NETAPP, INC. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, 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 ofNetApp, 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 described in our 2022 Annual Report on Form 10-K, including under the heading "Risk Factors" and discussed in 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 endedApril 29, 2022 , 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. 27
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Overview
Our Company
NetApp is a global cloud-led, data-centric software company that gives organizations the freedom to put data to work in the applications that elevate their business. We help our customers get the most out of their data with industry-leading public cloud services, and hybrid cloud solutions. Building on a rich history of innovation, we give customers the freedom to manage applications and data across hybrid multicloud environments. No matter where a customer's data is or how the business uses it, NetApp helps to bring it together in a data fabric. For nearly three decades, NetApp has supported customers to accelerate their unique data fabrics and extend their workflows into a hybrid cloud environment with the right tools and right capabilities.
Our operations are organized into two segments: Hybrid Cloud and Public Cloud.
Hybrid Cloud offers a portfolio of storage management and infrastructure solutions that help customers recast their data centers with the power of cloud. This portfolio is designed to operate with public clouds to unlock the potential of hybrid, multi-cloud operations. We offer a broad portfolio of cloud-connected all-flash, hybrid-flash, and object storage systems, powered by intelligent data management software. Hybrid Cloud is composed of software, hardware, and related support, as well as professional and other services. Public Cloud offers a portfolio of products delivered primarily as-a-service, including related support. This portfolio includes cloud storage and data services, and cloud operations services. Our enterprise-class solutions and services enable customers to control and manage storage in the cloud, consume high-performance storage services for primary workloads, and optimize cloud environments for cost and efficiency. These solutions and services are generally available on the leading public clouds, including Microsoft Azure, Google Cloud Platform and Amazon AWS. Global Business Environment Macroeconomic Conditions Continuing global economic uncertainty, political conditions and fiscal challenges in theU.S. and abroad have resulted, and could continue to result in adverse macroeconomic conditions, including inflation, rising interest rates, foreign exchange volatility, slower growth or recession. In particular, during the first six months of fiscal 2023, we continued to experience inflationary pressure, constraints in our supply chain and foreign exchange volatility. We also observed a slowdown in customer demand during the second quarter of fiscal 2023 as a result of continuing global economic uncertainty. Ongoing supply chain constraints, which substantially began to impact us in the second half of fiscal 2022, led to higher product component and freight costs in the first six months of fiscal 2023 than incurred in the first six months of fiscal 2022, and increased our cost of revenues. Supply chain constraints also delayed our ability to fulfill certain customer orders during the first six months of fiscal 2023. If these macroeconomic uncertainties or supply chain challenges persist or worsen in the second half of fiscal 2023, we may continue to observe reduced customer demand for our offerings, increased competition for critical components, challenges fulfilling certain customer orders or continued increases in component and freight costs, any of which could impact our operating results, including our ability to achieve historical levels of revenue growth.
COVID-19
The COVID-19 pandemic and efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in many of the regions in which we sell our products and services and conduct our business operations. We have taken precautionary measures intended to minimize the risk of the virus to our employees, our customers, and the communities in which we operate. SinceMarch 2020 , the vast majority of our employees have been working remotely. Russia Sanctions Beginning inFebruary 2022 , in response to Russian military actions inUkraine , theU.S. and other countries imposed sanctions onRussia , and we suspended business operations, including sales, support on existing contracts and professional services, inRussia andBelarus . In the second quarter of fiscal 2023, we discontinued business operations inRussia ,Belarus , and certain regions ofUkraine . The impact of these actions was not significant to our results in either the second quarter or first six months of fiscal 2023. The magnitude and duration of the disruption to our business, and impact to our operational and financial performance of the factors above remain uncertain. Refer to Part II, Item 1A. - Risk Factors for the significant risks we have identified related to the global business environment.
Stock Repurchase and Dividend Activity
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During the first six months of fiscal 2023, we repurchased approximately 7
million shares of our common stock at an average price of $67.70 per share, for
an aggregate of $500 million . We also declared aggregate cash dividends of $0.50
per share in that period, for which we paid $218 million .
Restructuring Events
In the first six months of fiscal 2023, we executed a restructuring plan to
redirect resources to highest return activities, and also continued
restructuring activities related to the establishment of an international
headquarters. Aggregate restructuring charges incurred under these two plans
during the second quarter and first six months totaled
As part of the establishment of our international headquarters, we executed an intra-entity transfer of certain intellectual property which resulted in the recognition of a discrete tax benefit of$524 million in the second quarter of fiscal 2023. 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 2023 and 2022, ending onApril 28, 2023 andApril 29, 2022 , respectively, 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 income data as a percentage of net revenues for the periods indicated:
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 2022 2021
Net revenues:
Product 50 % 52 % 50 % 51 %
Services 50 48 50 49
Net revenues 100 100 100 100
Cost of revenues:
Cost of product 25 24 25 23
Cost of services 10 9 9 9
Gross profit 65 68 66 68
Operating expenses:
Sales and marketing 29 30 29 30
Research and development 15 14 15 14
General and administrative 4 5 4 5
Restructuring charges 1 - 1 1
Acquisition-related expense - - - -
Total operating expenses 48 49 49 50
Income from operations 17 19 16 18
Other income (expense), net 1 (1 ) 1 (1 )
Income before income taxes 18 18 18 17
(Benefit) provision for income taxes (27 ) 4 (12 ) 3
Net income 45 % 14 % 30 % 14 %
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Net Revenues (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
Net revenues $ 1,663 $ 1,566 6 % $ 3,255 $ 3,024 8 %
The increase in net revenues for the second quarter and first six months of
fiscal 2023 compared to the corresponding periods of fiscal 2022 was due to an
increase in both product revenues and services revenues. Product revenues as a
percentage of net revenues decreased by less than two percentage points in the
second quarter and first six months of fiscal 2023, respectively, compared to
the corresponding periods of fiscal 2022. Fluctuations in foreign currency
exchange rates adversely impacted net revenues percent growth by approximately
five percentage points in both the second quarter and first six months of fiscal
2023 compared to the corresponding periods of fiscal 2022.
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--------------------------------------------------------------------------------Product Revenues (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
Product revenues $ 837 $ 814 3 % $ 1,623 $ 1,544 5 %
Hardware (Non-GAAP) 342 339 1 % 652 655 - %
Software (Non-GAAP) 495 475 4 % 971 889 9 %
Hybrid Cloud
Product revenues consist of sales of configured all-flash array and hybrid
systems, which are bundled hardware and software products, as well as add-on
flash, disk and/or hybrid storage and related OS, NetApp HCI, StorageGrid, OEM
products and add-on optional software.
In order to provide visibility into the value created by our software innovation
and R&D investment, we disclose the software and hardware components of our
product revenues. Software product revenues include the operating system
software and optional add-on software solutions attached to our systems across
our entire product set, while hardware product revenues include the non-software
component of our systems across the entire set. Because our revenue recognition
policy under GAAP defines a configured storage system, inclusive of the
operating system software essential to its functionality, as a single
performance obligation, the hardware and software components of our product
revenues are considered non-GAAP measures. The hardware and software components
of our product revenues are derived from an estimated fair value allocation of
the transaction price of our contracts with customers, down to the level of the
product hardware and software components. This allocation is primarily based on
the contractual prices at which NetApp has historically billed customers for
such respective components.
Total product revenues increased in the second quarter and first six months of
fiscal 2023 compared to the corresponding periods of the prior year primarily
driven by an increase in sales of hybrid systems, despite the unfavorable impact
from foreign exchange rate fluctuations.
Revenues from the hardware component of product revenues represented 41% and 40%
of product revenues in the second quarter and first six months of fiscal 2023,
compared to 42% of product revenues in the corresponding periods of the prior
year. The software component of product revenues represented 59% and 60% of
product revenues in the second quarter and first six months of fiscal 2023,
compared to 58% of product revenues in the corresponding periods of the prior
year. The increase in the software component percentage of product revenues in
the second quarter and first six months of fiscal 2023 was primarily due to the
mix of systems sold.
Services Revenues (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
Services revenues $ 826 $ 752 10 % $ 1,632 $ 1,480 10 %
Support 607 590 3 % 1,205 1,168 3 %
Professional and other
services 77 75 3 % 153 146 5 %
Public cloud 142 87 63 % 274 166 65 %
Hybrid Cloud
Hybrid Cloud services revenues are derived from the sale of: (1) support, which
includes both hardware and software support contracts (the latter of which
entitle customers to receive unspecified product upgrades and enhancements, bug
fixes and patch releases), and (2) professional and other services, which
include customer education and training.
Support revenues increased in the second quarter and first six months of fiscal
2023 compared to the corresponding periods of the prior year, primarily due to
growth in sales of all-flash systems (which carry a higher support dollar
content than our other products) in recent periods, and a higher aggregate
support contract value for our installed based in the current year, despite the
unfavorable impact from foreign exchange rate fluctuations.
Professional and other services revenues increased in the second quarter and
first six months of fiscal 2023 compared to the corresponding periods of the
prior year primarily due to an increase in demand from increased product sales.
Public Cloud
Public Cloud revenues are derived from the sale of public cloud offerings primarily delivered as-a-service, which include cloud storage and data services, and cloud operations services.
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Public Cloud revenues increased in the second quarter and first six months of
fiscal 2023 compared to the corresponding periods of the prior year primarily
due to strong customer demand for NetApp's diversified cloud offerings, coupled
with overall growth in the cloud market, and the acquisitions of Instaclustr
early in the first quarter of fiscal 2023 and CloudCheckr in the third quarter
of fiscal 2022.
Cost of Revenues
Our cost of revenues consists of:
(1) cost of product revenues, composed of (a) cost of Hybrid Cloud product revenues, which includes the costs of manufacturing and shipping our products, inventory write-downs, and warranty costs, and (b) unallocated cost of product revenues, which includes stock-based compensation and amortization of intangibles, and; (2) cost of services revenues, composed of (a) cost of support revenues, which includes the costs of providing support activities for hardware and software support, global support partnership programs, and third party royalty costs, (b) cost of professional and other services revenues, (c) cost of public cloud revenues, constituting the cost of providing our Public Cloud offerings which includes depreciation and amortization expense and third party datacenter fees, and (d) unallocated cost of services revenues, which includes stock-based compensation and amortization of intangibles.
Cost of Product Revenues (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % ChangeCost of product revenues $ 418 $ 372 12 % $ 815 $ 701 16 % Hybrid Cloud 417 369 13 % 812 695 17 % Unallocated 1 3 (67 )% 3 6 (50 )% Hybrid Cloud Cost of Hybrid Cloud product revenues represented 50% of product revenues for the second quarter and first six months of fiscal 2023 compared to 46% and 45% for the corresponding periods of fiscal 2022. Materials costs represented 95% and 94% of cost of Hybrid Cloud product revenues for the second quarter and first six months of fiscal 2023, respectively, compared to 92% and 91% for the corresponding periods of fiscal 2022. Materials costs increased by approximately$54 million and$126 million in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of the prior year, reflecting the increases in product revenues, the mix of systems sold, and higher component and freight costs as a result of COVID-19 related supply chain challenges. Hybrid Cloud product gross margins decreased by approximately four percentage points and five percentage points in the second quarter and first six months of fiscal 2023, respectively, compared to the corresponding periods of the prior year, primarily due to the impact of higher component and freight costs, and the adverse impacts of fluctuations in foreign currency exchange rates on product revenues. Unallocated Unallocated cost of product revenues decreased in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of the prior year due to certain intangible assets becoming fully amortized during the first quarter of fiscal 2023.
Cost of Services Revenues (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
Cost of services
revenues $ 158 $ 135 17 % $ 307 $ 265 16 %
Support 45 48 (6 )% 88 96 (8 )%
Professional and other
services 54 54 - % 106 105 1 %
Public cloud 45 25 80 % 85 48 77 %
Unallocated 14 8 75 % 28 16 75 %
Hybrid Cloud
31-------------------------------------------------------------------------------- Cost of Hybrid Cloud services revenues, which are composed of the costs of support and professional and other services, decreased in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of fiscal 2022. Cost of Hybrid Cloud services revenues represented approximately 14% of Hybrid Cloud services revenues in the second quarter and first six months of fiscal 2023, compared to 15% for the corresponding periods of fiscal 2022. Hybrid Cloud support gross margins increased by one percentage point in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of the prior year due to growth in support revenues achieved with a slightly reduced cost base resulting from operational efficiencies. Hybrid Cloud professional and other services gross margins increased by two percentage points and three percentage points in the second quarter and first six months of fiscal 2023, respectively, compared to the corresponding periods of the prior year due to the mix of services provided.
Public Cloud
Cost of Public Cloud revenues increased in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of fiscal 2022 reflecting the increase in Public Cloud revenues. Public Cloud gross margins decreased by three percentage points and two percentage points in the second quarter and first six months of fiscal 2023, respectively, compared to the corresponding periods of fiscal 2022, primarily due to the mix of offerings provided.
Unallocated
Unallocated cost of services revenues increased in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of the prior year due to our acquisitions of Instaclustr in the first quarter of fiscal 2023 and CloudCheckr in the third quarter of fiscal 2022, which resulted in higher amortization expense from acquired intangible assets.
Operating Expenses
Sales and Marketing, Research and Development and General and Administrative Expenses
Sales and marketing, research and development, and general and administrative expenses for the second quarter and first six months of fiscal 2023 totaled$789 million , or 47% of net revenues, and$1,559 million , or 48% of net revenues, respectively, reflecting a decrease of one percentage point each, compared to the corresponding periods of fiscal 2022, primarily as a result of scaling our cost structure as revenues grow. While fluctuations in foreign currency exchange rates adversely impacted net revenues in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of fiscal 2022, they favorably impacted operating expenses by approximately 4% and 3%, respectively.
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.
Total compensation costs included in operating expenses increased by
Total compensation costs included in operating expenses increased by
Sales and Marketing (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
Sales and marketing expenses $ 479 $ 465 3 % $ 937 $ 916 2 %
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Sales and marketing expenses consist primarily of compensation costs,
commissions, outside services, facilities and IT support costs, advertising and
marketing promotional expense and travel and entertainment expense. The changes
in sales and marketing expenses consisted of the following (in percentage points
of the total change):
Three Months Ended Six Months Ended
Fiscal 2023 to Fiscal Fiscal 2023 to Fiscal
2022 2022
Compensation costs 2 3
Commissions (2 ) (2 )
Travel and entertainment 2 1
Other 1 -
Total change 3 2
The increase in compensation costs for the second quarter and first six months
of fiscal 2023, compared to the corresponding periods of the prior year
reflected an increase in average headcount of approximately 10% and 9%,
respectively. The expansion of our sales and marketing teams are expected to
support our ability to execute on key market opportunities. The impact of the
increase in headcount was partially offset by the impact of foreign exchange
rate fluctuations.
The decrease in commissions expense for the second quarter and first six months of fiscal 2023 compared to the corresponding periods of the prior year was primarily due to lower performance against sales goals.
Travel and entertainment expense increased in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of the prior year as COVID-19 related travel restrictions eased.
Research and Development (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
Research and development
expenses $ 243 $ 216 13 % $ 483 $ 426 13 %
Research and development expenses consist primarily of compensation costs,
facilities and IT support 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
(in percentage points of the total change):
Three Months Ended Six Months Ended
Fiscal 2023 to Fiscal Fiscal 2023 to Fiscal
2022 2022
Compensation costs 9 12
Development projects and outside services 2 1
Other 2 -
Total change 13 13
The increase in compensation costs for the second quarter and first six months
of fiscal 2023 compared to the corresponding periods in the prior year was
primarily attributable to an increase in average headcount of 16% and 14%,
respectively. The expansion of our research and development teams are expected
to support our ability to continue expanding and enhancing our portfolio
offerings. The impact of the increase in headcount was partially offset by the
impact of foreign exchange rate fluctuations.
The increase in development projects and outside services for the second quarter
and first six months of fiscal 2023 compared to the corresponding periods in the
prior year was primarily due to the higher spending on certain engineering
projects.
General and Administrative (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
General and
administrative expenses $ 67 $ 76 (12 )% $ 139 $ 142 (2 )%
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General and administrative expenses consist primarily of compensation costs,
professional and corporate legal fees, outside services and facilities and IT
support costs. Changes in general and administrative expense consisted of the
following (in percentage points of the total change):
Three Months Ended Six Months Ended
Fiscal 2023 to Fiscal
Fiscal 2023 to Fiscal 2022 2022
Compensation costs (1 ) 3
Professional and legal fees and
outside services (8 ) (3 )
Facilities and IT support costs (7 ) (5 )
Other 4 3
Total change (12 ) (2 )
The decrease in compensation costs in the second quarter of fiscal 2023 compared to the corresponding period of the prior year was primarily attributable to lower incentive compensation expense, partially offset by the increase in salaries, benefits and stock-based compensation expenses.
The increase in compensation costs in the first six months of fiscal 2023 compared to the corresponding periods of the prior year was primarily attributable to the increase in salaries, benefits and stock-based compensation expenses, partially offset by the decrease in incentive compensation expense.
The decrease in professional and legal fees and outside services expense in the second quarter and the first six months of fiscal 2023 was primarily due to lower spending on business transformation projects and a decrease in legal fees.
The decrease in facilities and IT support costs in the second quarter and first six months of fiscal 2023 was primarily related to lower spending for certain IT projects.
Restructuring Charges (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % ChangeRestructuring charges $ 11 $ 7 57 % $ 22 $ 29 (24 )% In the second quarter and first six months of fiscal 2023, we recognized$11 million and$22 million , respectively, in restructuring charges, which consisted primarily of severance-related costs, legal costs and tax-related consulting costs, for ongoing restructuring activities related to the establishment of an international headquarters inCork, Ireland , and a restructuring plan in the first six months of fiscal 2023 to redirect resources to highest return activities which resulted in a reduction of our global workforce by approximately 1%.
Acquisition-related Expense (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
Acquisition-related expense $ 5 $ 1 NM $ 15 $ 2 NM
NM - Not Meaningful
Acquisition-related expenses, primarily legal and consulting fees, totaled $5
million and $15 million in the second quarter and first six months of fiscal
2023, respectively, and were primarily related to our acquisition of Instaclustr
US Holding, Inc. Other Income (Expense), Net (in millions, except percentages)
The components of other income (expense), net were as follows:
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change
Interest income $ 14 $ 1 NM $ 21 $ 3 NM
Interest expense (17 ) (18 ) (6 )% (35 ) (36 ) (3 )%
Other, net 26 3 NM 52 7 NM
Total $ 23 $ (14 ) NM $ 38 $ (26 ) NM
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NM - Not Meaningful
Interest income increased in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of the prior year due primarily to higher yields earned on our cash and investments. Interest expense remained flat in the second quarter and first six months of fiscal 2023 compared to the corresponding periods of fiscal 2022. In the second quarter of fiscal 2023, Other, net includes$21 million of other income for non-refundable, up-front payments from customers inRussia for support contracts, which we were not able to fulfill due to imposed sanctions and for which we have no remaining legal obligation to perform. Other, net for the first six months of fiscal 2023 also includes a$32 million gain recognized on our sale of a minority equity interest in a privately held company for proceeds of approximately$59 million . The remaining differences in Other, net for the second quarter and first six months of fiscal 2023 as compared to the corresponding periods of the prior year are partially due to foreign exchange gains and losses year-over-year.
Provision for Income Taxes (in millions, except percentages):
Three Months Ended Six Months Ended
October 28, October 29, October 28, October 29,
2022 2021 % Change 2022 2021 % Change(Benefit) provision for income taxes$ (445 ) $ 56 NM$ (389 ) $ 91 NM NM - Not Meaningful Our effective tax rate for the three and six months endedOctober 28, 2022 , decreased compared to the corresponding periods of the prior year, primarily due to the discrete tax benefit resulting from an intra-entity asset transfer of certain IP. During the second quarter of fiscal 2023, we completed an intra-entity asset transfer of certain IP to our international headquarters (the "IP Transfer"). The transaction resulted in a step-up of tax-deductible basis in the transferred assets, and accordingly, created a temporary difference where the tax basis exceeded the financial statement basis of such intangible assets, which resulted in the recognition of a discrete tax benefit and related deferred tax asset of$524 million during the second quarter of fiscal 2023. Management applied significant judgment when determining the fair value of the IP, which serves as the tax basis of the deferred tax asset. With the assistance of third-party valuation specialists, the fair value of the IP was determined principally based on the present value of projected cash flows related to the IP which reflects management's assumptions regarding projected revenues, expenses and a discount rate. The tax-deductible amortization related to the transferred IP rights will be recognized in future periods and any amortization that is unused in a particular year can be carried forward indefinitely. The deferred tax asset and the tax benefit were measured based on the enacted tax rates expected to apply in the years the asset is expected to be realized. We expect to realize the deferred tax asset resulting from the IP Transfer and will assess the realizability of the deferred tax asset quarterly.Any Organisation for Economic Co-operation and Development's ("OECD") actions adopted internationally, could impact our financial results in future periods. The impact of the transaction to net cash provided by or used in operating, investing and financing activities on the condensed consolidated statements of cash flows during the quarter endedOctober 28, 2022 , was not material. As ofOctober 28, 2022 , we had$225 million of gross unrecognized tax benefits. Inclusive of penalties, interest and certain income tax benefits,$140 million would affect our provision for income taxes if recognized. Net unrecognized tax benefits of$140 million have been recorded in other long-term liabilities.
Liquidity, Capital Resources and Cash Requirements
October 28 ,April 29 , (In millions) 2022
2022
Cash, cash equivalents and short-term investments
$ 2,400 $ 2,650
The following is a summary of our cash flow activities:
Six Months Ended
October 28, October 29,
(In millions) 2022 2021
Net cash provided by operating activities $ 495 $ 540
Net cash used in investing activities (916 ) (85 )
Net cash used in financing activities (979 ) (461 )
Effect of exchange rate changes on cash, cash
equivalents and restricted cash (43 ) (13 )
Net change in cash, cash equivalents and restricted
cash $ (1,443 ) $ (19 )
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Cash Flows
As ofOctober 28, 2022 , our cash, cash equivalents and short-term investments were$3.0 billion , which represents a decrease of$1.1 billion for the first six months of fiscal 2023. The decrease was primarily due to$491 million , net of cash acquired, used for the acquisition of a privately-held company,$500 million paid for the repurchase of our common stock,$218 million used for the payment of dividends and$250 million repayment of our Senior Notes, partially offset by$495 million provided by operating activities. Net working capital was$1.2 billion as ofOctober 28, 2022 , a reduction of$784 million when compared toApril 29, 2022 , primarily due to the decrease in cash, cash equivalents and short-term investments discussed above.
Cash Flows from Operating Activities
During the first six months of fiscal 2023, we generated cash from operating activities of$495 million , reflecting net income of$964 million which was reduced by$524 million for non-cash deferred tax benefits and increased for non-cash depreciation and amortization expense of$117 million and non-cash stock-based compensation expense of$145 million , compared to$540 million of cash generated from operating activities during the first six months of fiscal 2022.
Significant changes in assets and liabilities in the first six months of fiscal 2023 included the following:
•
Accounts receivable decreased$313 million , reflecting typical lower billings in the first six months of fiscal 2023 compared to the last six months of fiscal 2022.
•
Accrued expenses decreased by
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, shipping linearity, accounts receivable collections performance, inventory and supply chain management, vendor payment initiatives, and the timing and amount of compensation, income taxes and other payments.
Cash Flows from Investing Activities
During the first six months of fiscal 2023, we used$342 million for the purchases of investments, net of maturities and sales, and paid$142 million for capital expenditures, as compared to the same period of fiscal 2022, in which we generated$26 million from maturities and sales of investments, net of purchases, and paid$97 million for capital expenditures. During the first six months of fiscal 2023, we paid approximately$491 million , net of cash acquired for a privately-held company, as compared to$14 million , net of cash acquired, that we paid for a privately-held company in the first six months of fiscal 2022. Additionally, we received proceeds of$59 million from the sale of one of our minority investments during the first six months of fiscal 2023.
Cash Flows from Financing Activities
During the first six months of fiscal 2023, cash flows used in financing activities totaled$979 million and include$500 million for the repurchase of approximately 7 million shares of common stock,$218 million for the payment of dividends and$250 million to redeem our Senior Notes due inDecember 2022 . During the first six months of fiscal 2022, cash flows used in financing activities totaled$461 million and included$225 million for the repurchase of approximately 3 million shares of common stock and$224 million for the payment of dividends. 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 cash, cash equivalents and short-term investments, cash generated from operations, and our ability to access capital markets and committed credit lines 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. For further discussion of factors that could affect our cash flows and liquidity requirements, including the impact of the COVID-19 pandemic, see Part II, Item 1A. Risk Factors. 36
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Liquidity
Our principal sources of liquidity as ofOctober 28, 2022 consisted of cash, cash equivalents and short-term investments, cash we expect to generate from operations, and our commercial paper program and related credit facility. Cash, cash equivalents and short-term investments consisted of the following (in millions): October 28, April 29, 2022 2022 Cash and cash equivalents$ 2,669 $ 4,112 Short-term investments 364 22 Total$ 3,033 $ 4,134 As ofOctober 28, 2022 andApril 29, 2022 ,$1.4 billion and$2.3 billion , respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based inU.S. dollar-denominated holdings, while$1.6 billion and$1.8 billion , respectively, were available in theU.S. 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 through asset purchases and/or business acquisitions, service interest and principal payments on our debt, fund our stock repurchase program, and pay dividends, as and if declared. In the ordinary course of business, we engage in periodic reviews of opportunities to invest in or acquire companies or units in companies to expand our total addressable market, leverage technological synergies and establish new streams of revenue, particularly in our Public Cloud segment. 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 ofOctober 28, 2022 . 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. We also have an automatic shelf registration statement on file with theU.S. 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
Amount
3.30% Senior Notes Due September 2024 $ 400
1.875% Senior Notes Due June 2025 750
2.375% Senior Notes Due June 2027 550
2.70% Senior Notes Due June 2030 700
Total $ 2,400
Interest on the Senior Notes is payable semi-annually. For further information
on the underlying terms, see Note 7 - Financing Arrangements of the Notes to
Condensed Consolidated Financial Statements.
On
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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 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. No commercial paper notes were outstanding as ofOctober 28, 2022 . In connection with the Program, we have a senior unsecured credit agreement with a syndicated group of lenders. The credit agreement, which was amended onJanuary 22, 2021 , provides for a$1.0 billion revolving unsecured credit facility, with a sublimit of$50 million available for the issuance of letters of credit on our behalf. The credit facility matures onJanuary 22, 2026 , with an option for us to extend the maturity date for two additional 1-year periods, subject to certain conditions. The proceeds of the loans may be used by us for general corporate purposes and as liquidity support for our existing commercial paper program. As ofOctober 28, 2022 , we were compliant with all associated covenants in the agreement. No amounts were drawn against this credit 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 2023 to be between$100 million and$200 million .
Transition Tax Payments
The Tax Cuts and Jobs Act of 2017 imposed a mandatory, one-time transition tax on accumulated foreign earnings and profits that had not previously been subject toU.S. income tax. As ofOctober 28, 2022 , outstanding payments related to the transition tax are estimated to be approximately$303 million of which$88 million ,$115 million and$100 million are expected to be paid during fiscal 2024, fiscal 2025 and fiscal 2026, respectively. During the first six months of fiscal 2023, transition tax payments totaled$48 million . Our estimates for future transition tax payments, however, could change with further guidance or review fromU.S. federal and state tax authorities or other regulatory bodies.
Dividends and Stock Repurchase Program
On
As ofOctober 28, 2022 , our Board of Directors had authorized the repurchase of up to$15.1 billion of our common stock under our stock repurchase program. Under this program, we may purchase shares of our outstanding common stock through solicited or unsolicited transactions in the open market, in privately negotiated transactions, through 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 theMay 13, 2003 inception of this program throughOctober 28, 2022 , we repurchased a total of 355 million shares of our common stock at an average price of$40.52 per share, for an aggregate purchase price of$14.4 billion . As ofOctober 28, 2022 , the remaining authorized amount for stock repurchases under this program was$0.7 billion .
Purchase Commitments
In the ordinary course of business, we make commitments to third-party contract manufacturers and component suppliers 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. In addition, 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. These off-balance sheet purchase commitments totaled approximately$0.9 billion atOctober 28, 2022 . 38
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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. We sold$10 million and$38 million of receivables during the first six months of fiscal 2023 and fiscal 2022, 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. 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. As ofOctober 28, 2022 andApril 29, 2022 , 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 ofOctober 28, 2022 , 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
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 15 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles inthe United States of America (GAAP), 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, including the ongoing COVID-19 pandemic, 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. The summary of significant accounting policies is included under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our fiscal 2022 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 respect to Income Taxes, specifically estimates related to the intra-entity asset transfer of the IP to our international headquarters during the second quarter of fiscal 2023. The following are the key estimates and assumptions and corresponding uncertainties for estimating the value of the IP: 39 -------------------------------------------------------------------------------- Key Estimates and Assumptions Key Uncertainties
· The assessment of the fair value of · While we employ experts to determine
the IP transferred to our the fair value of IP, its fair
value
international headquarters is based on is based on significant management
factors that market participants would assumptions and estimates, which are
use in an orderly transaction in inherently uncertain and
highly
accordance with the accounting subjective and as a result,
actual
guidance for the fair value results may differ from
estimates. If
measurement of nonfinancial assets and different assumptions were to be used,
transfer pricing principles from the it could materially impact the IP
Organisation for Economic Co-operation valuation. Volatile macroeconomic and and Development. market conditions caused by the COVID-19 pandemic have increased the
The valuation of our IP is principally level of uncertainty and subjectivity
based on estimates of the future of certain management
assumptions and
performance and cash flows expected to estimates.
be generated through use of the IP.
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