

 

16

 

 

 

19

 

 

Provision for income taxes

 

 

65

 

 

 

3

 

 

 

25

 

 

 

2

 

 

 

 

4

 

 

 

3

 

 

 

3

 

 

 

1

 

 

Net income (loss)

 

 

(33

)

%

 

10

 

%

 

(5

)

%

 

8

 

%

Net income

 

 

18

 

%

 

16

 

%

 

13

 

%

 

18

 

%

 

Percentages may not add due to rounding

Discussion and Analysis of Results of Operations

Overview

Net revenues for the thirdsecond quarter and first ninesix months of fiscal 20182020 were $1,523$1,371 million and $4,270$2,607 million, respectively, reflecting an increasea decrease of $119$146 million, or 8%10%, and $232$384 million, or 6%13%, respectively, compared to the corresponding periods of the prior year, primarily reflecting higherlower product revenues, partially offset by lower hardwareand to a lesser extent, the unfavorable impact of foreign exchange rate fluctuations in the quarter. Hardware maintenance and other services revenues also decreased compared to the corresponding periods of the prior year, offset by an increase in software maintenance revenues.

27


Gross profit as a percentage of net revenues for the thirdsecond quarter and the first ninesix months of fiscal 20182020 increased by one percentage point and onethree and a half percentage points and two percentage points, respectively, compared to the corresponding periods in fiscal 2017,2019, primarily reflecting higher margins on product revenues and hardware maintenance and other services revenues. Gross profit margins on product revenues increased fourby two and a half percentage points in the thirdsecond quarter of fiscal 20182020 and four percentage pointswere relatively flat in the first ninesix months of fiscal 20182020, compared to the corresponding periods of fiscal 2017, primarily due2019. Gross profit margins in both the second quarter and first six months of fiscal 2020 benefitted from a higher mix of All Flash FAS (AFF) product sales and cost reductions. These benefits were partially offset in the second quarter of fiscal 2020, and fully offset in the first six months of fiscal 2020, by high-margin revenue recognized related to an increasethe software license components of several ELAs in average selling price (ASP) and, to a lesser extent, the favorable impactcorresponding periods of foreign exchange rate fluctuations.fiscal 2019, which did not repeat in fiscal 2020.

30


Sales and marketing, research and development, and general and administrative expenses for the thirdsecond quarter and the first six months of fiscal 20182020 totaled $688 million. This represented 45%$667 million, or 49% of net revenues consistent with the third quarter of fiscal 2017. In the first nine months of fiscal 2018, sales and marketing, research and development, and general and administrative expenses totaled $2,057$1,358 million, or 48%52% of net revenues, respectively, representing an increase of three and a decrease of twohalf percentage points and six percentage points, respectively, when compared to the corresponding periodperiods of fiscal 2017,2019, primarily due to higherlower net revenues in the current year coupled with lower average headcount as a result of our restructuring plans and other cost reduction initiatives.periods.

Net Revenues (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Net revenues

 

$

1,523

 

 

$

1,404

 

 

 

8

%

 

$

4,270

 

 

$

4,038

 

 

 

6

%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Net revenues

 

$

1,371

 

 

$

1,517

 

 

 

(10

)%

 

$

2,607

 

 

$

2,991

 

 

 

(13

)%

 

The increasedecrease in net revenues for the thirdsecond quarter and first ninesix months of fiscal 20182020 compared to the corresponding periods of fiscal 20172019 was primarily due to an increasea decrease in product revenues of $136$142 million and $296 million, respectively, partially offset by a decrease in hardware maintenance and other services revenues of $14 million and $52$373 million, respectively. Product revenues as a percentage of net revenues increaseddecreased by four percentage points and five and a half percentage points in the thirdsecond quarter of fiscal 2018 and four percentage points in the first ninesix months of fiscal 20182020, respectively, compared to the corresponding periods of fiscal 2017.2019.

The following customers, each of which is a distributor, accounted for 10% or more of net revenues:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

Arrow Electronics, Inc.

 

 

22

%

 

 

22

%

 

 

23

%

 

 

21

%

 

 

24

%

 

 

24

%

 

 

24

%

 

 

23

%

Tech Data Corporation (previously presented as Avnet, Inc.)

 

 

19

%

 

 

20

%

 

 

19

%

 

 

20

%

Tech Data Corporation

 

 

21

%

 

 

21

%

 

 

21

%

 

 

19

%

 

Product Revenues (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Product revenues

 

$

920

 

 

$

784

 

 

 

17

%

 

$

2,450

 

 

$

2,154

 

 

 

14

%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Product revenues

 

$

771

 

 

$

913

 

 

 

(16

)%

 

$

1,415

 

 

$

1,788

 

 

 

(21

)%

 

Product revenues are derived through the sale of our strategic and mature solutions, and consist of sales of configured AFF and Hybrid systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, private cloud solutions (including SolidFire, converged and hyper-converged infrastructure products, StorageGrid), original equipment manufacturer (OEM) products and add-on hardwareoptional software.

Under the revised Strategic and software.

ProductMature product groupings, as described in the Overview section above, product revenues from strategic solutions represented 70%57% and 55% of product revenues in the thirdsecond quarter and first ninesix months of fiscal 2018,2020, respectively, compared to 65%53% and 64%54% in the corresponding periods of the prior year.year, respectively. Product revenues from mature solutions represented 30%43% and 45% of product revenues in the thirdsecond quarter and first ninesix months of fiscal 2018,2020, respectively, compared to 35%47% and 36%46% in the corresponding periods of the prior year.year, respectively.

Product revenues declined in the second quarter and first six months of fiscal 2020 compared to the corresponding periods of the prior year primarily due less favorable macroeconomic conditions, lower enterprise IT spending and, in the first quarter of fiscal 2020, go-to-market execution issues experienced with some of our largest global customer accounts.

Total product revenues from strategic solutions totaled $647$442 million in the thirdsecond quarter of fiscal 20182020 reflecting a 26% increase9% decrease from $512$485 million in the thirdsecond quarter of fiscal 2017. This increase was2019. Total product revenues from strategic solutions totaled $779 million in the first six months of fiscal 2020 reflecting a 19% decrease from $960 million in the first six months of fiscal 2019. These decreases were primarily due to a 5% increasesubstantial amount of revenue recognized in unit volumethe prior year periods related to the software license components of Clustered ONTAP systemsseveral ELAs which did not repeat, a decrease in add-on optional software sales in the current year periods and, for the six month period, decreased sales of AFF products. These decreases were partially offset by an increase in ASP driven byrevenues from private cloud solutions in both fiscal 2020 periods and, for the second quarter, increased sales of our All-Flash FASAFF products.

Total product revenue from mature solutions totaled $273$329 million in the thirdsecond quarter of fiscal 2018, relatively flat compared to $2722020 reflecting a 23% decrease from $428 million in the thirdsecond quarter of fiscal 2017. A decrease in unit volume of 7-mode systems resulting2019. Total product revenue from the movement of customer demand from older products to our newer products was offset by an 11% increase in add-on hardware, storage and related OS revenues. Product revenues from both strategic and mature solutions were favorably impacted by foreign exchange rate fluctuations in the third quarter of fiscal 2018 compared to the third quarter of fiscal 2017.

Total product revenues from strategic solutions totaled $1,704$636 million in the first ninesix months of fiscal 20182020 reflecting a 24% increase23% decrease from $1,375$828 million in the first ninesix months of fiscal 2017. This increase was2019. These decreases were primarily due to a 7% increase in unit volume of Clustered ONTAP systems and an increase in ASP driven bydecreased sales of our All-Flash FAS products. Total product revenue from

28


mature solutions totaled $746 millionHybrid and OEM products, as well as add-on storage, in the first nine months of fiscal 2018 reflecting a 4% decrease from $779 million in the first nine months of fiscal 2017. This decrease was primarily due to a 69% decrease in unit volume of 7-mode systems, and a 10% decrease in OEM revenues, partially offset by an 11% increase in add-on hardware, storage and related OS revenues.current year periods.

31


Software Maintenance Revenues (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Software maintenance revenues

 

$

237

 

 

$

240

 

 

 

(1

)%

 

$

711

 

 

$

723

 

 

 

(2

)%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Software maintenance revenues

 

$

254

 

 

$

236

 

 

 

8

%

 

$

504

 

 

$

465

 

 

 

8

%

 

Software maintenance revenues are associated with contracts which entitle customers to receive unspecified product upgrades and enhancements on a when-and-if-available basis, bug fixes and patch releases, as well as internet and telephone access to technical support personnel located in our global support centers.

The fluctuations in software maintenance revenues reflect fluctuations in the aggregate contract value of the installed base under software maintenance contracts, which is recognized as revenue ratably over the terms of the underlying contracts.

Hardware Maintenance and Other Services Revenues (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Hardware maintenance and other services revenues

 

$

366

 

 

$

380

 

 

 

(4

)%

 

$

1,109

 

 

$

1,161

 

 

 

(4

)%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Hardware maintenance and other services revenues

 

$

346

 

 

$

368

 

 

 

(6

)%

 

$

688

 

 

$

738

 

 

 

(7

)%

 

Hardware maintenance and other services revenues include hardware maintenance, professional services, and educational and training services revenues.

Hardware maintenance contract revenues were $299decreased year over year, at $286 million and $903$570 million, respectively, for the thirdsecond quarter and first ninesix months of fiscal 2018, respectively,2020, compared to $313$303 million and $952$606 million, respectively, for the corresponding periods of the prior year. The decreases in the current year were primarily dueattributable to lower contract renewal rates, and a decline in ASPaverage selling price on contracts executed contracts.recently.

Professional services and educational and training services revenues were $67$60 million and $206$118 million, respectively, for the thirdsecond quarter and first ninesix months of fiscal 2018, respectively,2020, compared to $67$65 million and $209$132 million, respectively, for the corresponding periods of the prior year.

Revenues by Geographic Area:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

 

October 25,

2019

 

 

October 26,

2018

 

United States, Canada and Latin America (Americas)

 

 

54

%

 

 

55

%

 

 

55

%

 

 

56

%

 

 

56

%

 

 

57

%

 

 

54

%

 

 

57

%

Europe, Middle East and Africa (EMEA)

 

 

32

%

 

 

33

%

 

 

31

%

 

 

31

%

 

 

29

%

 

 

28

%

 

 

31

%

 

 

29

%

Asia Pacific (APAC)

 

 

14

%

 

 

13

%

 

 

14

%

 

 

13

%

 

 

14

%

 

 

15

%

 

 

15

%

 

 

14

%

 

Percentages may not add due to rounding

Americas revenues consist of sales to Americas commercial and U.S. public sector markets. OurDuring the first six months of fiscal 2020, Americas revenues were negatively impacted by general macroeconomic conditions in the region and, in the first quarter of fiscal 2020, go-to-market execution issues with some of our largest customer accounts, which was reflected in the geographic distribution of revenues as a percentage of net revenues was relatively consistent in the thirdsecond quarter and first ninesix months of fiscal 20182020 compared to the third quarter and first nine monthscorresponding periods of fiscal 2017.2019.

Cost of Revenues

Our cost of revenues consists of three elements: (1) cost of product revenues, which includes the costs of manufacturing and shipping our storage products, amortization of purchased intangible assets, inventory write-downs, and warranty costs, (2) cost of software maintenance, which includes the costs of providing software maintenance and third-party royalty costs and (3) cost of hardware maintenance and other services revenues, which includes costs associated with providing support activities for hardware maintenance, global support partnership programs, professional services and educational and training services.

Cost of Product Revenues (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Cost of product revenues

 

$

468

 

 

$

435

 

 

 

8

%

 

$

1,238

 

 

$

1,170

 

 

 

6

%


 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Cost of product revenues

 

$

341

 

 

$

428

 

 

 

(20

)%

 

$

653

 

 

$

826

 

 

 

(21

)%

32


The changes in cost of product revenues consisted of the following (in percentage points of the total change):

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Fiscal 2018 to Fiscal 2017

 

 

Fiscal 2018 to Fiscal 2017

 

 

Fiscal 2020 to Fiscal 2019

 

 

Fiscal 2020 to Fiscal 2019

 

 

Percentage Change Points

 

 

Percentage Change Points

 

 

Percentage Change Points

 

 

Percentage Change Points

 

Materials costs

 

 

9

 

 

 

5

 

 

 

(23

)

 

 

(23

)

Excess and obsolete inventory

 

 

(1

)

 

 

 

 

 

2

 

 

 

1

 

Other

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

Total change

 

 

8

 

 

 

6

 

 

 

(20

)

 

 

(21

)

Cost of product revenues represented 51%44% and 46% of product revenues for the thirdsecond quarter and first ninesix months of fiscal 2018,2020, respectively, compared to 55%47% and 54%46% for the third quarter and first nine monthscorresponding periods of fiscal 2017, respectively.2019. Materials costs represented 91%86% and 90%84% of product costs for the thirdsecond quarter and first ninesix months of fiscal 2018,2020, respectively, compared to 90%91% and 91%89% in the thirdcorresponding periods of fiscal 2019.

Materials costs decreased $98 million and $190 million in the second quarter and first ninesix months of fiscal 2017, respectively.

Materials costs increased $37 million and $57 million in the third quarter and first nine months of fiscal 2018,2020, respectively, compared to the corresponding periods of the prior year, primarily due to higher unit volumea decline in product revenue and, to a lesser extent, a decline in the price of Clustered ONTAP systems.

Averagecertain product components. The average unit materials costs for Clustered ONTAPof both AFF and FAS Hybrid systems increased slightlydecreased in the thirdsecond quarter and first ninesix months of fiscal 20182020 compared to the corresponding periods of the prior year.fiscal 2019.

An increase in ASPMargins on revenue recognized for strategic systems resulted in higher margins for strategic products insolutions increased during the thirdsecond quarter and first ninesix months of fiscal 2018 compared to the third quarter and first nine months of fiscal 2017. Margins in the third quarter of fiscal 2018 were also favorably impacted by fluctuations in foreign exchange rates. Margins for mature products were relatively consistent in the third quarter and first nine months of fiscal 20182020 compared to the corresponding periods of the prior year.

Cost of product revenues in the third quarter of fiscal 2018 compared to the third quarter of fiscal 20172019, while margins for mature solutions were favorably impacted by a $5 million decrease in charges for excess and obsolete inventory.relatively flat.

Cost of Software Maintenance Revenues (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Cost of software maintenance revenues

 

$

6

 

 

$

7

 

 

 

(14

)%

 

$

19

 

 

$

22

 

 

 

(14

)%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Cost of software maintenance revenues

 

$

11

 

 

$

8

 

 

 

38

%

 

$

21

 

 

$

15

 

 

 

40

%

 

Cost of software maintenance revenues wasin dollars were relatively flat in the thirdsecond quarter and first ninesix months of fiscal 20182020 compared to the corresponding periods of fiscal 20172019 and represented 3%4% of software maintenance revenues for allsecond quarter and first six months of fiscal 2020, and 3% for the corresponding periods presented.of fiscal 2019.

 

Cost of Hardware Maintenance and Other Services Revenues (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Cost of hardware maintenance and other services revenues

 

$

108

 

 

$

111

 

 

 

(3

)%

 

$

336

 

 

$

369

 

 

 

(9

)%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Cost of hardware maintenance and other services revenues

 

$

94

 

 

$

107

 

 

 

(12

)%

 

$

192

 

 

$

213

 

 

 

(10

)%

 

Cost of hardware maintenance and other services revenues decreased $3by $13 million, or 3%12%, and $21 million, or 10%, respectively, for the thirdsecond quarter and first six months of fiscal 20182020 compared to the third quartercorresponding periods of fiscal 2017,2019, in line with the decreases in hardware maintenance and decreased $33 million, or 9%, for the first nine months of fiscal 2018 compared to the first nine months of fiscal 2017, primarily due to the favorable impactother services revenues, and also as a result of cost savings initiatives. Costs represented 30%27% of hardware maintenance and other services revenues in the thirdsecond quarter, and 28% in the first six months of fiscal 2020, compared to 29% in the second quarter and first ninesix months of fiscal 2018, compared to 29% and 32% in the third quarter and first nine months of fiscal 2017, respectively.2019.

 

Operating Expenses

Sales and Marketing, Research and Development and General and Administrative Expenses

Compensation costs represent the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation expense and employee incentive compensation plan costs.

30


Total compensation costs included in operating expenses increased by $26 million, or 7% in the third quarter of fiscal 2018 compared to the corresponding period in the prior year primarily due to higher incentive compensation expense, reflecting stronger operating performance against goals, and, to a lesser extent, the unfavorable impact of foreign exchange rate fluctuations.

Total compensation costs included in operating expenses decreased by $6$9 million and $13 million, respectively, or 1%2%, in the second quarter and first ninesix months of fiscal 20182020, compared to the corresponding period inperiods of the prior year reflectingprimarily due to lower incentive compensation expense and, to a decreaselesser extent, the favorable impact of 3% in average headcount,foreign exchange rate fluctuations, partially offset by higher incentive compensation expense.salaries expense, reflecting a 2% increase in average headcount in the fiscal 2020 periods.

33


Sales and Marketing (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Sales and marketing expenses

 

$

423

 

 

$

381

 

 

 

11

%

 

$

1,268

 

 

$

1,228

 

 

 

3

%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Sales and marketing expenses

 

$

389

 

 

$

408

 

 

 

(5

)%

 

$

794

 

 

$

817

 

 

 

(3

)%

Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, allocated facilities and information technology (IT) costs, advertising and marketing promotional expense and travel and entertainment expense. The changes

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

Fiscal 2020 to Fiscal 2019

 

 

Fiscal 2020 to Fiscal 2019

 

 

 

Percentage Change Points

 

 

Percentage Change Points

 

Compensation costs

 

 

(1

)

 

 

(1

)

Advertising and marketing promotional expense

 

 

(3

)

 

 

(2

)

Other

 

 

(1

)

 

 

 

Total change

 

 

(5

)

 

 

(3

)

Compensation costs decreased slightly for the second quarter and first six months of fiscal 2020 compared to the corresponding periods of the prior year, reflecting a 2% decrease in salesaverage headcount in each of the current year periods. Advertising and marketing promotional expense decreased in the second quarter and first six months of fiscal 2020, primarily due to certain annual marketing events being held earlier in the prior year. Sales and marketing expenses consistedin the second quarter and first six months of the following:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Fiscal 2018 to Fiscal 2017

 

 

Fiscal 2018 to Fiscal 2017

 

 

 

Percentage Change Points

 

 

Percentage Change Points

 

Compensation costs

 

 

4

 

 

 

1

 

Commissions

 

 

6

 

 

 

2

 

Other

 

 

1

 

 

 

 

Total change

 

 

11

 

 

 

3

 

The increase in commissions expense reflects higher performance against sales goals, while the increase in compensation costs reflects a combination of higher average salaries due to merit increases, higher incentive compensation expense, and the unfavorable impact offiscal 2020 also benefitted slightly from foreign exchange rate fluctuations.

Research and Development (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Research and development expenses

 

$

193

 

 

$

181

 

 

 

7

%

 

$

580

 

 

$

588

 

 

 

(1

)%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Research and development expenses

 

$

209

 

 

$

211

 

 

 

(1

)%

 

$

424

 

 

$

419

 

 

 

1

%

Research and development expenses consist primarily of compensation costs, allocated facilities and IT costs, depreciation, equipment and software-related costs, prototypes, non-recurring engineering charges and other outside services costs. Changes in research and development expense consisted of the following:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Fiscal 2018 to Fiscal 2017

 

 

Fiscal 2018 to Fiscal 2017

 

 

Fiscal 2020 to Fiscal 2019

 

 

Fiscal 2020 to Fiscal 2019

 

 

Percentage Change Points

 

 

Percentage Change Points

 

 

Percentage Change Points

 

 

Percentage Change Points

 

Compensation costs

 

 

6

 

 

 

(1

)

 

 

1

 

 

 

2

 

Development projects and outside services

 

 

4

 

 

 

1

 

 

 

(1

)

 

 

(1

)

Depreciation

 

 

(2

)

 

 

(1

)

Facilities and IT support costs

 

 

(1

)

 

 

(1

)

Other

 

 

 

 

 

1

 

 

 

(1

)

 

 

 

Total change

 

 

7

 

 

 

(1

)

 

 

(1

)

 

 

1

 

The increase in compensation costs for the thirdsecond quarter and first six months of fiscal 20182020 compared to the third quarter of fiscal 2017corresponding periods in the prior year was attributable to a 3%an increase in average headcount of 9% and stronger operating performance against goals, which resulted8%, respectively, resulting in higher salaries, benefits and stock-based compensation expense, partially offset by lower incentive compensation expense. Compensation costs forThe increase in headcount reflects our investment in additional engineering resources to support the first nine monthsexpansion and enhancement of fiscal 2018 decreased slightly compared to the corresponding period of fiscal 2017 due to slightly lower salaries, benefitsproducts and stock-based compensation expenses resulting from a 4% decrease in average headcount.solutions targeted at our most important customer and market opportunities. Development projects and outside services increasedexpense for the second quarter and first six months of fiscal 2020 decreased slightly as a result of higherlower spending on materials and services associated with engineering activities to develop new products and enhance existing products. Depreciation expense decreased primarilyenhanced products, due to certain equipment becoming fully depreciated by the endtiming of fiscal 2017, and facilities and IT support costs decreased primarily due to cost containment efforts.new product introductions.

31


General and Administrative (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

General and administrative expenses

 

$

72

 

 

$

64

 

 

 

13

%

 

$

209

 

 

$

201

 

 

 

4

%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

General and administrative expenses

 

$

69

 

 

$

69

 

 

 

%

 

$

140

 

 

$

142

 

 

 

(1

)%

34


General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and allocated facilities and IT support costs. Changes in general and administrative expense consisted of the following:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Fiscal 2018 to Fiscal 2017

 

 

Fiscal 2018 to Fiscal 2017

 

 

Fiscal 2020 to Fiscal 2019

 

 

Fiscal 2020 to Fiscal 2019

 

 

Percentage Change Points

 

 

Percentage Change Points

 

 

Percentage Change Points

 

 

Percentage Change Points

 

Compensation costs

 

 

1

 

 

 

(5

)

 

 

(10

)

 

 

(9

)

Professional and legal fees and outside services

 

 

7

 

 

 

5

 

 

 

13

 

 

 

11

 

Facilities and IT support costs

 

 

2

 

 

 

3

 

 

 

(6

)

 

 

(5

)

Other

 

 

3

 

 

 

1

 

 

 

3

 

 

 

2

 

Total change

 

 

13

 

 

 

4

 

 

 

 

 

 

(1

)

Compensation costs forWhile average headcount increased in the thirdsecond quarter and first six months of fiscal 2018 increased slightly2020 compared to the corresponding periodperiods of fiscal 2017 asthe prior year, compensation costs decreased because a resultgreater percentage of higher incentive compensation expense, partially offset by a slight decreaseemployees were located in average headcount. Compensation costs for the first nine months of fiscal 2018 were favorably impacted by lower salaries, benefits and stock-based compensation expenses compared to the corresponding period of fiscal 2017 due to an 11% decrease in average headcount, partially offset by higher incentive compensation expense.cost geographies. The increaseincreases in professional and legal fees and outside services expense in the thirdsecond quarter and first ninesix months of fiscal 2018 was2020 were primarily due to the higher spending levels on business transformation projects, and outside services, while the increasedecreases in facilities and IT support costs waswere primarily due to an increase inlower spending levels on IT projects.

Restructuring Charges (in millions, except percentages):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

Restructuring charges

 

$

 

 

$

52

 

 

NM

 

$

 

 

$

52

 

 

NM

 

 

Three Months Ended

 

Six Months Ended

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

Restructuring charges

 

$

 

 

$

 

 

NM

 

$

21

 

 

$

19

 

 

NM

 

NM – Not Meaningful

Management has previously approved several

In the first quarter of fiscal 2020, we announced a restructuring actionsplan (the May 2019 Plan) to streamline our business, eliminatereduce costs and redirect resources to our highest return activities, including the March 2016 Plan and the November 2016 Plan, under which we reducedincluded a reduction in our global workforce byof approximately 11% and 6%, respectively. We completed2%. Charges related to the plan consisted primarily of employee severance-related costs. Substantially all workforce related activities under these plans as of the end of fiscal 2017.plan have been completed. See Note 12 – Restructuring Charges of the Notes to Condensed Consolidated Financial Statements for more details regarding our restructuring plans.details.

Gain on Salesale or derecognition of Propertiesassets (in millions, except percentages)percentages):

 

 

Three Months Ended

 

Nine Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

Gain on sale of properties

 

$

(218

)

 

$

(10

)

 

NM

 

$

(218

)

 

$

(10

)

 

NM

 

 

Three Months Ended

 

Six Months Ended

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

Gain on sale or derecognition of assets

 

$

(38

)

 

$

 

 

NM

 

$

(38

)

 

$

 

 

NM

 

NM – Not Meaningful

OnIn September 8, 2017, we entered into an agreement to sell certain properties previously classified as assets held-for-sale for a total of $306 million,land and buildings located in Sunnyvale, California, through two separate and independent closings. On December 7, 2017, the date ofclosings, the first of which was completed in the third quarter of fiscal 2018. The remaining properties, consisting of land, were classified as assets held for sale, and included as other current assets in our condensed consolidated balance sheet as of April 26, 2019. On August 29, 2019, the second closing occurred and we consummated the sale of propertiesthe land, with a net book value of $66$53 million, forand received cash proceeds of $210 million,$96 million. resulting in a gain, net of direct selling costs, of $142$38 million.

32


During the third quarter of fiscal 2018, our continuing involvement with properties subject to a sale-leaseback arrangement entered into in fiscal 2016 ended, and as a result we recorded a non-cash sale of properties, extinguished the associated financing obligation and recognized a gain of $76 million.

Other Income, (Expense), Net (in millions, except percentages)

The components of other income, (expense), net were as follows:

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

Six Months Ended

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Interest income

 

$

20

 

 

$

10

 

 

 

100

%

 

$

55

 

 

$

31

 

 

 

77

%

 

$

12

 

 

$

21

 

 

 

(43

)%

 

$

31

 

 

$

46

 

 

 

(33

)%

Interest expense

 

 

(17

)

 

 

(12

)

 

 

42

%

 

 

(47

)

 

 

(39

)

 

 

21

%

 

 

(12

)

 

 

(14

)

 

 

(14

)%

 

 

(27

)

 

 

(28

)

 

 

(4

)%

Other income, net

 

 

11

 

 

 

2

 

 

 

450

%

 

 

17

 

 

 

7

 

 

 

143

%

 

 

3

 

 

 

 

 

NM

 

 

 

14

 

 

 

7

 

 

 

100

%

Total

 

$

14

 

 

$

 

 

NM

 

 

$

25

 

 

$

(1

)

 

NM

 

 

$

3

 

 

$

7

 

 

 

(57

)%

 

$

18

 

 

$

25

 

 

 

(28

)%

 

NM - Not Meaningful

35


Interest income increaseddecreased in the thirdsecond quarter and the first ninesix months of fiscal 20182020 compared to the corresponding periods of the prior year primarily due to a shiftreduction in size of our investment portfolio to higher-yielding investments.

Interest expense increased in the third quarter and the first nine months of fiscal 2018 primarily as a result of our commercial paper program, which begansale of approximately $1.0 billion of available-for-sale debt securities in the thirdfirst quarter of fiscal 2017,2020. Other income, net increased in the first six months of fiscal 2020 compared to the corresponding period of fiscal 2019 as a result of the $14 million gain we realized from the sale of these securities, partially offset by differences in foreign exchange gains and losses. Interest expense remained relatively flat in the September 2017 issuancesecond quarter and first six months of $800 million aggregate principal amountfiscal 2020 compared to the corresponding periods of the prior year, as we repaid our maturing Senior Notes which have a higher weightedbut increased our average interest rate than the $750 million aggregate principal amount of Senior Notes extinguished in November 2017.  outstanding commercial paper balance.

Provision for Income Taxes (in millions, except percentages):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

 

January 26,

2018

 

 

January 27,

2017

 

 

% Change

 

Provision for income taxes

 

$

991

 

 

$

37

 

 

 

2,578

%

 

$

1,058

 

 

$

98

 

 

 

980

%

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

 

October 25,

2019

 

 

October 26,

2018

 

 

% Change

 

Provision for income taxes

 

$

56

 

 

$

52

 

 

 

8

%

 

$

72

 

 

$

41

 

 

 

76

%

Our effective tax rate for the thirdsecond quarter of fiscal 20182020 was 204.3%18.7% compared to an effective tax rate of 20.2%17.7% for the thirdsecond quarter of fiscal 2017.2019. Our effective tax rate for the first ninesix months of fiscal 20182020 was 122.6%17.2% compared to an effective tax rate of 23.5%7.3% for the corresponding period of fiscal 2017.2019. Our effective tax rates increased for the third quarter and first nine months of fiscal 2018 compared to the corresponding periods in the prior year, primarily as a result of the impact of U.S. tax reform and the sale of certain buildings and land in Sunnyvale, California, which resulted in aggregate discrete tax charges of $856 million and $72 million, respectively. Our fiscal 2017 effective tax rates reflect the impact of a significant amount of our earnings, primarily income from our European operations, which are headquartered in the Netherlands, being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate.  See Note 13 – Income TaxesOur effective tax rate increased for the second quarter of fiscal 2020 compared to the corresponding period of the Notesprior year primarily due to Condensed Consolidated Financial Statementsthe discrete tax charge on the sale of land in Sunnyvale, California and the differences in discrete benefits for additional information.stock-based compensation. Our effective tax rate increased for the first six months of fiscal 2020 compared to the corresponding period in the prior year primarily due to the discrete tax benefits related to the adoption of the new revenue standard in fiscal 2019, and the same items that impacted the second quarter effective tax rate.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted into law. The TCJA made significant changes to the U.S. corporate income tax system including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, the imposition of a one-time transition tax on deferred foreign earnings, and the creation of new taxes on certain foreign-sourced earnings. As of April 26, 2019, we had completed the accounting for the tax impacts of the TCJA, however, we will continue to assess the impact of further guidance from federal and state tax authorities on our business and consolidated financial statements, and recognize any adjustments in the period in which they are determined.

During fiscal 2019, we adopted the new revenue accounting standard and, during the six months ended October 26, 2018, we recognized a $34 million discrete tax benefit for adjustments to certain intercompany transactions resulting from the retrospective application of the new revenue accounting standard.

As of January 26, 2018,October 25, 2019, we had $338$294 million of gross unrecognized tax benefits. Unrecognized tax benefitsInclusive of $284 million, including penalties, interest and indirectcertain income tax benefits, $246 million would affect our provision for income taxes if recognized, and $303$251 million has been recorded in other long-term liabilities. As result of the U.S. tax reform, we recorded #113 million of associated gross unrecognized tax benefits.

We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions. We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude, certain statutes of limitations will lapse, or both. As a result of uncertainties regarding tax audits and their possible outcomes, an estimate of the range of possible impacts to unrecognized tax benefits in the next twelve months cannot be made at this time.

 

 

Liquidity, Capital Resources and Cash Requirements

 

(In millions, except percentages)

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Cash, cash equivalents and short-term investments

 

$

5,619

 

 

$

4,921

 

 

$

2,987

 

 

$

3,899

 

Principal amount of debt

 

$

2,182

 

 

$

2,000

 

 

$

1,649

 

 

$

1,799

 

Debt as a percentage of stockholders' equity

 

 

100

%

 

 

72

%

 

33


The following is a summary of our cash flow activities:

 

 

Nine Months Ended

 

 

Six Months Ended

 

(In millions)

 

January 26,

2018

 

 

January 27,

2017

 

 

October 25,

2019

 

 

October 26,

2018

 

Net cash provided by operating activities

 

$

984

 

 

$

621

 

 

$

257

 

 

$

491

 

Net cash used in investing activities

 

 

(141

)

 

 

(133

)

Net cash provided by investing activities

 

 

1,116

 

 

 

381

 

Net cash used in financing activities

 

 

(350

)

 

 

(1,128

)

 

 

(1,148

)

 

 

(1,429

)

Effect of exchange rate changes on cash and cash equivalents

 

 

37

 

 

 

(15

)

Net increase (decrease) in cash and cash equivalents

 

$

530

 

 

$

(655

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

(5

)

 

 

(25

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

$

220

 

 

$

(582

)

36


Cash Flows

As of January 26, 2018,October 25, 2019, our cash, cash equivalents and short-term investments were $5.6$3.0 billion, an increasea decrease of $0.7$0.9 billion from April 28, 2017.26, 2019. The increasedecrease was primarily due to $795$750 million paid for the repurchase of net proceeds fromour common stock, $400 million used for the issuancerepayment of long-term debt, $210our Senior Notes due September 2019, $226 million used for the payment of dividends, and $68 million in proceeds from the salepurchases of properties, $132property and equipment, partially offset by $249 million in proceeds from the issuance of commercial paper notes, net, $96 million in proceeds from the sale of repayments,properties, and $984$257 million of cash provided by operating activities, partially offset by $750 million paid to redeem our Senior Notes due in December 2017, $450 million paid for the repurchase of our common stock and $161 million used for the payment of dividends.activities. Working capital increaseddecreased by $1.1$0.7 billion to $3.2$1.0 billion as of January 26, 2018October 25, 2019 compared to April 28, 201726, 2019 primarily due to an increasethe decreases in cash, cash equivalents and short termshort-term investments that was primarily attributable to proceeds from the sale of properties, proceeds from the issuance of commercial paper, net of repayment, and net cash provided by operating activities.discussed above.

Cash Conversion Cycle

The following table presents the components of our cash conversion cycle:

 

Three Months Ended

 

 

Three Months Ended

 

(In days)

 

January 26,

2018

 

 

April 28,

2017

 

 

January 27,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

 

October 26,

2018

 

Days sales outstanding (1)

 

 

45

 

 

 

45

 

 

 

39

 

 

 

52

 

 

 

70

 

 

 

46

 

Days inventory outstanding (2)

 

 

15

 

 

 

26

 

 

 

21

 

 

 

23

 

 

 

21

 

 

 

14

 

Days payables outstanding (3)

 

 

(72

)

 

 

(56

)

 

 

(42

)

 

 

(78

)

 

 

(87

)

 

 

(79

)

Cash conversion cycle (4)

 

 

(11

)

 

 

15

 

 

 

17

 

 

 

(4

)

 

 

3

 

 

 

(19

)

 

Days may not add due to rounding

 

(1)

Days sales outstanding, referred to as DSO, calculates the average collection period of our receivables. DSO is based on ending accounts receivable and net revenue for each period. DSO is calculated by dividing accounts receivable by average net revenue per day for the current quarter (91 days for each of the quarters presented above). The increase in DSO for the thirdsecond quarter of fiscal 20182020 increased compared to the third quartercorresponding period of fiscal 2017 was2019 due to differences inless favorable shipping linearity and the timing of shipments to certain customers.large customers, while it decreased compared to the fourth quarter of fiscal 2019 due to lower seasonal invoicing levels and more favorable shipping linearity.

(2)

Days inventory outstanding, referred to as DIO, measures the average number of days from procurement to sale of our products. DIO is based on ending inventory and cost of revenues for each period. DIO is calculated by dividing ending inventory by average cost of revenues per day for the current quarter. DIO for the thirdsecond quarter of fiscal 2018 decreased2020 increased compared to the corresponding period of fiscal 2019 as a result of higher levels of on hand inventory and lower cost of goods sold in the current year period, while it was relatively flat compared to the fourth quarter of fiscal 2017 due to lower levels of purchased components, primarily solid state drives, on hand at the end of the current quarter. Additionally, it decreased compared to the third quarter of fiscal 2017 as a result of increased product sales in the third quarter of fiscal 2018.2019.

(3)

Days payables outstanding, referred to as DPO, calculates the average number of days our payables remain outstanding before payment. DPO is based on ending accounts payable and cost of revenues for each period. DPO is calculated by dividing accounts payable by average cost of revenues per day for the current quarter. DPO for the thirdsecond quarter of fiscal 2018 increased2020 was relatively consistent with the corresponding period of fiscal 2019, while it decreased compared to the fourth and third quartersquarter of fiscal 2017,2019, primarily as a resultdue to the timing of improved vendor payables management and an extension of payment terms with our suppliers.purchases from contract manufacturers.

(4)

The cash conversion cycle is the sum of DSO and DIO less DPO. Items which may cause the cash conversion cycle in a particular period to differ include, but are not limited to, changes in business mix, changes in payment terms (including extended payment terms from suppliers), the extent of shipment linearity, seasonal trends and the timing of revenue recognition and inventory purchases within the period.

Cash Flows from Operating Activities

During the first ninesix months of fiscal 2018,2020, we generated cash from operating activities of $984$257 million, reflecting a net lossincome of $195$346 million, adjusted by non-cash depreciation and amortization of $150$99 million, stock-based compensation of $125 million, a deferred income tax provision of $258$82 million, and a gain on sale of properties of $218$38 million, compared to $621$491 million of cash generated from operating activities during the first ninesix months of fiscal 2017.2019.

Changes in assets and liabilities in the first ninesix months of fiscal 20182020 included the following:

Accounts payable increased $115 million, primarily due to improved vendor payables management and an extension of payment terms with our suppliers during fiscal 2018.

34


Deferred revenue and financed unearned services revenue decreased $102 million, primarily due to a decrease in deferred software and hardware maintenance contract revenues reflecting lower contract renewal rates and a decline in ASP on executed contracts.

Accounts receivable decreased $435 million, reflecting lower DSO.

Accounts payable decreased $157 million, reflecting lower DPO.

Long-term taxes payable increased $723 million primarily due to a one-time transition tax liability recorded during the third quarter of fiscal 2018 as a result of the impact of U.S. tax reform, which will be paid over a period of eight years.

Accrued expenses decreased $315 million, primarily due to employee compensation payouts related to fiscal year 2019 commissions and incentive compensation plans and payments of income taxes.

Deferred revenue and financed unearned services revenue decreased $197 million, primarily due to a decrease in deferred software and hardware maintenance contract revenues reflecting the seasonality of maintenance contract renewal activities.

We expect that cash provided by operating activities may materially fluctuate in future periods due to a number of factors, including fluctuations in our operating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, tax benefits or charges from stock-based compensation, and the timing and amount of compensation and other payments.

37


Cash Flows from Investing Activities

During the first ninesix months of fiscal 2018,2020, we paid $178 million for the purchasesgenerated $1.1 billion from maturities and sales of investments, net of maturities and sales,purchases, and paid $97$68 million for capital expenditures, while during the first ninesix months of fiscal 20172019, we generated $2$489 million from maturities and sales of investments, net of purchases, and paid $137$107 million for capital expenditures. Additionally, during the first ninesix months of fiscal 2018,2020, we paid $75received $96 million to acquire two privately-held companies, and received proceeds of $210 million fromfor the sale of properties.land in Sunnyvale, California and paid $56 million net to acquire a privately-held company.

Cash Flows from Financing Activities

During the first ninesix months of fiscal 2018,2020, we generated $795 million in cash from the issuance of long-term debt, $132 million in cash from issuances of commercial paper notes, net of repayments, and used $450$750 million for the repurchase of 10fourteen million shares of our common stock, $161$226 million for the payment of dividends, and $750$400 million to redeemfor the repayment of our Senior Notes due in December 2017. During the first nine months of fiscal 2017, we generated $392September 2019, partially offset by $249 million in cashproceeds from issuancesthe issuance of commercial paper notes, net, of repayments, andcompared to $1.1 billion used $850 million to repay our short-term loan, $576 million for the repurchase of fourteen million shares of common stock, and $157$207 million used for the payment of dividends.dividends, and $135 million used for the repayment of commercial paper notes, net, during the first six months of fiscal 2019.

Key factors that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable, accounts payable and inventories, the timing and amount of stock repurchases and payment of cash dividends, the impact of foreign exchange rate changes, our ability to effectively integrate acquired products, businesses and technologies and the timing of repayments of our debt. Based on past performance and our current business outlook, we believe that our sources of liquidity, including potential future issuances of debt, equity or other securities, will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months. However, in the event our liquidity is insufficient, we may be required to curtail spending and implement additional cost saving measures and restructuring actions or enter into new financing arrangements. We cannot be certain that we will continue to generate cash flows at or above current levels or that we will be able to obtain additional financing, if necessary, on satisfactory terms, if at all.

Liquidity

Our principal sources of liquidity as of January 26, 2018October 25, 2019 consisted of cash, cash equivalents and short-term investments, as well as cash we expect to generate from operations.operations, and our commercial paper program and related credit facility.

Cash, cash equivalents and short-term investments consisted of the following (in millions):

 

 

January 26,

2018

 

 

April 28,

2017

 

 

October 25,

2019

 

 

April 26,

2019

 

Cash and cash equivalents

 

$

2,974

 

 

$

2,444

 

 

$

2,545

 

 

$

2,325

 

Short-term investments

 

 

2,645

 

 

 

2,477

 

 

 

442

 

 

 

1,574

 

Total

 

$

5,619

 

 

$

4,921

 

 

$

2,987

 

 

$

3,899

 

As of January 26, 2018October 25, 2019 and April 28, 2017, $5.026, 2019, $2.9 billion and $4.5$3.7 billion, respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based in U.S. dollar-denominated holdings, while $0.6$0.1 billion and $0.4$0.2 billion, respectively, were available in the U.S. atThe TCJA imposed a one-time transition tax on substantially all accumulated foreign earnings through December 31, 2017, and generally allows companies to make distributions of foreign earnings without incurring additional federal taxes. As a part of the endrecognition of each period. Under the transition taximpacts of the TCJA, we have treated all historical foreign earnings as taxable in the U.S. which resulted in a $739 million discrete tax expense in the current quarter. As a part of the provisional estimates recorded during the quarter, we considered the impacts of the TCJA and reviewed our projected global cash requirements and have determined that certain historical and future foreign earnings will no longer be indefinitely reinvested.

35


Our principal liquidity requirements are primarily to meet our working capital needs, support ongoing business activities, fund research and development, meet capital expenditure needs, invest in critical or complementary technologies, and service interest and principal payments on our debt.debt, fund our stock repurchase program, and pay dividends, as and if declared.

The principal objectives of our investment policy are the preservation of principal and maintenance of liquidity. We attempt to mitigate default risk by investing in high-quality investment grade securities, limiting the time to maturity and monitoring the counter-parties and underlying obligors closely. We believe our cash equivalents and short-term investments are liquid and accessible. We are not aware of any significant deterioration in the fair value of our cash equivalents or investments from the values reported as of January 26, 2018.October 25, 2019.

38


Our investment portfolio has been and will continue to be exposed to market risk due to trends in the credit and capital markets. We continue to closely monitor current economic and market events to minimize the market risk of our investment portfolio. We routinely monitor our financial exposure to both sovereign and non-sovereign borrowers and counterparties. We utilize a variety of planning and financing strategies in an effort to ensure our worldwide cash is available when and where it is needed. Based on past performance and current expectations, we believe our cash and cash equivalents, investments, cash generated from operations, and ability to access capital markets and committed credit lines will satisfy, through at least the next 12 months, our liquidity requirements, both in total and domestically, including the following: working capital needs, capital expenditures, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on debt, and other liquidity requirements associated with our operations. We also have an automatic shelf registration statement on file with the Securities and Exchange Commission (SEC). We may in the future offer an additional unspecified amount of debt, equity and other securities.

Senior Notes

The following table summarizes the principal amount of our Senior Notes as of January 26, 2018October 25, 2019 (in millions):

 

2.00% Senior Notes Due September 2019

 

$

400

 

3.375% Senior Notes Due June 2021

 

 

500

 

 

$

500

 

3.25% Senior Notes Due December 2022

 

 

250

 

 

 

250

 

3.30% Senior Notes Due September 2024

 

 

400

 

 

 

400

 

Total

 

$

1,550

 

 

$

1,150

 

Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 98 – Financing Arrangements of the Notes to Condensed Consolidated Financial Statements.

Commercial Paper Program and Credit Facility

We have a commercial paper program (the Program), under which we may issue unsecured commercial paper notes. On July 17, 2017 we amendedAmounts available under the Program to increase the maximum amounts available that may be borrowed, repaid and re-borrowed, to anwith the aggregate face or principal amount of the notes outstanding ofunder the Program at any time not to exceed $1.0 billion as compared to $600 million prior to the amendment. The maturities of the notes can vary, but may not exceed 397 days from the date of issue. The notes are sold under customary terms in the commercial paper market and may be issued at a discount from par or, alternatively, may be sold at par and bear interest at rates dictated by market conditions at the time of their issuance. The proceeds from the issuance of the notes are used for general corporate purposes. As of January 26, 2018,October 25, 2019, we had commercial paper notes outstanding with an aggregate principal amount of $632$499 million, a weighted-average interest rate of 1.81%2.20% and maturities ranging from 177 days to 4691 days.

In connection with the Program, we have a senior unsecured credit agreement that expires on December 10, 2021. The credit agreement which was amended on July 17, 2017 provides a $1.0 billion revolving unsecured credit facility that serves as a back-up for the Program. Proceeds from the facility may also be used for general corporate purposes, providing another potential source of liquidity to the extent that the credit facility exceeds the outstanding debt issued under the Program. The credit agreement also includes options that allow us to request an increase in the facility of up to an additional $300 million and to extend its maturity date for two additional one-year periods, both subject to certain conditions. As of January 26, 2018,October 25, 2019, we were in compliance with all associated covenants in this agreement. No amounts were drawn against this facility during any of the periods presented.

Capital Expenditure Requirements

We expect to fund our capital expenditures, including our commitments related to facilities, equipment, operating leases and internal-use software development projects over the next few years through existing cash, cash equivalents, investments and cash generated from operations. The timing and amount of our capital requirements cannot be precisely determined and will depend on a number of factors, including future demand for products, changes in the network storage industry, hiring plans and our decisions related to the financing of our facilities and equipment requirements. We anticipate capital expenditures for the remainder of fiscal 20182020 to be between $50$75 million and $100 million.

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Dividends and Stock Repurchase Program

On February 14, 2018,November 13, 2019, we declared a cash dividend of $0.20$0.48 per share of common stock, payable on April 25, 2018January 22, 2020 to holders of record as of the close of business on April 6, 2018.January 3, 2020.

Our Board of Directors hadhas authorized the repurchase of up to $9.6$13.6 billion of our common stock under our stock repurchase program.program. Under this program, we canmay purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, andin privately negotiated transactions, at pricesthrough accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management. The stock repurchase program may be suspended or discontinued at any time. Since the May 13, 2003 inception of this program through January 26, 2018,October 25, 2019, we repurchased a total of 279327 million shares of our common stock at an average price of $33.31$38.20 per share, for an aggregate purchase price of $9.3$12.5 billion. As of January 26, 2018,October 25, 2019, the remaining authorized amount for stock repurchases under this program was $0.3 billion, with no termination date, which we plan to complete by May 2018.$1.1 billion.

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The timing and amount of stock repurchase transactions and future dividends will depend on market conditions, corporate business and financial considerations and regulatory requirements.

Contractual Obligations

Operating Lease Commitments

As of January 26, 2018, future annual minimum lease payments under non-cancelable operating leases with an initial term in excess of one year totaled $198 million.

Purchase Orders and Other Commitments

In the ordinary course of business, we make commitments to our third-party contract manufacturers to manage manufacturer lead times and meet product forecasts, and to other parties to purchase various key components used in the manufacture of our products. A significant portion of our reported purchase commitments arising from these agreements consists of firm, non-cancelable, and unconditional commitments. As of January 26, 2018,October 25, 2019, we had $387$447 million in non-cancelable purchase commitments for inventory. We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. To the extent that such forecasts are not achieved, our commitments and associated accruals may change.

In addition to inventory commitments with contract manufacturers and component suppliers, we have open purchase orders and construction related obligations associated with our ordinary course of business for which we have not received goods or services. As of January 26, 2018,October 25, 2019, we had $15$5 million in construction related obligations and $222$244 million in other purchase obligations.

Unrecognized Tax Benefits

As of January 26, 2018,October 25, 2019, our liability for uncertain tax positions was $303$251 million, including interest, penalties and offsetting indirectcertain income tax benefits. Due to the uncertainty of the timing of future cash payments,uncertainties regarding tax audits and their possible outcomes, we cannotare unable to make reasonably reliable estimates of the period of cash settlement with the taxing authorities.

Sale-leaseback Transactions

In fiscal 2016, we entered into a sale-leaseback arrangement of certain of our land and buildings, under which we leased back certain of our properties rent free over lease terms ending at various dates through December 31, 2017. These properties did not qualify for sale-leaseback accounting and as a result they were accounted for as financing transactions. In December 2017, we terminated the leases and recorded a non-cash sale of properties with a net book value of $54 million, the extinguishment of $130 million in financing obligations, and a gain of $76 million. As of January 26, 2018, there are no balances remaining on our condensed consolidated balance sheets associated with this sale-leaseback arrangement.

Financing Guarantees

While most of our arrangements for sales include short-term payment terms, from time to time we provide long-term financing to creditworthy customers. We have generally sold receivables financed through these arrangements on a non-recourse basis to third party financing institutions within 10 days of the contracts’ dates of execution, and we classify the proceeds from these sales as cash flows from operating activities in our condensed consolidated statements of cash flows. We account for the sales of these receivables as “true sales” as defined in the accounting standards on transfers of financial assets, as we are considered to have surrendered control of these financing receivables. Provided all other revenue recognition criteria have been met, we recognize product revenues for these arrangements, net of any payment discounts from financing transactions, upon product acceptance. We sold $62$34 million and $142$43 million of receivables during the first ninesix months of fiscal 20182020 and fiscal 2017,2019, respectively.

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In addition, we enter into arrangements with leasing companies for the sale of our hardware systems products. These leasing companies, in turn, lease our products to end-users. The leasing companies generally have no recourse to us in the event of default by the end-user and we recognize revenue upon delivery to the end-user customer, if all other revenue recognition criteria have been met.

Some of the leasing arrangements described above have been financed on a recourse basis through third-party financing institutions. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. These arrangements are generally collateralized by a security interest in the underlying assets. Where we provide a guarantee for recourse leases and collectability is probable, we defer revenues subjectaccount for these transactions as sales type leases. If collectability is not probable, the cash received is recorded as a deposit liability and revenue is deferred until the arrangement is deemed collectible. For leases that we are not a party to, the industry-specific softwareother than providing recourse, we recognize revenue recognition guidance and recognize revenues for non-software deliverables in accordance with our multiple deliverable revenue arrangement policy. In connection with certain recourse financing arrangements, we receive advance payments associated with undelivered elements that are subject to customer refund rights.when control is transferred. As of January 26, 2018October 25, 2019 and April 28, 2017,26, 2019, the aggregate amount by which such contingencies exceeded the associated liabilities was not significant. To date, we have not experienced significant losses under our lease financing programs or other financing arrangements.

We have entered into service contracts with certain of our end-user customers that are supported by third-party financing arrangements. If a service contract is terminated as a result of our non-performance under the contract or our failure to comply with the terms of the financing arrangement, we could, under certain circumstances, be required to acquire certain assets related to the service contract or to pay the aggregate unpaid payments under such arrangements. As of January 26, 2018,October 25, 2019, we have not been required to make any payments under these arrangements, and we believe the likelihood of having to acquire a material amount of assets or make payments under these arrangements is remote. The portion of the financial arrangement that represents unearned services revenue is included in deferred revenue and financed unearned services revenue in our condensed consolidated balance sheets.

Indemnification Agreements

We enter 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-parties due to various events, such as lawsuits arising from patent or copyright infringement. These indemnification obligations are considered off-balance sheet arrangements under accounting guidance.

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Legal Contingencies

We are subject to various legal proceedings and claims which arise in the normal course of business. See further details on such matters in Note 16 – Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.

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ItemItem 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to fluctuations in market prices, interest rates, and foreign currency exchange rates. We use certain derivative financial instruments to manage foreign currency exchange risks. We do not use derivative financial instruments for speculative or trading purposes. All financial instruments are used in accordance with management-approved policies.

Interest Rate Risk

Fixed Income Investments — As of January 26, 2018,October 25, 2019, we had fixed income debt investments of $3.1 billion.$442 million. Our investment portfolio primarily consists of investments with original maturities greater than three months at the date of purchase, which are classified as available-for-sale investments. These investments, which consist primarily of corporate bonds, U.S. Treasury and government debt securities commercial paper and certificates of deposit, are subject to interest rate and interest income risk and will decrease in value if market interest rates increase. Conversely, declines in interest rates, including the impact from lower credit spreads, could have a material adverse impact on interest income for our investment portfolio. A hypothetical 100 basis point increase in market interest rates from levels as of January 26, 2018October 25, 2019 would have resulted in a decrease in the fair value of our fixed-income securities of approximately $53$2 million. Volatility in market interest rates over time will cause variability in our interest income. We do not use derivative financial instruments in our investment portfolio.

Our investment policy is to limit 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 actively review, along with our investment advisors, current investment ratings, company-specific events and general economic conditions in managing our investments and in determining whether there is a significant decline in fair value that is other-than-temporary. We monitor and evaluate our investment portfolio on a quarterly basis for any other-than-temporary impairments.

Debt — As of January 26, 2018,October 25, 2019, we have outstanding $1.6$1.2 billion aggregate principal amount of Senior Notes. We carry these instruments at face value less unamortized discount on our condensed consolidated balance sheets. Since these instruments bear interest at fixed rates, we have no financial statement risk associated with changes in interest rates. However, the fair value of these instruments fluctuates when interest rates change. See Note 98 – Financing Arrangements of the Notes to Condensed Consolidated Financial Statements for more information.

Credit Facility — We are exposed to the impact of changes in interest rates in connection with our $1.0 billion five-year revolving credit facility. Borrowings under the facility accrue interest at rates that vary based on certain market rates and our credit rating on our Senior Notes. Consequently, our interest expense would fluctuate with any changes in these market interest rates or in our credit rating if we were to borrow any amounts under the credit facility. As of January 26, 2018,October 25, 2019, no amounts were outstanding under the credit facility.

Foreign Currency Exchange Rate Risk

We hedge risks associated with certain foreign currency transactions to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize foreign currency exchange forward and option contracts to hedge against the short-term impact of foreign currency fluctuations on certain foreign-currency-denominatedforeign currency denominated monetary assets and liabilities. We also use foreign currency exchange forward contracts to hedge foreign currency exposures related to forecasted sales transactions denominated in certain foreign currencies. These derivatives are designated and qualify as cash flow hedges under accounting guidance for derivatives and hedging.

We do not enter into foreign currency exchange contracts for speculative or trading purposes. In entering into foreign currency exchange forward and option contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of the contracts. We attempt to limit our exposure to credit risk by executing foreign currency exchange contracts with creditworthy multinational commercial banks. All contracts have a maturity of less than six12 months. See Note 11 – Derivatives and Hedging Activities of the Notes to Condensed Consolidated Financial Statements for more information regarding our derivatives and hedging activities.

 

 

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ItemItem 4. Controls and Procedures.

Disclosure Controls and Procedures

The phrase “disclosure controls and procedures” refers to controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (SEC). Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of January 26, 2018,October 25, 2019, the end of the fiscal period covered by this Quarterly Report on Form 10-Q (the Evaluation Date). Based on this evaluation, our CEO and CFO concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information required to be disclosed in our SEC reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with our evaluation that occurred during the thirdsecond quarter of fiscal 20182020 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

 

 

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PARTPART II — OTHER INFORMATION

 

 

For a discussion of legal proceedings, see Note 16 – Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.

 

 

Item 1A. Risk Factors.

 

The following descriptions of risk factors includes any material changes to, and supersedes the description of risk factors associated with, the Company’s business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended April 28, 201726, 2019 (the “2019 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) (the “2017 Form 10-K”) under the heading “Risk Factors.” Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly cause our actual results of operations and financial condition to vary materially from the past, or from anticipated future, results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, results of operations and common stock price.

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding any statement in this Form 10-Q or elsewhere. The following information should be read in conjunction with the condensed consolidated financial statements and the related notes in Part I, Item 1 – Financial Statements and Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q.

The following discussion reflects our current judgment regarding the most significant risks we face. These risks can and will change in the future.

Our business may be harmed by technological trends in the networked storage hardwareour market or if we are unable to keep pace with rapid industry, technological and market changes.

Our industry and the markets in which we compete have historically experienced significant growth due to the increase in the demand for storage and data management solutions by consumers, enterprises and government bodies around the world, and the resultant purchases of storage and data management solutions to address this demand. However, despite continued data growth, our traditional market, the networked storage hardware market, experienced a decline in each of the last twothree calendar years due to a combination of customers delaying purchases in the face of technology transitions, increasing adoption of Cloud environments built on commodity hardware, increased storage efficiency, and changing economic and business environments. While customers are navigating through their ITinformation technology (IT) transformations, which leverage modern architectures and hybrid cloud environments, they are also reducing IT budgets, looking for simpler solutions, and rethinking how they consume IT. This evolution is diverting spending towards transformational projects and architectures like flash, hybrid cloud, IT as a service, converged infrastructure, and software defined storage. Our business may be adversely impacted if we are unable to keep pace with rapid industry, technological or market changes or if our Data Fabric strategy is not accepted in the marketplace. As a result of these and other factors discussed in the report, our revenue may grow atdecline on a slower rate than in past periods, or may declineyear-over-year basis, as it did in fiscal years 2015, 2016 and 2017, on a year-over year basis.2017. The future impact of these trends on both short-term and long-term growth patterns is uncertain. If the general historical rate of industry growth declines, if the growth rates of the specific markets in which we compete decline, and/or if the consumption model of storage changes and our new and existing products, services and solutions do not receive customer acceptance, our business, operating results and financial condition could suffer.

If we are unable to develop, introduce and gain market acceptance for new products and services while managing the transition from older products,ones, or if we cannot provide the expected level of quality service and support for our new products and services, our business, operating results and financial condition could be harmed.

Our future growth depends upon the successful development and introduction of new hardware and software products and related services. Due to the complexity of storage software, subsystems and appliances and the difficulty in gauging the engineering effort required to produce new products and services, such products and services are subject to significant technical and quality control risks.

If we are unable, for technological, customer reluctance or other reasons, to develop, introduce and gain market acceptance for new products and services, as and when required by the market and our customers, our business, operating results and financial condition could be materially and adversely affected.

44


New or additional product introductions, including new softwarehardware and flash productsoftware offerings, such as NetApp HCI, Cloud Volumes ONTAP, Cloud,and new all flash FAS, AltaVault, and SolidFire,storage products, subject us to additional financial and operational risks, including our ability to forecast customer preferences and/or demand, our ability to successfully manage the transition from older products and solutions, our ability to forecast the impact of customers’ demand for new products, services and solutions or the products being replaced, and our ability to manage production capacity to meet the demand for new products.products and services. In addition, as new or enhanced products and services are introduced, we must also avoid excessive levels of

41


older product inventories and related components and ensure that enough supplies of new products and services can be delivered to meet customers’ demands. Further risks inherent in the introduction of new productproducts, services and solutions introductions include the uncertainty of price-performance relative to products of competitors, competitors’ responses to the introductions, delays in sales caused by the desire of customers to evaluate new products for extended periods of time and our partners’ investment in selling our new products and solutions. If these risks are not managed effectively, we could experience material risks to our operations, financial condition and business model.

As we enter 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.

Our new consumption basedTransition to consumption-based business models may adversely affect our revenues and profitability.profitability in other areas of our business.

We offer customers a full range of consumption models, including the deployment of our software through our subscription and cloud-based SaaS,Software as a Service (SaaS), and utility pricing and managed services offerings for our hardware and software systems. These business models continue to evolve, and we may not be able to compete effectively, generate significant revenues or maintain the profitability of our consumption basedconsumption-based offerings. Additionally, the increasing prevalence of cloud and SaaS delivery models offered by us and our competitors may unfavorably impact the pricing of our on-premise hardware and software offerings and could have a dampening impact on overall demand for our on-premise hardware and software product and service offerings, which could reduce our revenues and profitability, at least in the near term. If we do not successfully execute our consumption model strategy or anticipate the needs of our customers, our revenues and profitability could decline.

As customer demand for our consumption model offerings increases, we couldwill experience volatilitydifferences in our reported revenues and operating results due to the differences in timing of revenue recognition between our traditional hardware arrangements and software licenses, (that arelicense arrangements, including for the software license components of enterprise software license agreements (for which revenue is generally recognized in full at the time of delivery), relative to our consumption model offering arrangements, (that areofferings, (for which revenue is generally recognized ratably over the termsterm of the arrangement). We incur certain expenses associated with the infrastructure and marketing of our consumption model offerings in advance of our ability to recognize the revenues associated with these offerings.

Our sales and distribution structure makes forecasting revenues difficult and, if disrupted, could harm our operating results.

Our business and sales models make revenues difficult to forecast. We sell to a variety of customers directly and through various channels, with a corresponding variety of sales cycles. In addition,cycles, and we recently reorganized our sales resources to improve the alignment of those resources with customer and market opportunities. The reorganization of our sales resources could result in short or long-term disruption of our sales cycles and harm our operating results. The majority of our sales are made and/or fulfilled indirectly through channel partners, including value-added resellers, systems integrators, distributors, original equipment manufacturers (OEMs) and strategic business partners.partners, which now include hyperscalers. This structure significantly complicates our ability to forecast future revenue, especially within any particular fiscal quarter or year. Moreover, our relationships with our indirect channel partners and strategic business partners are critical to our success. The loss of one or more of our key indirect channel partners in a given geographic area or the failure of our channel or strategic partners to promote our products could harm our operating results, as qualifyingresults. Qualifying and developing new indirect channel partners typically requirerequires a significant investment of time and resources before acceptable levels of productivity are met. If we fail to maintain our relationships with our indirect channel partners and strategic partners, if their financial condition, business or customer relationships were to weaken, if they fail to comply with legal or regulatory requirements, or if we were to cease to do business with them for these or other reasons, our business, operating results and financial condition could be harmed.

Increasing competition and industry consolidation could harm our business and operating results.

The storage and data management markets are intensely competitive and are characterized by rapidly changing technology and fragmentation. We compete with many companies in the markets we serve, including established public companies, newlynewer public companies with a strong flash focus, and new market entrants addressing the growing opportunity for hyper-converged systems. Some offer a broad spectrum of IT products and services (full-stack vendors) and others offer a more limited set of storage and data management products or services. Technology trends, such as the emergence of hosted or public cloud storage, SaaS and flash storage are driving significant changes in storage architectures and solution requirements. Cloud service providers provide customers storage as an operating expense, rather than asfor their data centers on demand, without requiring a capital expenditure, for the customers’ data centers, which meets rapidly evolving business needs and has changed the competitive landscape.

45


Competitors may develop new technologies or products in advance of us or establish new business models, more flexible contracting models or new technologies disruptive to us. By extending our flash, converged infrastructure and cloud storage offerings, we are competing in new segments with both traditional competitors and new competitors, particularly smaller emerging storage vendors. The longer-term potential and competitiveness of these emerging vendors remains to be determined. In cloud and converged infrastructure, we also compete with large well-established competitors.

For additional information regarding our competitors, see the section entitled “Competition” contained in Item 1 – Business of Part I of our fiscal 2017this Form 10-K. It is possible that new competitors or alliances among competitors might emerge and rapidly acquire significant market share or buying power. An increase in industry consolidation might result in stronger competitors that are better able to compete as full stackfull-stack vendors for customers and achieve increased economies of scale in the supply chain. For example, in October 2016, Dell Inc. and EMC Corp. consummated their agreement to merge. Also, in April 2017, HP Enterprise completed their

42


acquisition of Nimble Storage. In addition, current and potential competitors have established or might establish cooperative relationships among themselves or with third parties, including some of our partners or suppliers.

Continuing uncertain economic and political conditions restrict our visibility and may harm our operating results, including our revenue growth and profitability.

The continuingContinuing global economic uncertainty, political conditions and fiscal challenges in the United States (U.S.) and abroad have, among other things, limited our ability to forecast future demand for our products, contributed to increased periodic volatility in the computer, storage and networking industries at large, as well as the information technology (IT)IT market, and could constrain future access to capital for our suppliers, customers and partners. The impacts of these circumstances are global and pervasive, and the timing and nature of any ultimate resolution of these matters remain highly uncertain. Consequently, we expect these concerns to challenge our business for the foreseeable future, which could cause harm to our operating results. Such conditions have resulted, and may in the future again result, in failure to meet our forecasted financial expectations and to achieve historical levels of revenue growth.

Our quarterly operating results may fluctuate materially, which could harm our common stock price.

Our operating results have fluctuated in the past and will continue to do so, sometimes materially. All of the matters discussed in this Risk Factors section could impact our operating results in any fiscal quarter or year. In addition to those matters, we face the following issues, which could impact our quarterly results:

 

Seasonality, such as our historical seasonal decline in revenues in the first quarter of our fiscal year and seasonal increase in revenues in the second quarter of our fiscal year, with the latter due in part to the impact of the U.S. federal government’s September 30 fiscal year end on the timing of its orders; and

Seasonality, such as our historical seasonal decline in revenues in the first quarter of our fiscal year and seasonal increase in revenues in the second quarter of our fiscal year, with the latter due in part to the impact of the U.S. federal government’s September 30 fiscal year end on the timing of its orders; and

 

Linearity, such as our historical intra-quarter bookings and revenue pattern in which a disproportionate percentage of each quarter’s total bookings and related revenue occur in the last month of the quarter; and

Linearity, such as our historical intra-quarter bookings and revenue pattern in which a disproportionate percentage of each quarter’s total bookings and related revenue occur in the last month of the quarter.

Unpredictability associated with larger scale enterprise software license agreements which generally take longer to negotiate and occur less consistently than other types of contracts, and for which revenue attributable to the software license component is typically recognized in full upon delivery.

If our operating results fall below our forecasts and the expectations of public market analysts and investors, the trading price of our common stock may decline.

If we are unable to maintain and develop relationships with strategic partners, our revenues may be harmed.

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Our growth strategy includes developing and maintaining strategic partnerships with major third-party software and hardware vendors to integrate our products into their products and also co-market our products with them. A number of our strategic partners are industry leaders that offer us expanded access to segments of the storage and data management markets. In particular, strategic partnerships with hyperscalers and cloud service vendors are critical to the success of our cloud-based business. However, there is intense competition for attractive strategic partners, and these relationships may not be exclusive, may not generate significant revenues and may be terminated on short notice. For instance, some of our partners are also partnering with our competitors, which may increase the availability of competing solutions and harm our ability to grow our relationships with those partners. Moreover, some of our partners, particularly large, more diversified technology companies, are also competitors, thereby complicating our relationships. If we are unable to establish new partnerships or maintain existing partnerships, if our strategic partners favor their relationships with other vendors in the storage industry or if our strategic partners increasingly compete with us, we could experience lower than expected revenues, suffer delays in product development, or experience other harm to our business, operating results and financial condition.

A portion of our revenues is generated by large, recurring purchases from various customers, resellers and distributors. A loss, cancellation or delay in purchases by any of these parties has negatively affected our revenues in the past, and could negatively affect our revenues in the future.

A significant portion of our net revenues are generated through sales to a limited number of customers and distributors. We generally do not enter into binding purchase commitments with our customers, resellers and distributors for extended periods of time, and thus there is no guarantee we will continue to receive large, recurring orders from these customers, resellers or distributors. For example, our reseller agreements generally do not require minimum purchases, and our customers, resellers and distributors can stop purchasing and marketing our products at any time. In addition, unfavorable economic conditions may negatively impact the solvency of our customers, resellers and distributors or the ability of such customers, resellers and distributors to obtain credit to finance purchases of our products. If any of our key customers, resellers or distributors changes its pricing practices, reduces the size or frequency of its orders for our products, or stops purchasing our products altogether, our operating results and financial condition could be materially adversely impacted.

Our gross margins vary.

Our gross margins reflect a variety of factors, including competitive pricing, component and product design, and the volume and relative mix of revenues from product, software maintenance, hardware maintenance and other services revenues.offerings. Increased component costs, increased pricing and discounting pressures, the relative and varying rates of increases or decreases in component costs and product prices, or changes in the mix of revenue or decreased volume from product, software maintenance, hardware maintenance and other services revenue mix or decreased volumeofferings could harm our revenues, gross margins or earnings. Our gross margins are also impacted by the cost of any materials that are of poor quality and our sales and distribution activities, including, without limitation, pricing actions, rebates, sales initiatives and discount levels, and the timing of service contract renewals.

The costs of third-party components comprise a significant portion of our product costs. While we generally have been able to manage our component and product design costs, we may have difficulty managing these costs if supplies of certain components become limited or component prices increase. Any such limitation could result in an increase in our product costs. An increase in component or design costs relative to our product prices could harm our gross margins and earnings.

We often incur expenses before we receive related benefits, and expenses may be difficult to reduce quickly if demand declines.

We base our expense levels in part on future revenue expectations and a significant percentage of our expenses is fixed. It is difficult to reduce our fixed costs quickly, and if revenue levels are below our expectations, operating results could be adversely impacted. During periods of uneven growth or decline, we may incur costs before we realize the anticipated related benefits, which could also harm our operating results. We have made, and will continue to make, significant investments in engineering, sales, service and support, marketing and other functions to support and grow our business. We are likely to recognize the costs associated with these investments earlier than some of the related anticipated benefits, such as revenue growth, and the return on these investments may be lower, or may develop more slowly, than we expect, which could harm our business, operating results and financial condition.

If we are unable to maintain and develop relationships with strategic partners, our revenues may be harmed.

Our growth strategy includes developing and maintaining strategic partnerships with major third-party software and hardware vendors to integrate our products into their products and also co-market our products with them. A number of these strategic partners are industry leaders that offer us expanded access to segments of the storage and data management markets. However, there is intense competition for attractive strategic partners, and these relationships may not be exclusive, may not generate significant revenues and may be terminated on short notice. For instance, some of our partners are also partnering with our competitors, which may increase the availability of competing solutions and harm our ability to grow our relationships with those partners. Moreover, some of our partners,

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particularly large, more diversified technology companies, are also competitors, complicating our relationships. If we are unable to establish new partnerships or maintain existing partnerships, if our strategic partners favor their relationships with other vendors in the storage industry or if our strategic partners increasingly compete with us, we could experience lower than expected revenues, suffer delays in product development, or experience other harm to our business, operating results and financial condition.

If we do not achieve forecasted bookings in any quarter, our financial results could be harmed.

We derive a majority of our revenues in any given quarter from orders booked in the same quarter. Bookings typically follow intra-quarter seasonality patterns weighted toward the back end of the quarter. If we do not achieve the level, timing and mix of bookings consistent with our quarterly targets and historical patterns, or if we experience cancellations of significant orders, our financial results could be harmed.

A portion of our revenues is generated by large, recurring purchases from various customers, resellers and distributors. A loss, cancellation or delay in purchases by any of these parties has negatively affected us in the past, and in the future could, negatively affect our revenues.

A significant portion of our net revenues are generated through sales to a limited number of distributors. We generally do not enter into binding purchase commitments with our customers, resellers and distributors for extended periods of time, and thus we may not be able to continue to receive large, recurring orders from these customers, resellers or distributors. For example, our reseller agreements generally do not require minimum purchases, and our customers, resellers and distributors can stop purchasing and marketing our products at any time. In addition, unfavorable economic conditions may negatively impact the solvency of our customers, resellers and distributors or the ability of such customers, resellers and distributors to obtain credit to finance purchases of our products. If any of our key customers, resellers or distributors changes its pricing practices, reduces the size or frequency of its orders for our products, or stops purchasing our products altogether, our operating results and financial condition could be materially adversely impacted.

We rely on a limited number of suppliers for critical product components.

We rely on a limited number of suppliers for drives and other components utilized in the assembly of our products, including certain single source suppliers, which has subjected us, and could in the future subject us, to price rigidity, periodic supply constraints, and the inability to produce our products with the quality and in the quantities demanded. Consolidation among suppliers, particularly within the semiconductor and disk drive industries, has contributed to price rigidity and may in the future create supply constraints. When industry supply is constrained, our suppliers may allocate volumes away from us and to our competitors, all of which rely on many of the same suppliers as we do. Accordingly, our operating results may be harmed.

Any disruption to our supply chain could materially harm our business, operating results and financial condition.

We do not manufacture our products or their components. Instead, we rely on third parties to make our products and critical components, such as disk drives, as well as for associated logistics. Our lack of direct responsibility for, and control over, these elements of our business, as well as the diverse international geographic locations of our manufacturing partners and suppliers, creates significant risks for us, including, among other things:

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Limited ability to control the quality, quantity and cost of our products or of their components;

 

The potential for binding price or purchase commitments with our suppliers that areat higher than market rates;

 

Limited ability to adjust production volumes in response to our customers’ demand fluctuations;

 

Labor and political unrest at facilities we do not operate or own;

 

Geopolitical disputes disrupting our supply chain;

 

Business, legal compliance, litigation and financial concerns affecting our suppliers or their ability to manufacture and ship our products in the quantities, quality and manner we require; and

 

Disruptions due to floods, earthquakes, storms and other natural disasters, particularly in countries with limited infrastructure and disaster recovery resources.

Such risks have in the pastsubjected us, and could again in the future subject us, to supply constraints, price increases and minimum purchase requirements and our business, operating results and financial condition could be harmed. The risks associated with our out-sourcedoutsourced manufacturing model are particularly acute when we transition products to new facilities or manufacturers, introduce and increase volumes of new products or qualify new contract manufacturers or suppliers, at which times our ability to manage the relationships among us, our manufacturing partners and our component suppliers, becomes critical. New manufacturers, products, components or

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facilities create increased costs and risk that we will fail to deliver high quality products in the required volumes to our customers. Any failure of a manufacturer or component supplier to meet our quality, quantity or delivery requirements in a cost-effective manner will harm our business, operating results and customer relationships.

Due to the global nature of our business, risks inherent in our international operations could materially harm our business.

A significant portion of our operations isare located, and a significant portion of our revenues isare derived, outside of the U.S. In addition, most of our products are manufactured outside of the U.S., and we have research and development, sales and service centers overseas. Accordingly, our business and our future operating results could be adversely impacted by factors affecting our international operations including, among other things, local political or economic conditions, trade protection and export and import requirements, tariffs, local labor conditions, transportation costs, government spending patterns, acts of terrorism, international conflicts and natural disasters in areas with limited infrastructure. In particular, the current trade tensions between the U.S. and China, including newly imposed tariffs, and the United Kingdom’s pending withdrawal from the European Union, which is now scheduled to be effective on January 31, 2020, could impact our business and operating results. For products we manufacture in Mexico, tensions between the U.S. and Mexico related to trade and border security issues could delay our shipments to customers, or impact pricing or our business and operating results. In addition, due to the global nature of our business, we are subject to complex legal and regulatory requirements in the U.S. and the foreign jurisdictions in which we operate and sell our products, including antitrust and anti-competition laws, rules and regulations, and regulations related to data privacy. We are also subject to the potential loss of proprietary information due to piracy, misappropriation, or laws that may be less protective of our intellectual property rights than U.S. laws. Such factors could have an adverse impact on our business, operating results and financial condition.

We face exposure to adverse movements in foreign currency exchange rates as a result of our international operations. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. We utilize forward and option contracts in an attempt to reduce the adverse earnings impact from the effect of exchange rate fluctuations on certain assets and liabilities as well as certain anticipated foreign currency cash flows on a short-term basis.liabilities. Our hedging strategies may not be successful, and currency exchange rate fluctuations could have a material adverse effect on our operating results.results and cash flows. In addition, our foreign currency exposure on assets, liabilities and liabilities for whichcash flows that we do not hedge could have a material impact on our operatingfinancial results in periods when the U.S. dollar significantly fluctuates in relation to unhedged non-U.S. currencies in which we transact business.

Additional risks inherent in our international business activities generally include, among others, longer accounts receivable payment cycles and difficulties in managing international operations.foreign currencies.

Moreover, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by our internal policies and procedures, or U.S. laws and regulations applicable to us, such as the Foreign Corrupt Practices Act. There can be no assurance that all our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, will comply with these policies, procedures, laws and/or regulations. Any such violation could subject us to fines and other penalties, which could have a material adverse effect on our business, operating results and financial condition.

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We often incur expenses before we receive related benefits, and expenses may be difficult to reduce quickly if demand declines.

We base our expense levels in part on future revenue expectations and a significant percentage of our expenses are fixed. It is difficult to reduce our fixed costs quickly, and if revenue levels are below our expectations, operating results could be adversely impacted. During periods of uneven growth or decline, we may incur costs before we realize the anticipated related benefits, which could also harm our operating results. We have made, and will continue to make, significant investments in engineering, sales, service and support, marketing and other functions to support and grow our business. We are likely to recognize the costs associated with these investments earlier than some of the related anticipated benefits, such as revenue growth, and the return on these investments may be lower, or may develop more slowly, than we expect, which could harm our business, operating results and financial condition.

We could be subject to additional income tax liabilities.

Our effective tax rate is influenced by a variety of factors, many of which are outside of our control. These factors include among other things, fluctuations in our earnings and financial results in the various countries and states in which we do business, the outcome of income tax audits and changes to the tax laws in such jurisdictions. Changes to any of these factors could materially impact our operating results.

We receive significant tax benefits from sales to our non-U.S. customers. These benefits are contingent upon existing tax laws and regulations in the U.S. and in the countries in which our international operations are located. Future changes in domestic or international tax laws and regulations or a change in how we manage our international operations could adversely affect our ability to continue realizing these tax benefits.

Many countries around the world are beginning to implement legislation and other guidance to align their international tax rules with the Organisation for Economic Co-operation’s Base Erosion and Profit Shifting recommendations and related action plans that aim to standardize and modernize global corporate tax policy, including changes to cross-border tax, transfer-pricing documentation rules and nexus-based tax incentive practices. As a result, many of these changes, if enacted, could increase our worldwide effective tax rate and harm our financial position and results of operations.

We are routinely subject to income tax audits in the U.S. and several foreign tax jurisdictions. If the ultimate determination of income taxes or at-source withholding taxes assessed under these audits results in amounts in excess of the tax provision we have recorded or reserved for, our operating results, cash flows and financial condition could be adversely affected.

Our effective tax rate could also be adversely affected by different and evolving interpretations of existing law or regulations, which in turn would negatively impact our operating and financial results as a whole. Additionally, our effective tax rate could also be adversely affected if there is a change in international operations, our tax structure and how our operations are managed and structured, and as a result, we could experience harm to our operating results and financial condition. The recent U.S. tax law changes enacted through the Tax Cuts and Jobs Act effective in December 2017 are subject to further interpretations from the U.S. federal and state governments and regulatory organizations, such as the Treasury Department and/or IRS.Internal Revenue Service. Changes to interpretations of the law could change the provisional tax

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expenseamount or accounting treatment of the $739 million expense we have recorded in relation to the transition tax. We have elected to pay the transition tax over a period of eight years. As result, our cash flows from operating activities will be adversely impacted until the additional tax provisions are paid in full.

Our success depends upon our ability to effectively plan and manage our resources and restructure our business in response to changing market conditions and market demand for our products, and such actions may have an adverse effect on our financial and operating results.

Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning, forecasting, and management process to enable us to effectively scale and adjust our business in response to fluctuating market opportunities and conditions.

In response to changes in market conditions and market demand for our products, we have in the past undertaken cost savings initiatives. For example, in May 2015, March 2016 and November 2016, we executed restructuring events designed to streamline our business, reduce our cost structure and focus our resources on key strategic opportunities. As a result, we have recognized substantial restructuring charges. We may in the future undertake initiatives that may include restructuring, disposing of, and/or otherwise discontinuing certain products, or a combination of these actions. Rapid changes in the size, alignment or organization of our workforce, including sales account coverage, could adversely affect our ability to develop, sell and deliver products and services as planned or impair our ability to realize our current or future business and financial objectives. Any decision to take these actions may result in charges to earnings associated with, among other things, inventory or other fixed, intangible or goodwill asset reductions (including, without limitation, impairment charges), workforce and facility reductions and penalties and claims from third party resellers or users of discontinued products. Charges associated with these activities would harm our operating results. In addition to the costs associated with these activities, we may not realize any of the anticipated benefits of the underlying restructuring activities.

If our products are defective, or are perceived to be defective as a result of improper use or maintenance, our gross margins, operating results and customer relationships may be harmed.

Our hardware and software products are complex. We have experienced in the past, and expect to experience in the future, quality issues. Quality risk is most acute when we are introducing new products. Quality issues have and could again in the future cause customers to experience outages or disruptions in service, data loss or data corruption. 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, loss of revenue, inventory costs or product reengineering expenses and higher ongoing warranty and service costs, and these occurrences could have a material impact on our gross margins, business and operating results. In addition, we exercise little control over how our customers use or maintain our products, and in some cases improper usage or maintenance could impair the performance of our products, which could lead to a perception of a quality issue. Customers and we may experience losses that may result from or are alleged to result from defects in our products, which could subject us to claims for damages, including consequential damages.

If a data center or other third-party who relies on our products experiences a disruption in service or a loss of data, such disruption could be attributed to the quality of our products, thereby causing financial or reputational harm to our business.

Our clients, including data centers, SaaS, cloud computing and Internetinternet infrastructure and bandwidth providers, rely on our products for their data storage needs. Our clients may authorize third-party technology providers to access their data on our systems. Because we do not control the transmissions between our clients, their customers, and third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the complete integrity or security of such transmissions or processing. Errors or wrongdoing by clients, their customers, or third-party technology providers resulting in security breaches may be attributed to us.

A failure or inability to meet our clients’ expectations with respect to security and confidentiality through a disruption in the services provided by these third-party vendors, or the loss of data stored by such vendors, could result in financial or reputational harm to our business to the extent that such disruption or loss is caused by, or perceived by our customers to have been caused by, defects in our products. Moreover, the risk of reputational harm may be magnified and/or distorted through the rapid dissemination of information over the Internet,internet, including through news articles, blogs, chat rooms, and social media sites. This may affect our ability to retain clients and attract new business.

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If a cybersecurity or other security breach occurs on our systems or on our end userend-user customer systems, or if stored data is improperly accessed, customers may reduce or cease using our solutions, our reputation may be harmed and we may incur significant liabilities.

We store and transmit personal, sensitive and proprietary data related to our products, our employees, customers, clients and partners (including third-party vendors such as data centers and providers of SaaS, cloud computing, and Internetinternet infrastructure and bandwidth), and their respective customers, including intellectual property, books of record and personally identifiablepersonal information. It is critical to our business strategy that our infrastructure, remainsproducts and services remain secure and isare perceived by customers, clients and partners to be secure. There are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, state-sponsored intrusions, industrial espionage,

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human error and technological vulnerabilities. Cybersecurity incidents or other security breaches could result in (1) unauthorized access to, or loss or unauthorized disclosure of, such information; (2) litigation, indemnity obligations, government investigations and other possible liabilities; (3) negative publicity; and (4) disruptions to our internal and external operations. Any of these could damage our reputation and public perception of the security and reliability of our products, as well as harm our business and cause us to incur significant liabilities. In addition, a cybersecurity incident or other security breachloss of personal information could result in other negative consequences, including remediation costs, disruption of internal operations, increased cybersecurity protection costs and lost revenues.

Our clients and customers use our platforms for the transmission and storage of sensitive data. We do not monitor or review the information or content that our clients and their customers upload and store, and, therefore, we have no direct control over the substance of the information or content stored within our platforms. If our employees, or our clients, partners or their respective customers use our platforms for the transmission or storage of personally identifiablepersonal or other sensitive information and our security measures are breached as a result of third-party action, employee error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business may be harmed and we could incur significant liabilities.

High-profile cyber-attackscyberattacks and security breaches have increased in recent years, and security industry experts and government officials have warned about the risks of hackers and cyberattacks targeting information technologyIT products and businesses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As we continue to increase our client base and expand our brand, we may become more of a target for third parties seeking to compromise our security systems and we anticipate that hacking attempts and cyberattacks will increase in the future. We cannot give assurance that we will always be successful in preventing or repelling unauthorized access to our systems.

Many jurisdictions have enacted or are enacting laws requiring companies to notify regulators or individuals of data security breachesincidents involving certain types of personal data. These mandatory disclosures regarding security breachesincidents often lead to widespread negative publicity. Moreover, the risk of reputational harm may be magnified and/or distorted through the rapid dissemination of information over the Internet,internet, including through news articles, blogs, chat rooms, and social media sites. Any security breach,incident, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our data security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their support contracts or their SaaS subscriptions, or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results. In particular, our SaaSOur business could be subject to stricter obligations, and greater fines and private causes of action under the impending enactment of new data privacy laws, including but not limited to, the new European Union General Data Protection Regulation enacted on May 25, 2018.2018 and the California Consumer Privacy Act to be enacted on January 1, 2020.

There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. Our existing general liability insurance coverage and coverage for errors and omissions may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims, or our insurers may deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, operating results and financial condition.

Our success depends upon our ability to effectively plan and manage our resources and restructure our business in response to changing market conditions and market demand for our products, and such actions may have an adverse effect on our financial and operating results.

Our ability to successfully offer our products and services in a rapidly evolving market requires an effective planning, forecasting, and management process to enable us to effectively scale and adjust our business in response to fluctuating market opportunities and conditions.

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In response to changes in market conditions and market demand for our products, we have in the past undertaken cost savings initiatives. For example, in March 2016, November 2016, May 2018, April 2019 and May 2019 we executed restructuring events designed to streamline our business, reduce our cost structure and focus our resources on key strategic opportunities. As a result, we have recognized substantial restructuring charges. In fiscal 2018, we created the Storage Systems and Software, Cloud Data Services, and Cloud Infrastructure business units to enable us to develop the organization and systems to successfully execute a multi-product business. We also reorganized our sales resources to better align with customer and market opportunities. We may in the future undertake initiatives that could include reorganizing our workforce, restructuring, disposing of, and/or otherwise discontinuing certain products, or a combination of these actions. Rapid changes in the size, alignment or organization of our workforce, including our new business unit structure and sales account coverage, could adversely affect our ability to develop, sell and deliver products and services as planned or impair our ability to realize our current or future business and financial objectives. Any decision to take these actions may result in charges to earnings associated with, among other things, inventory or other fixed, intangible or goodwill asset reductions (including, without limitation, impairment charges), workforce and facility reductions and penalties and claims from third-party resellers or users of discontinued products. Charges associated with these activities would harm our operating results. In addition to the costs associated with these activities, we may not realize any of the anticipated benefits of the underlying restructuring activities.

If our products are defective, or are perceived to be defective as a result of improper use or maintenance, our gross margins, operating results and customer relationships may be harmed.

Our hardware and software products are complex. We have experienced in the past, and expect to experience in the future, quality issues. Such quality issues may be due to, for example, our own designs or processes, the designs or processes of our suppliers, and/or flaws in third-party software used in our products. Quality risk is most acute when we are introducing new products. We have also increased the cadence of our product release cycle, which could impact product and service quality. Quality issues have and could again in the future cause customers to experience outages or disruptions in service, data loss or data corruption. 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, loss of revenue, inventory costs or product reengineering expenses and higher ongoing warranty and service costs, and these occurrences could have a material impact on our gross margins, business and operating results. In addition, we exercise little control over how our customers use or maintain our products, and in some cases improper usage or maintenance could impair the performance of our products, which could lead to a perception of a quality issue. Customers and we may experience losses that may result from or are alleged to result from defects in our products, which could subject us to claims for damages, including consequential damages.

If we are unable to attract and retain qualified personnel, our business, operating results and financial condition could be harmed.

Our continued success depends, in part, on our ability to hire and retain qualified personnel and to preserve the key aspects of our corporate culture. 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 hire and retain qualified engineers.engineers, including in emerging areas of technology such as artificial intelligence and machine learning. In addition, to increase revenues, we will be required to increase the productivity of our sales force and support infrastructure to achieve adequate customer coverage. Competition for qualified employees, particularly in Silicon Valley, is intense. We have periodically reduced our workforce, including an 11% reduction announced in March 2016, and a 6% reduction announced in November 2016, and more minor reductions announced in fiscal 2019 and fiscal 2020, and these actions may make it more difficult to attract and retain qualified employees. Our inability to hire and retain qualified management and skilled personnel, particularly engineers, salespeople and key executive management, could be disruptive to our development efforts, sales results, business relationships and/or our ability to execute our business plan and strategy on a timely basis and could materially and adversely affect our operating results.

Equity grants are a critical component of our current compensation programs. If we reduce, modify or eliminate our equity programs, we may have difficulty attracting and retaining critical employees.

In addition, because of the structure of our sales, cash and equity incentive compensation plans, we may be at increased risk of losing employees at certain times. For example, the retention value of our compensation plans decreases after the payment of annual bonuses or the vesting of equity awards.

We are continually seeking ways to make our cost structure, business processes and systems more efficient, including by moving activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing new

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business information systems. Problems with the execution of these activities could have an adverse effect on our business, operating results and financial condition. In addition, we may not achieve the expected benefits of these initiatives.

We continuously seek to make our cost structure and business processes more efficient, including by moving our business activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing changes to our business information systems. These efforts involve a significant investment of financial and human resources and significant changes to our current operating processes. In addition, as we move operations into lower-cost jurisdictions and outsource certain business processes, we become subject to new regulatory regimes and lose control of certain aspects of our operations and, as a consequence, become more dependent upon the systems and business processes of third-parties. If we are unable to move our operations, outsource business processes and implement new business information systems in a manner that complies with local law and maintains adequate standards, controls and procedures, the quality of our products and services may suffer and we may be subject to increased litigation risk, either of which could have an adverse effect on our business, operating results and financial condition. Additionally, we may not achieve the expected benefits of these and other transformational initiatives, which could harm our business, operating results and financial condition.

Our acquisitions may not achieve expected benefits, and may increase our liabilities, disrupt our existing business and harm our operating results.

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As part of our strategy, we seek to acquire other businesses and technologies to complement our current products, expand the breadth of our markets, or enhance our technical capabilities. For example, in FebruaryMay 2019 (fiscal 2020), we acquired a privately held company, in fiscal 2018 we acquired two privately held companies, and in fiscal 2016 we acquired SolidFire, Inc., and in fiscal 2015 we acquired the SteelStore product line (renamed AltaVault) from Riverbed Technology, Inc. The benefits we have received, and expect to receive, from these and other acquisitions depend on our ability to successfully conduct due diligence, negotiate the terms of the acquisition and integrate the acquired business into our systems, procedures and organizational structure. Any inaccuracy in our acquisition assumptions or any failure to uncover liabilities or risks associated with the acquisition, make the acquisition on favorable terms, integrate the acquired business or assets as and when expected or retain key employees of the acquired company may reduce or eliminate the expected benefits of the acquisition to us, increase our costs, disrupt our operations, result in additional liabilities, investigations and litigation, and may also harm our strategy, our business and our operating results. The failure to achieve expected acquisition benefits may also result in impairment charges for goodwill and purchased intangible assets.

Reduced U.S. government demand could materially harm our business and operating results. In addition, we could be harmed by claims that we have or a channel partner has failed to comply with regulatory and contractual requirements applicable to sales to the U.S. government.

The U.S. government is an important customer for us. However, government demand is uncertain, as it is subject to political and budgetary fluctuations and constraints. Events such as the U.S. federal government shutdown in October 2013from December 2018 to January 2019 and continued uncertainty regarding the U.S. budget and debt levels have increased demand uncertainty for our products, and in our fiscal 2016 resulted in lower sales to these customers. In addition, like other customers, the U.S. government may evaluate competing products and delay purchasing in the face of the technology transitions taking place in the storage industry. If the U.S. government or an individual agency or multiple agencies within the U.S. government continue to reduce or shift their IT spending patterns, our revenues and operating results may be harmed.

Selling our products to the U.S. government, whether directly or through channel partners, also subjects us to certain regulatory and contractual requirements. Failure to comply with these requirements by either us or our channel partners could subject us to investigations, fines, and other penalties, which could materially harm our operating results and financial condition. As an example, the United States Department of Justice (DOJ) and the General Services Administration (GSA) have in the past pursued claims against and financial settlements with IT vendors, including us and several of our competitors and channel partners, under the False Claims Act and other statutes related to pricing and discount practices and compliance with certain provisions of GSA contracts for sales to the federal government. Although the DOJ and GSA currently have no claims pending against us, we could face claims in the future. Violations of certain regulatory and contractual requirements, including with respect to data security, could also result in us being suspended or debarred from future government contracting. Any of these outcomes could have a material adverse effect on our business, operating results and financial condition.

Initiatives intended to make our cost structure, business processes and systems more efficient may not achieve the expected benefits and could inadvertently have an adverse effect on our business, operating results and financial condition.

We are exposedcontinuously seek to credit risksmake our cost structure and fluctuations in the market valuesbusiness processes more efficient, including by moving our business activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing changes to our business information systems. These efforts involve a significant investment of financial and human resources and significant changes to our current operating processes. In addition, as we move operations into lower-cost jurisdictions and outsource certain business processes, we become subject to new regulatory regimes and lose control of certain aspects of our investment portfolio.

We maintain an investment portfoliooperations and, as a consequence, become more dependent upon the systems and business processes of various holdings, types,third-parties. If we are unable to move our operations, outsource business processes and maturities. Credit ratingsimplement new business information systems in a manner that complies with local law and pricingmaintains adequate standards, controls and procedures, the quality of our investments canproducts and services may suffer and we may be negatively affected by liquidity, credit deterioration, financial results, economicsubject to increased litigation risk, political risk, sovereign risk or other factors. As a result, the value and liquidityeither of our investments may fluctuate substantially. Therefore, although wewhich could have not recently realized any significant lossesan adverse effect on our investments, future fluctuations in their valuebusiness, operating results and financial condition. Additionally, we may not achieve the expected benefits of these and other transformational initiatives, which could result in a significant realized loss.harm our business, operating results and financial condition.

There are risks associated with our outstanding and future indebtedness.

As of January 26, 2018,October 25, 2019, we had $1.6$1.2 billion aggregate principal amount of outstanding indebtedness for our senior notes that mature at specific dates in calendar years 2019, 2021, 2022 and 2024, and we had an aggregate of $632$499 million of commercial paper

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notes outstanding with maturities ranging from 177 days to 4691 days. We may incur additional indebtedness in the future under existing credit facilities and/or enteringenter into new financing arrangements. We may fail to pay these or additional future obligations, as and when required. Specifically, if we are unable to generate sufficient cash flows from operations or to borrow sufficient funds in the future to service or refinance our debt, our business, operating results and financial condition will be harmed. Any downgrades from credit rating agencies such as Moody’s Investors Service or Standard & Poor’s Rating Services may adversely impact our ability to obtain additional financing or the terms of such financing and reduce the market capacity for our commercial paper. Furthermore, if prevailing interest rates or other factors result in higher interest rates upon any potential future financing, then interest expense related to the refinance indebtedness would increase.

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In addition, all our debt and credit facility arrangements subject us to continued compliance with restrictive and financial covenants. If we do not comply with these covenants or otherwise default under the arrangements, we may be required to repay any outstanding amounts borrowed under these agreements. Moreover, compliance with these covenants may restrict our strategic or operational flexibility in the future, which could harm our business, operating results and financial condition.

We are exposed to credit risks and fluctuations in the credit and non-payment riskmarket values of our customers, resellersinvestment portfolio.

We maintain an investment portfolio of various holdings, types, and distributors, especially during timesmaturities. Credit ratings and pricing of our investments can be negatively affected by liquidity, credit deterioration, financial results, economic uncertaintyrisk, political risk, sovereign risk or other factors. As a result, the value and tight credit markets, whichliquidity of our investments may fluctuate substantially. Therefore, although we have not recently realized any significant losses on our investments, future fluctuations in their value could result in material losses.

Most of our sales to customers are on an open credit basis, with typical payment terms of 30 days. We may experience losses due to a customer’s inability to pay. Beyond our open credit arrangements, some of our customers have entered into recourse and non-recourse financing leasing arrangements using third-party leasing companies. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. During periods of economic uncertainty, our exposure to credit risks from our customers increases. In addition, our exposure to credit risks of our customers may increase further if our customers and their customers or their lease financing sources are adversely affected by global economic conditions.significant realized loss.

Our failure to adjust to emerging standards in the storage and data management industry may harm our business.

Emerging standards in the storage and data management markets may adversely affect the 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, pharmaceutical and government market segments, industries that are subject to various evolving governmental regulations with respect to data access, reliability and permanence 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 we may not be able to expand our product offerings in these market and geographical segments at the rates which we have forecasted.

Some of our products are subject to U.S. export control laws and other laws affecting the countries in which our products and services may be sold, distributed, or delivered;delivered, and any violation of these laws could have a material and adverse effect on our business, operating results and financial condition.

Due to the global nature of our business, we are subject to import and export restrictions and regulations, including the Export Administration Regulations administered by the Commerce Department’s Bureau of Industry and Security (BIS) and the trade and economic sanctions regulations administered by the Treasury Department’s Office of Foreign Assets Control (OFAC). The U.S., through the BIS and OFAC, places restrictions on the sale or export of certain products and services to certain countries and persons. Violators of these export control and sanctions laws may be subject to significant penalties, which may include significant monetary fines, criminal proceedings against them and their officers and employees, a denial of export privileges, and suspension or debarment from selling products to the federal government. Our products could be shipped to those targets by third parties, including potentially our channel partners, despite our precautions.

If we were ever found to have violated U.S. export control laws, we may be subject to various penalties available under the laws, any of which could have a material and adverse impact on our business, operating results and financial condition. Even if we were not found to have violated such laws, the political and media scrutiny surrounding any governmental investigation of us could cause us significant expense and reputational harm. Such collateral consequences could have a material adverse impact on our business, operating results and financial condition.

Changes in regulations relating to our products or their components, or the manufacture, sourcing, distribution or use thereof, may harm our business and operating results.

The laws and regulations governing the manufacturing, sourcing, distribution and use of our products have become more complex and stringent over time. For example, in addition to various environmental laws relating to carbon emissions and the use and discharge of hazardous materials, the SEC adopted regulations concerning the supply of certain minerals originating from the conflict zones of the Democratic Republic of Congo or adjoining countries. We incur costs to comply with the disclosure requirements of this law and may realize other costs relating to the sourcing and availability of minerals used in our products. Further, since our supply chain is complex, we may face reputational harm if our customers or other stakeholders conclude that we are unable to verify sufficiently the

49


origins of the minerals used in the products we sell. As the laws and regulations governing our products continue to expand and change, our costs are likely to rise, and the failure to comply with any such laws and regulations could subject us to business interruptions, litigation risks and reputational harm.

53


Our failure to protect our intellectual property could harm our business, operating results and financial condition.

Our success depends significantly upon developing, maintaining and protecting our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions with employees, resellers, strategic partners and customers, to protect our proprietary rights. We currently have multiple U.S. and international patent applications pending and multiple U.S. and international patents issued. The pending applications may not be approved, and our existing and future patents may be challenged. If such challenges are brought, the patents may be invalidated. We may not be able to develop proprietary products or technologies that are patentable, and patents issued to us may not provide us with any competitive advantages and may be challenged by third parties. Further, the patents of others may materially and adversely affect our ability to do business. In addition, a failure to obtain and defend our trademark registrations may impede our marketing and branding efforts and competitive condition. 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 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. Our means of protecting our proprietary rights may not be adequate or our competitors may independently develop similar technology, duplicate our products, or design around patents issued to us or other intellectual property rights of ours.

We are subject In addition, while we train employees in confidentiality practices and include terms in our employee and consultant agreements to protect our intellectual property, there is persistent risk that some individuals will improperly take our intellectual property after terminating their employment or other engagements with us, which could lead to intellectual property leakage to competitors and a loss of our competitive advantages.

We may be found to infringe on intellectual property rights of others.

We compete in markets in which intellectual property infringement claims that arise in the normal course of business. We may,Third parties have, from time to time, receiveasserted intellectual property-related claims that we are infringing third parties’ intellectual property rights,against us, including claims for alleged patent infringement brought by non-practicing entities. Such claims may be made against our products and services, our customers’ use of our products and services, or a combination of our products and third-party products. We also may be subject to claims and indemnification obligations from customers and resellers with respect to third-party intellectual property rights pursuant to our agreements with them. If we refuse to indemnify or defend such claims, even in situations in which the third-party’s allegations are involvedmeritless, then customers and resellers may refuse to do business with us.  

Patent litigation is particularly common in our industry. We have been, and continue to be, in active patent litigations brought bywith non-practicing entities. We believeWhile we have strong arguments that our products do not infringe and/or the asserted patents are invalid, and we intend to vigorously defend againstour ability to compete in the plaintiffs’ claims. However, marketplace, there is no guarantee that, in patent or other types of intellectual property litigation, we will prevail at trial and ifor be able to settle at a reasonable cost.  If a judge or jury were to find that our products infringe, we could be required to pay significant monetary damages and maybe subject to an injunction that could cause product shipment delays, require us to redesign our products, affect our ability to supply or service our customers, and/or require us to enter into compulsory royalty or licensing agreements.

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 network storage and data management markets 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, and any such infringement claims discussed above, 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.

We rely on software from third parties, and a failure to properly manage our use of third-party software could result in increased costs or loss of revenue.

Many of our products are designed to include software licensed from third parties. Such third-party software includes software licensed from commercial suppliers and software licensed under public open source licenses. We have internal processes to manage our use of such third-party software. However, if we fail to adequately manage our use of third-party software, then we may be subject to copyright infringement or other third-party claims. If we are non-compliant with a license for commercial software, then we may be required to pay penalties or undergo costly audits pursuant to the license agreement. In the case of open-source software licensed under certain “copyleft” licenses, the license itself may require, or a court-imposed remedy for non-compliant use of the open source software may require, that proprietary portions of our own software be publicly disclosed or licensed. This could result in a loss of intellectual property rights, increased costs, damage to our reputation and/or a loss of revenue.

54


We are exposed to the credit and non-payment risk of our customers, resellers and distributors, especially during times of economic uncertainty and tight credit markets, which could result in material losses.

Most of our sales to customers are on an open credit basis, with typical payment terms of 30 days. We may experience losses due to a customer’s inability to pay. Beyond our open credit arrangements, some of our customers have entered into recourse and non-recourse financing leasing arrangements using third-party leasing companies. Under the terms of recourse leases, which are generally three years or less, we remain liable for the aggregate unpaid remaining lease payments to the third-party leasing companies in the event of end-user customer default. During periods of economic uncertainty, our exposure to credit risks from our customers increases. In addition, our exposure to credit risks of our customers may increase further if our customers and their customers or their lease financing sources are adversely affected by global economic conditions.

Our business could be materially and adversely affected as a result of natural disasters, terrorist acts or other catastrophic events.

We depend on the ability of our personnel, inventories, equipment and products to move reasonably unimpeded around the world. Any political, military, terrorism, global trade, world health or other issue that hinders this movement or restricts the import or export of materials could lead to significant business disruptions. Furthermore, any economic failure or other material disruption caused by natural disasters, including fires, floods, hurricanes, earthquakes, and volcanoes; power loss or shortages; environmental disasters; telecommunications or business information systems failures or 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 IT, or directly impact our marketing, manufacturing, financial and logistics functions, or impair our ability to meet our customer demands, our operating results and financial condition could be materially adversely affected. In addition, ourOur headquarters is located in Northern California, an area susceptible to earthquakes.earthquakes and wildfires. If any significant disaster were to occur there, our ability to operate our business and our financial condition could be impaired.

Changes in financial accounting standards may cause adverse unexpected fluctuations and affect our reported operating results.

A change in accounting standards or practices and varying interpretations of existing accounting pronouncements, the increased use of fair value measures, changes to revenue recognition, lease accounting, financial instruments and other accounting standards could have a significant effect on our reported financial results or the way we conduct our business. Implementation of accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could cause us to defer recognition of revenue or recognize lower revenue, which may affect our operating results.

Our stock price is subject to volatility.

Our stock price is subject to changes in recommendations or earnings estimates by financial analysts, changes in investors' or analysts' valuation measures for our stock, changes in our capital structure, including issuance of additional debt, changes in our credit

50


ratings, our ability to pay dividends and to continue to execute our stock repurchase program as planned and market trends unrelated to our performance.

Our ability to pay quarterly dividends and to continue to execute our stock repurchase program as planned will be subject to, among other things, our financial condition and operating results, available cash and cash flows in the U.S., capital requirements, and other factors. Future dividends are subject to declaration by our Board of Directors, and our stock repurchase program does not obligate us to acquire any specific number of shares. If we fail to meet any expectations related to dividends and/or stock repurchases, the market price of our stock could decline significantly, and could have a material adverse impact on investor confidence. Additionally, price volatility of our stock over a given period may cause the average price at which we repurchase our own stock to exceed the stock’s market price at a given point in time.

Furthermore, speculation in the press or investment community about our strategic position, financial condition, results of operations or business can cause changes in our stock price. These factors, as well as general economic and political conditions and the timing of announcements in the public market regarding new products or services, product enhancements or technological advances by our competitors or us, and any announcements by us of acquisitions, major transactions, or management changes may adversely affect our stock price.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Purchases of equity securities

The following table provides information with respect to the shares of common stock repurchased by us during the three months ended January 26, 2018:October 25, 2019:

 

 

 

 

 

 

 

 

 

 

 

Total Number of Shares

 

 

Approximate Dollar Value

 

 

 

Total Number

 

 

Average

 

 

Purchased as Part of

 

 

of Shares That May Yet

 

 

 

of Shares

 

 

Price Paid

 

 

Publicly Announced

 

 

Be Purchased Under The

 

Period

 

Purchased

 

 

per Share

 

 

Program

 

 

Repurchase Program

 

 

 

(Shares in thousands)

 

 

 

 

 

 

(Shares in thousands)

 

 

(Dollars in millions)

 

October 28, 2017 - November 24, 2017

 

 

 

 

$

 

 

 

276,051

 

 

$

494

 

November 25, 2017 - December 22, 2017

 

 

1,482

 

 

$

57.38

 

 

 

277,533

 

 

$

409

 

December 23, 2017 - January 26, 2018

 

 

1,045

 

 

$

62.17

 

 

 

278,578

 

 

$

344

 

Total

 

 

2,527

 

 

$

59.36

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Number of Shares

 

 

Approximate Dollar Value

 

 

 

Total Number

 

 

Average

 

 

Purchased as Part of

 

 

of Shares That May Yet

 

 

 

of Shares

 

 

Price Paid

 

 

Publicly Announced

 

 

Be Purchased Under The

 

Period

 

Purchased

 

 

per Share

 

 

Program

 

 

Repurchase Program

 

 

 

(Shares in thousands)

 

 

 

 

 

 

(Shares in thousands)

 

 

(Dollars in millions)

 

July 27, 2019 - August 23, 2019

 

 

2,293

 

 

$

48.23

 

 

 

319,390

 

 

$

1,528

 

August 24, 2019 - September 20, 2019

 

 

3,077

 

 

$

50.94

 

 

 

322,467

 

 

$

1,371

 

September 21, 2019 - October 25, 2019

 

 

4,398

 

 

$

52.90

 

 

 

326,865

 

 

$

1,139

 

Total

 

 

9,768

 

 

$

51.19

 

 

 

 

 

 

 

 

 

55


In May 2003, our Board of Directors approved a stock repurchase program. As of January 26, 2018,October 25, 2019, our Board of Directors has authorized the repurchase of up to $9.6$13.6 billion of our common stock. Since inception of the program through January 26, 2018,October 25, 2019, we repurchased a total of 279327 million shares of our common stock for an aggregate purchase price of $9.3$12.5 billion. Under this program, which we may suspend or discontinue at any time, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, andin privately negotiated transactions, at pricesthrough accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such other manner as deemed appropriate by our management. The stock repurchase program may be suspended or discontinued at any time.

 

 

Item 3. Defaults upon Senior Securities.

None.

 

 

Item 4. Mine Safety Disclosures.

Not Applicable.

 

 

Item 5. Other Information.

None.

 

 

5156


ItemItem 6. Exhibits.

The following documents are filed as exhibits to this report.

 

 

 

 

 

Incorporation by Reference

Exhibit
No

  

Description

  

Form

  

File No.

  

Exhibit

  

Filing Date

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.1

 

Third Amendment toRetirement Agreement of Purchase and Sale and Joint Escrow Instructions dated as of October 31, 2017,August 14, 2019 by and between the Company and Google LLC.

10.2

Fourth Amendment to Agreement of Purchase and Sale and Joint Escrow Instructions dated as of November 2, 2017, by and between the Company and Google LLC.

10.3

Fifth Amendment to Agreement of Purchase and Sale and Joint Escrow Instructions dated as of November 8, 2017, by and between the Company and Google LLC, successor by conversion to Google Inc.

10.4

Sixth Amendment to Agreement of Purchase and Sale and Joint Escrow Instructions dated as of November 10, 2017, by and between the Company and Google LLC.Joel Reich

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.1

  

Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 31.2

  

Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

 

 32.1

  

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

 32.2

  

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

 

 

101.INS

  

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

  

  

  

  

 

 

 

 

 

 

101.SCH

  

Inline XBRL Taxonomy Extension Schema Document

  

 

  

 

  

 

  

 

 

 

 

 

 

 

101.CAL

  

Inline XBRL Taxonomy Calculation Linkbase Document

  

 

  

 

  

 

  

 

 

 

 

 

 

 

101.DEF

  

Inline XBRL Taxonomy Extension Definition Linkbase Document

  

 

  

 

  

 

  

 

 

 

 

 

 

 

101.LAB

  

Inline XBRL Taxonomy Label Linkbase Document

  

  

  

  

 

 

 

 

 

 

101.PRE

  

Inline XBRL Taxonomy Extension Presentation Linkbase Document

  

 

  

 

  

 

  

 

    104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

 

 

5257


SIGNATURESIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

NETAPP, INC.

(Registrant)

 

/s/ RONALD J. PASEK

Ronald J. Pasek

Executive Vice President and

Chief Financial Officer

Date: February 22, 2018November 18, 2019

 

 

 

 

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