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 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 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 endedApril 24, 2020 , 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 leader in hybrid cloud data services. In a world of increasing complexity, we simplify. We help our customers ensure their data and applications are in the right place at the right time with the right characteristics and capabilities in order to achieve new insights and accelerate innovation. Only NetApp delivers everything IT organizations need to build their own unique data fabrics. NetApp helps customers move from building data centers to building data fabrics. A data fabric simplifies the integration and orchestration of data services across clouds and on-premises to accelerate digital transformation. Only NetApp can deliver the full range of capabilities organizations need for their data fabrics: the power to discover resources, integrate disparate data services, automate operations, optimize over time, and protect and secure data everywhere.
Together with our partners, we empower organizations to unleash the full potential of their data to expand customer touchpoints, foster greater innovation and optimize their operations.
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 drive data-driven innovation with the cloud, build clouds to gain speed and agility, and modernize and simplify IT to accelerate critical business applications.
With NetApp products and solutions, customers can:
• Adopt new cloud-based capabilities by leveraging the best cloud resources
for their business and simplify the complexities of managing data across multiple, public clouds and on-premises • Add new capabilities to their current environment by delivering new applications and services faster, and run existing workloads more efficiently with a foundation that brings the power of cloud-native data services on premises • Run their current IT application environment more efficiently by optimizing and future proofing infrastructure with high-performing, cloud-integrated technologies and converged infrastructure. We employ a multichannel distribution strategy, selling products and services to end users and service providers through a direct sales force and through channel partners, including value-added resellers, system integrators, original equipment manufacturers (OEMs) and distributors. As our product portfolio evolves, market dynamics change, and management continues to assess our largest opportunities, we periodically change how we group product revenue. To provide improved visibility into the value created by our software innovation and R&D investment, beginning in fiscal 2021, we no longer group our products by "Strategic" and "Mature" solutions, but instead disclose the "Software" and "Hardware" components of our product revenues. The engineering DNA of NetApp and the value we provide to customers is grounded in software (particularly our ONTAP OS) and we will continue to look for opportunities to highlight and reinvest in this innovation engine. Software product revenue includes the OS software and optional add-on software solutions attached to our systems across our entire product set: A-series arrays (AFF), SolidFire, EF-series, Hybrid FAS, E-series, NetApp HCI, and StorageGrid. Hardware product revenues include the non-software component of our systems across our entire product set. 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 build their unique data fabrics and efficiently manage their data. Revenues generated by our Public Cloud Services (formerly referred to as Cloud Data Services) offerings are included in software maintenance revenues.
COVID-19
The novel coronavirus, or COVID-19, pandemic and efforts to control its spread have significantly curtailed the movement of people, goods and services worldwide, including in most or all 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 and we have suspended business travel. During the first nine months of fiscal 2021, due to the macroeconomic uncertainty caused by COVID-19, we continue to observe certain customers delay purchases of our products and services, while other customers accelerate or place new orders to address the demands of remote working and digital business, though on a net basis the impact to product revenues was unfavorable. We also continue to experience certain logistical challenges in delivering our products and services to customers in certain regions, and minor supply chain constraints. We believe our existing balances of cash, cash equivalents and investments, cash generated from operations, and ability to access capital markets and committed lines of credit will be sufficient to satisfy our working capital needs, capital expenditures, dividends, stock repurchases, required debt repayments and other liquidity requirements associated with our operations. 28 -------------------------------------------------------------------------------- The magnitude and duration of the disruption to our business, and impact to our operational and financial performance, caused by COVID-19 pandemic is uncertain. Refer to Item 1A. - Risk Factors for the significant risks we have identified as a result of the COVID-19 pandemic.
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 and percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 2021 2020 Net revenues$ 1,470 $ 1,404 $ 4,189 $ 4,011 Gross profit $ 975 $ 941$ 2,780 $ 2,682 Gross profit margin percentage 66 % 67 % 66 % 67 % Income from operations $ 258 $ 268 $ 576 $ 668 Income from operations as a percentage of net revenues 18 % 19 % 14 % 17 % Net income $ 182 $ 277 $ 396 $ 623 Diluted net income per share$ 0.80 $ 1.21 $ 1.76 $ 2.64 Net cash provided by operating activities $ 373 $ 420 $ 774 $ 677 January 29, April 24, 2021 2020
Deferred revenue and financed unearned services revenue
Stock Repurchase and Dividend Activity
During the third quarter of fiscal 2021, we repurchased 0.8 million shares of our common stock at an average price of$64.78 per share, for an aggregate of$50 million . We also declared aggregate cash dividends of$0.48 per share in that period, for which we paid$107 million . During the first nine months of fiscal 2021, aggregate cash dividends declared totaled$1.44 per share, for which we paid an aggregate of$321 million .
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe 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. Management's estimates include, as applicable, the anticipated impacts of the COVID-19 pandemic. 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 2020 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.
New Accounting Standards
See Note 2 - Recently Adopted Accounting Standards 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 year 2021, ending onApril 30, 2021 is a 53-week year, with 14 weeks included in its first quarter and 13 weeks in each subsequent quarter. Fiscal year 2020, which ended onApril 24, 2020 , was a 52-week year, with 13 weeks in each of its 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. 29
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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 January 29, January 24, January 29, January 24, 2021 2020 2021 2020 Revenues: Product 53 % 56 % 51 % 55 % Software maintenance 23 19 22 19 Hardware maintenance and other services 25 25 26 26 Net revenues 100 100 100 100 Cost of revenues: Cost of product 25 26 25 25 Cost of software maintenance 2 1 2 1 Cost of hardware maintenance and other services 7 6 7 7 Gross profit 66 67 66 67 Operating expenses: Sales and marketing 30 29 31 30 Research and development 15 15 16 16 General and administrative 4 4 5 5 Restructuring charges - - 1 1 Acquisition-related expense - - - - Gain on sale or derecognition of assets - - - (1 ) Total operating expenses 49 48 53 50 Income from operations 18 19 14 17 Other income (expense), net (1 ) 1 (1 ) 1 Income before income taxes 17 20 13 17 Provision (benefit) for income taxes 4 - 3 2 Net income 12 % 20 % 9 % 16 %
Percentages may not add due to rounding
Discussion and Analysis of Results of Operations
Overview
Net revenues for the third quarter and first nine months of fiscal 2021 were$1,470 million and$4,189 million , respectively, reflecting an increase of$66 million , or 5%, and$178 million , or 4%, respectively, compared to the corresponding periods of the prior year. The growth in net revenues reflects an increase in software maintenance revenues and hardware maintenance and other services revenues, offset by a decrease in product revenues. For the third quarter of fiscal 2021, net revenues benefited by approximately two percentage points from fluctuations in foreign currency exchanges rates. For the first nine months of fiscal 2021, software and hardware maintenance revenues benefited from the extra week in our first quarter of fiscal 2021. Gross profit as a percentage of net revenues for the third quarter and first nine months of fiscal 2021 decreased by approximately one percentage point each compared to the corresponding periods in fiscal 2020, primarily due to a reduction in gross profit margins on product revenues. Gross profit margins on product revenues decreased by two percentage points and three percentage points in the third quarter and first nine months of fiscal 2021, respectively, compared to the corresponding periods of fiscal 2020 primarily due to a decline in the average selling prices of our products. For the first nine months of fiscal 2021 our gross profit margins on product revenues were also impacted by an increase in average unit materials costs. The decline in gross profit margins on product revenues was partially offset by an increase in software maintenance revenues. Sales and marketing, research and development, and general and administrative expenses for the third quarter and first nine months of fiscal 2021 totaled$714 million , or 49%, and$2,148 million , or 51% of net revenues, respectively, reflecting an increase of approximately one percentage point in both the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of fiscal 2020.
Net Revenues (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Net revenues$ 1,470 $ 1,404 5 %$ 4,189 $ 4,011 4 % 30
-------------------------------------------------------------------------------- The increase in net revenues for the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of fiscal 2020 was primarily due to an increase in hardware and software maintenance revenues, which in the first nine months of 2021 benefited from an additional week in that period. Product revenues as a percentage of net revenues decreased by approximately three percentage points and four percentage points in the third quarter and first nine months of fiscal 2021, respectively, compared to the corresponding periods of fiscal 2020. Fluctuations in foreign currency exchange rates benefited third quarter net revenues by approximately two percentage points for fiscal 2021 compared to the corresponding period of fiscal 2020. The following customers, each of which is a distributor, accounted for 10% or more of net revenues: Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 2021 2020 Arrow Electronics, Inc. 24 % 25 % 24 % 25 % Tech Data Corporation 19 % 20 % 20 % 20 %
Product Revenues (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Product revenues $ 775 $ 787 (2 )%$ 2,151 $ 2,202 (2 )% Product revenues are derived through the sale of our data solutions and 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. Total product revenues decreased in the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of the prior year primarily due to less favorable macroeconomic conditions in the current year, in part due to the economic uncertainty caused by the COVID-19 pandemic. While sales of all-flash array systems increased in the current year, this increase was more than offset by a decline in sales of our other products. Fluctuations in foreign currency exchange rates benefited third quarter product revenues by approximately two percentage points for fiscal 2021 compared to the corresponding period of fiscal 2020. As discussed in the Overview section, beginning in fiscal 2021, we disclose the software and hardware components of our product revenues. Because our revenue recognition policy under generally accepted accounting principles inthe United States of America (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. We believe that the presentation of the software and hardware components of our product revenues is meaningful to investors and management as it illustrates the significance of the Company's software and provides improved visibility into the value created by our software innovation and R&D investment. Revenues from the hardware component of product revenues totaled$347 million , representing 45% of product revenues, in the third quarter of fiscal 2021, compared to$412 million , representing 52% of product revenues, in the corresponding period of the prior year. Revenues from the hardware component of product revenues totaled$995 million , representing 46% of product revenues, in the first nine months of fiscal 2021, compared to$1,155 million , representing 52% of product revenues, in the first nine months of fiscal 2020. The software component of product revenues totaled$428 million , representing 55% of product revenues, in the third quarter of fiscal 2021, compared to$375 million , representing 48% of product revenues, in the corresponding period of the prior year. The software component of product revenues totaled$1,156 million , representing 54% of product revenues, in the first nine months of fiscal 2021, compared to$1,047 million , representing 48% of product revenues, in the corresponding period of the prior year. The increase in the software component percentage of product revenues in the third quarter and first nine months of fiscal 2021 is primarily due to a higher mix of all-flash array systems revenues, which contain a higher proportion of software components than other products. 31
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Software Maintenance Revenues (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change
Software maintenance revenues $ 334 $ 263
27 % $ 938 $ 767 22 %
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 growth in software maintenance revenues reflects higher Public Cloud Services revenue and the higher aggregate contract value of the installed base under software maintenance contracts, which is recognized as revenue ratably over the terms of the underlying contracts. Software maintenance revenues in the third quarter and first nine months of fiscal 2021 benefited from the continued growth in all-flash array product sales, as all flash systems carry a higher support dollar content than our other products. Software maintenance revenues in the first nine months of fiscal 2021 were favorably impacted by the additional week of deferred revenue amortization in that period, which contributed approximately$20 million of additional revenues. Hardware Maintenance and Other Services Revenues (in millions, except percentages): Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Hardware maintenance and other services revenues $ 361 $ 354 2 %$ 1,100 $ 1,042 6 %
Hardware maintenance and other services revenues include hardware maintenance, professional services, and educational and training services revenues.
Hardware maintenance contract revenues were flat at$293 million in the third quarter of each fiscal 2021 and fiscal 2020, while they were$896 million for the first nine months of fiscal 2021, compared to$863 million for the corresponding period of fiscal 2020, reflecting an increase of 4%. The increase in the first nine months of fiscal 2021 is partially due to the additional week in that period which contributed approximately$20 million of additional revenues. Professional services and educational and training services revenues were$68 million and$204 million , respectively, for the third quarter and first nine months of fiscal 2021, compared to$61 million and$179 million , respectively, for the corresponding periods of the prior year. The increase in the first nine months of fiscal 2021 is partially due to the additional week in that period.
Revenues by Geographic Area:
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 2021 2020United States ,Canada andLatin America (Americas) 53 % 50 % 54 % 52 % Europe, Middle East and Africa (EMEA) 32 % 35 % 31 % 32 % Asia Pacific (APAC) 15 % 15 % 15 % 15 %
Percentages may not add due to rounding
Americas revenues consist of sales toAmericas commercial andU.S. public sector markets. Demand across geographies was relatively consistent in the third quarter and first nine months of fiscal 2021 as compared to the corresponding periods of the prior year. 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, third-party royalty costs and amortization of purchased intangible assets 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. 32
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Cost of Product Revenues (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Cost of product revenues $ 369 $ 360 3 %$ 1,045 $ 1,013 3 %
The changes in cost of product revenues consisted of the following (in percentage points of the total change):
Three Months Nine Months Ended Ended Fiscal 2021 to Fiscal 2021 to Fiscal 2020 Fiscal 2020 Materials costs 4 6 Excess and obsolete inventory (2 ) (2 ) Warranty (1 ) (1 ) Other 2 - Total change 3 3 Cost of product revenues represented 48% and 49% of product revenues for the third quarter and first nine months of fiscal 2021, respectively, compared to 46% for each of the corresponding periods of fiscal 2020. Materials costs represented 89% of product costs for each of the third quarter and first nine months of fiscal 2021, compared to 87% and 85% in the corresponding periods of fiscal 2020. Materials costs increased by approximately$15 million and$62 million in the third quarter and first nine months of fiscal 2021, respectively, compared to the corresponding periods of the prior year. The trend in product mix toward all flash-array systems, which carry higher materials costs than hybrid systems, was the primary driver of these increases. The average unit materials cost of all flash-array systems also increased in the first nine months of fiscal 2021 compared to the corresponding period of fiscal 2020, due to an increase in the price of certain product components, which adversely impacted product margins. Excess and obsolete inventory reserves and warranty expenses were lower in the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of fiscal 2020. In addition to the increase in average unit materials costs of all flash-array systems described above, product margins were also adversely impacted in the third quarter and first nine months of fiscal 2021 by a decrease in the average selling prices of most of our products.
Cost of Software Maintenance Revenues (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Cost of software maintenance revenues $ 28 $ 12 133 % $ 67 $ 33 103 % Cost of software maintenance revenues increased in the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of fiscal 2020, reflecting the increase in Public Cloud Services revenue and an increase in amortization expense for acquired developed technology. Cost of software maintenance revenues represented 8% and 7% of software maintenance revenues, respectively, for the third quarter and first nine months of fiscal 2021, and 5% and 4%, respectively, for the corresponding periods of fiscal 2020. Cost of Hardware Maintenance and Other Services Revenues (in millions, except percentages): Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Cost of hardware maintenance and other services revenues $ 98 $ 91 8 % $ 297 $ 283 5 % Cost of hardware maintenance and other services revenues increased in the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of fiscal 2020, in line with the increase in hardware maintenance and other services revenues. Costs represented 27% of hardware maintenance and other services revenues in both the third quarter and first nine months of fiscal 2021, compared to 26% and 27%, respectively, in the corresponding periods of fiscal 2020. 33
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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.
Total compensation costs included in operating expenses increased by
Total compensation costs included in operating expenses increased$165 million , or 15% in the first nine months of fiscal 2021, compared to the corresponding period of the prior year, reflecting an increase in average headcount of 4%, higher incentive compensation expense, and the impact of one additional week in the first quarter of fiscal 2021.
Sales and Marketing (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change
Sales and marketing expenses $ 436 $ 402
8 %$ 1,297 $ 1,196 8 % 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. Changes in sales and marketing expense consisted of the following (in percentage points of the total change): Three Months Nine Months Ended Ended Fiscal 2021 to Fiscal 2021 to Fiscal 2020 Fiscal 2020 Compensation costs 10 9 Commissions 1 3 Advertising and marketing promotional expense 1 1 Travel and entertainment (4 ) (4 ) Other - (1 ) Total change 8 8 The increase in compensation costs for the third quarter and first nine months of fiscal 2021 reflected an increase in average headcount of 7% each, compared to the corresponding periods of the prior year, with this expansion of our sales and marketing teams supporting our ability to execute on key market opportunities. Compensation costs for the nine months of fiscal 2021 also reflected the impact of one additional week in the first quarter. The increase in commissions expense for the third quarter and first nine months of fiscal 2021 is primarily due to higher performance against sales goals than in the corresponding periods of fiscal year 2020. Advertising and marketing promotional expense increased in the third quarter of fiscal 2021 compared to the corresponding period of the prior year, primarily due to higher spending levels on certain projects. Travel and entertainment spend decreased significantly due to the ongoing COVID-19 pandemic.
Research and Development (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change
Research and development expenses $ 215 $ 211
2 % $ 660 $ 635 4 % 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 (in percentage points of the total change): Three Months Nine Months Ended Ended Fiscal 2021 to Fiscal 2021 to Fiscal 2020 Fiscal 2020 Compensation costs 7 7 Development projects and outside services (2 ) (1 ) Facilities and IT support costs (2 ) (1 ) Travel and entertainment (1 ) (1 ) Total change 2 4 34
-------------------------------------------------------------------------------- The increase in compensation costs for the third quarter and first nine months of fiscal 2021 compared to the corresponding periods in the prior year was primarily due to higher incentive compensation expense as a result of stronger company achievement against financial targets. Compensation costs for the first nine months of fiscal 2021 also reflected the impact of one additional week in the first quarter. The decrease in development projects and outside services were primarily due to the lower spending on certain engineering projects. The decrease in facilities and IT support costs were primarily due to cost containment efforts, and lower travel and entertainment expense was due to the impact of the ongoing COVID-19 pandemic.
General and Administrative (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change
General and administrative expenses $ 63 $ 60
5 % $ 191 $ 200 (5 )% 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 (in percentage points of the total change): Nine Months Three Months Ended Ended Fiscal 2021 to Fiscal 2021 to Fiscal 2020 Fiscal 2020 Compensation costs 13 7 Professional and legal fees and outside services (12 ) (15 ) Litigation settlement - 3 Facilities and IT support costs 2 1 Other 2 (1 ) Total change 5 (5 ) The increase in compensation costs in the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of the prior year was primarily due to higher incentive compensation expense as a result of stronger company achievement against financial targets. The decrease in professional and legal fees and outside services expense in the third quarter and first nine months of fiscal 2021 was primarily due to lower spending on business transformation projects in the current year. The increase in facilities and IT support costs was primarily due to higher spending levels on IT projects. During the second quarter of fiscal 2021, we incurred a litigation settlement charge of approximately$5 million that was included in general and administrative expenses in our condensed consolidated statements of operations.
Restructuring Charges (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Restructuring charges $ - $ - NM $ 42 $ 21 100 % NM - Not Meaningful In the second quarter of fiscal 2021, we announced a restructuring plan (theAugust 2020 Plan) to optimize our business and fund our biggest opportunities, which included a reduction in our global workforce of approximately 5%. Charges related to the plan consisted primarily of employee severance-related costs. We completed substantially all activities under the plan by the end of the third quarter fiscal 2021. See Note 12 - Restructuring Charges of the Notes to Condensed Consolidated Financial Statements for more details.
Acquisition-related Expense (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Acquisition-related expense $ 3 - NM $ 14 $ - NM NM - Not Meaningful 35
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In the first nine months of fiscal 2021, we incurred
Gain on sale or derecognition of assets (in millions, except percentages)
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Gain on sale or derecognition of assets $ - $ - NM $ - $ (38 ) NM NM - Not Meaningful InSeptember 2017 , we entered into an agreement to sell certain land and buildings located inSunnyvale, California , through two separate and independent closings, the first of which was completed in fiscal 2018. OnAugust 29, 2019 , the second closing occurred and we consummated the sale of the land, with a net book value of$53 million , and received cash proceeds of$96 million , resulting in a gain, net of direct selling costs, of$38 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 January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change Interest income $ 2 $ 10 (80 )% $ 7 $ 41 (83 )% Interest expense (19 ) (14 ) 36 % (55 ) (41 ) 34 % Other income (expense), net 6 12 (50 )% (2 ) 26 (108 )% Total $ (11 ) $ 8 (238 )% $ (50 ) $ 26 (292 )% Interest income decreased in the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of the prior year due to both a reduction in the size of our investment portfolio and lower yields earned on the investments. Interest expense increased in the third quarter and first nine months of fiscal 2021 compared to the corresponding periods of the prior year, as we issued Senior Notes in aggregate principal amount of$2.0 billion in the first quarter of fiscal 2021. The impact from the issuance of these Senior Notes was partially offset by the extinguishment of our Senior Notes dueJune 2021 in the first quarter of fiscal 2021, and a lower average outstanding commercial paper balance during fiscal 2021. In the first nine months of fiscal 2021, Other income (expense), net includes a$6 million gain recognized on our sale of a minority equity interest in a privately held company for proceeds of approximately$8 million . This benefit was more than offset in the first nine months period by a$14 million loss recognized from the extinguishment of our Senior Notes dueJune 2021 in the first quarter of fiscal 2021. Other income (expense), net for the first nine months of fiscal 2020 includes a$14 million gain we realized on the sale of available-for-sale debt securities during that period. The remaining fluctuations in other income (expense), net are primarily due to foreign exchange gains and losses.
Provision for Income Taxes (in millions, except percentages):
Three Months Ended Nine Months Ended January 29, January 24, January 29, January 24, 2021 2020 % Change 2021 2020 % Change
Provision (benefit) for income taxes $ 65 $ (1 )
NM $ 130 $ 71 83 % NM - Not Meaningful Our effective tax rate for the third quarter of fiscal 2021 was 26.3% compared to (0.4)% for the third quarter of fiscal 2020. Our effective tax rate for the first nine months of fiscal 2021 was 24.7% compared to 10.2% for the corresponding period of fiscal 2020. Our effective tax rates reflect the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below theU.S. statutory tax rate. Our effective tax rates for the third quarter and first nine months of fiscal 2021 increased compared to the corresponding periods of the prior year primarily due to the impact of taxes resulting from the integration of acquired companies. Additionally, the corresponding prior periods included discrete benefits for lapses in statutes of limitations. The remaining differences in effective tax rates for the third quarter of fiscal 2021 compared to the corresponding period of the prior year are primarily due to differences in discrete tax benefits/expenses for stock-based compensation. The remaining differences in effective tax rates for the first nine months of fiscal 2021 compared to the corresponding period of the prior year are primarily due to certain discrete expenses, including foreign audit results and differences in discrete tax benefits for stock-based compensation. 36 -------------------------------------------------------------------------------- As ofJanuary 29, 2021 , we had$224 million of gross unrecognized tax benefits, of which$133 million has been recorded in other long-term liabilities. Inclusive of penalties, interest and certain income tax benefits,$133 million would affect our provision for income taxes if recognized. 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 engage in continuous discussion and negotiation with taxing authorities regarding tax matters in multiple 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
January 29 ,April 24 , (In millions, except percentages) 2021
2020
Cash, cash equivalents and short-term investments
$ 2,650 $ 1,673
The following is a summary of our cash flow activities:
Nine Months Ended January 29, January 24, (In millions) 2021 2020 Net cash provided by operating activities $ 774 $ 677 Net cash (used in) provided by investing activities (320 )
1,227
Net cash provided by (used in) financing activities 624 (1,520 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash 70 (4 ) Net increase in cash, cash equivalents and restricted cash$ 1,148 $ 380 Cash Flows As ofJanuary 29, 2021 , our cash, cash equivalents and short-term investments were$3.9 billion , an increase of$1.0 billion fromApril 24, 2020 . The increase was primarily due to$2.0 billion of net proceeds from the issuance of Senior Notes and$774 million of cash provided by operating activities, partially offset by$513 million used for the extinguishment of our Senior Notes dueJune 2021 ,$420 million used for the net repayment of commercial paper notes with original maturities of three months or less,$350 million used for the acquisitions of two privately-held companies,$321 million used for the payment of dividends, and$124 million in purchases of property and equipment. Working capital increased by$1.4 billion to$2.1 billion as ofJanuary 29, 2021 compared toApril 24, 2020 primarily due to the increases in cash, cash equivalents and short-term investments discussed above, and the net repayment of commercial paper notes.
Cash Flows from Operating Activities
During the first nine months of fiscal 2021, we generated cash from operating activities of$774 million , reflecting net income of$396 million , adjusted by non-cash depreciation and amortization of$159 million and stock-based compensation of$149 million , compared to$677 million of cash generated from operating activities during the first nine months of fiscal 2020.
Changes in assets and liabilities in the first nine months of fiscal 2021 included the following:
• Accounts receivable decreased
shipping linearity for the third quarter of fiscal 2021 compared to the fourth quarter of fiscal 2020.
• Accounts payable decreased by
from, and payments to, our contract manufacturers.
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 and the timing and amount of compensation and other payments. 37
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Cash Flows from Investing Activities
During the first nine months of fiscal 2021, we generated$140 million from maturities and sales of investments, net of purchases, and paid$124 million for capital expenditures, while during the first nine months of fiscal 2020, we generated$1.3 billion from maturities and sales of investments, net of purchases, and paid$100 million for capital expenditures. Additionally, during the first nine months of fiscal 2021, we paid$350 million , net of cash acquired for two privately-held companies, as compared to$56 million , net of cash acquired that we paid in the first nine months of fiscal 2020 for a privately-held company. Additionally, during the first nine months of fiscal 2020, we received$96 million for the sale of land inSunnyvale, California .
Cash Flows from Financing Activities
During the first nine months of fiscal 2021, cash flows provided by financing activities totaled$624 million , primarily due to net cash proceeds of$2.0 billion from the issuance of Senior Notes, partially offset by the use of$513 million for the extinguishment of our Senior Notes dueJune 2021 ,$420 million for the net repayment of commercial paper notes with original maturities of three months or less,$321 million for the payment of dividends,$176 million for the repayment of commercial paper notes with original maturities of greater than three months, and$50 million for the repurchase of 1 million shares of common stock. During the first nine months of fiscal 2020, we used$1.3 billion for the repurchase of 22 million shares of common stock,$334 million for the payment of dividends, and$400 million for the repayment of our Senior Notes dueSeptember 2019 , partially offset by$443 million in net proceeds from the issuance of commercial paper notes with original maturities of three months or less. Key factors that could affect our cash flows include changes in our revenue mix and profitability, our ability to effectively manage our working capital, in particular, accounts receivable, accounts payable and inventories, the timing and amount of stock repurchases and payment of cash dividends, the impact of foreign exchange rate changes, our ability to effectively integrate acquired products, businesses and technologies and the timing of repayments of our debt. Based on past performance and our current business outlook, we believe that our sources of liquidity, including potential future issuances of debt, equity or other securities, will satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, cash dividends, contractual obligations, commitments, principal and interest payments on our debt and other liquidity requirements associated with operations and meet our cash requirements for at least the next 12 months. However, in the event our liquidity is insufficient, we may be required to curtail spending and implement additional cost saving measures and restructuring actions or enter into new financing arrangements. We cannot be certain that we will continue to generate cash flows at or above current levels or that we will be able to obtain additional financing, if necessary, on satisfactory terms, if at all. For further discussion of factors that could affect our cash flows and liquidity requirements, including the impact of the COVID-19 pandemic, see Item 1A. Risk Factors. Liquidity
Our principal sources of liquidity as of
Cash, cash equivalents and short-term investments consisted of the following (in millions): January 29, April 24, 2021 2020 Cash and cash equivalents$ 3,808 $ 2,658 Short-term investments 86 224 Total$ 3,894 $ 2,882 As ofJanuary 29, 2021 andApril 24, 2020 ,$2.3 billion and$2.5 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$0.4 billion , respectively, were available in theU.S. The Tax Cuts and Jobs Act ("TCJA") imposed a one-time transition tax on substantially all accumulated foreign earnings throughDecember 31, 2017 , and generally allows companies to make distributions of foreign earnings without incurring additional federal taxes. As a part of the recognition of the impacts of the TCJA, we have reviewed our projected global cash requirements and have determined that certain historical and future foreign earnings will no longer be indefinitely reinvested. 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, service interest and principal payments on our debt, fund our stock repurchase program, and pay dividends, as and if declared. 38 -------------------------------------------------------------------------------- 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 ofJanuary 29, 2021 . 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 theSecurities 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
3.25% Senior Notes Due December 2022$ 250 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$ 2,650 Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 8 - 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. 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 ofJanuary 29, 2021 . 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 ofJanuary 29, 2021 , 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 2021 to be between$25 million and$50 million .
Dividends and Stock Repurchase Program
On
39 -------------------------------------------------------------------------------- As ofJanuary 29, 2021 , our Board of Directors has authorized the repurchase of up to$13.6 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 throughJanuary 29, 2021 , we repurchased a total of 339 million shares of our common stock at an average price of$38.92 per share, for an aggregate purchase price of$13.2 billion . As ofJanuary 29, 2021 , the remaining authorized amount for stock repurchases under this program was$0.4 billion . During the first quarter of fiscal 2021, we announced the suspension of our stock repurchases to strengthen our liquidity position given the uncertainty surrounding the overall impact of the ongoing COVID-19 pandemic. We reinitiated our stock repurchase program during the third quarter of fiscal 2021.
Contractual Obligations
Purchase Orders and Other Commitments
In the ordinary course of business, we make commitments to our third-party contract manufacturers to manage 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 ofJanuary 29, 2021 , we had$602 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 ofJanuary 29, 2021 , we had$181 million in other purchase obligations. Unrecognized Tax Benefits As ofJanuary 29, 2021 , our liability for uncertain tax positions was$133 million , including interest, penalties and certain income tax benefits. Due to uncertainties regarding tax audits and their possible outcomes, we are unable to make reasonably reliable estimates of the period of cash settlement with the taxing authorities. 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$61 million and$49 million of receivables during the first nine months of fiscal 2021 and fiscal 2020, 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 ofJanuary 29, 2021 andApril 24, 2020 , 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 ofJanuary 29, 2021 , 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. 40
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Off-Balance Sheet Arrangements
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.
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. 41
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