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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

     
(Mark One)
   
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended October 29, 2004
 
or
 
o
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission file number 0-27130

Network Appliance, Inc.

(Exact name of registrant as specified in its charter)
     
Delaware
   77-0307520
(State or other jurisdiction of
incorporation or organization)		   (IRS Employer
Identification No.)

495 East Java Drive,

Sunnyvale, California 94089
(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code:

(408) 822-6000

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

     Number of shares outstanding of the registrant’s common stock, $0.001 par value, as of the latest practicable date.

     
Outstanding at
Class October 29, 2004
Common Stock
  358,783,067

TABLE OF CONTENTS

             
Page No.
     PART I — FINANCIAL INFORMATION        
   Condensed Consolidated Financial Statements (Unaudited)     2  
     Condensed Consolidated Balance Sheets as of October 29, 2004 and April 30, 2004 (Unaudited)     2  
     Condensed Consolidated Statements of Income for the three and six-month periods ended October 29, 2004 and October 31, 2003 (Unaudited)     3  
     Condensed Consolidated Statements of Cash Flows for the six-month periods ended October 29, 2004 and October 31, 2003 (Unaudited)     4  
     Notes to Condensed Consolidated Financial Statements (Unaudited)     5  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
   Quantitative and Qualitative Disclosures About Market Risk     41  
   Controls and Procedures     43  
     PART II — OTHER INFORMATION        
   Legal Proceedings     44  
   Changes in Securities     44  
   Defaults Upon Senior Securities     44  
   Submission of Matters to Vote of Security holders     45  
   Other Information     45  
   Exhibits and Reports on Form 8-K     45  
 
 SIGNATURE     47  
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2

1

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PART I. FINANCIAL INFORMATION

 
Item 1. Condensed Consolidated Financial Statements (Unaudited)

NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands — unaudited)
                     
October 29, April 30,
2004 2004
ASSETS
Current Assets:
                
 
Cash and cash equivalents
  $ 257,344     $ 241,149  
 
Short-term investments
    664,390       566,816  
 
Accounts receivable, net of allowances of $5,104 and $5,071, respectively
    219,276       193,942  
 
Inventories
    35,351       34,109  
 
Prepaid expenses and other
    32,216       29,057  
 
Deferred income taxes
    24,235       24,163  
     
     
 
   
Total current assets
    1,232,812       1,089,236  
Property and Equipment, net
     398,306       370,717  
Goodwill
     291,816       291,816  
Intangible Assets, net
     26,151       31,718  
Other Assets
     83,206       93,779  
     
     
 
    $ 2,032,291     $ 1,877,266  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
                
 
Accounts payable
  $ 57,773     $ 52,719  
 
Income taxes payable
    14,848       16,033  
 
Accrued compensation and related benefits
    70,064       65,186  
 
Other accrued liabilities
    46,581       43,683  
 
Deferred revenue
    200,263       166,602  
     
     
 
   
Total current liabilities
    389,529       344,223  
Long-Term Deferred Revenue
     139,591       112,337  
Long-Term Obligations
     4,771       4,858  
     
     
 
   
Total liabilities
    533,891       461,418  
     
     
 
Commitments and Contingencies (Note 13)
                
Stockholders’ Equity:
                
 
Common stock
    370       364  
 
Additional paid-in capital
    1,199,379       1,138,158  
 
Deferred stock compensation
    (18,980 )     (23,348 )
 
Treasury stock
    (219,185 )     (136,172 )
 
Retained earnings
    538,415       436,224  
 
Accumulated other comprehensive income (loss)
    (1,599 )     622  
     
     
 
   
Total stockholders’ equity
    1,498,400       1,415,848  
     
     
 
    $ 2,032,291     $ 1,877,266  
     
     
 

See accompanying notes to unaudited condensed consolidated financial statements.

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NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts — unaudited)
                                     
Three Months Ended Six Months Ended
October 29, October 31, October 29, October 31,
2004 2003 2004 2003
Revenues:
                                
 
Product revenue
  $ 336,804     $ 249,532     $ 661,431     $ 485,318  
 
Service revenue
    38,372       26,018       72,166       50,741  
     
     
     
     
 
   
Total revenues
    375,176       275,550       733,597       536,059  
     
     
     
     
 
Cost of Revenues:
                                
 
Cost of product revenue
    111,728       88,090       225,943       173,129  
 
Cost of service revenue
    32,287       22,397       61,535       41,744  
     
     
     
     
 
   
Total cost of revenues
    144,015       110,487       287,478       214,873  
     
     
     
     
 
 
Gross margin
    231,161       165,063       446,119       321,186  
     
     
     
     
 
Operating Expenses:
                                
 
Sales and marketing
    109,109       82,185       212,420       161,541  
 
Research and development
    40,650       31,513       79,353       63,054  
 
General and administrative
    17,870       12,728       34,752       24,993  
 
Stock compensation(1)
    2,139       893       4,243       1,547  
 
Restructuring charges
    —       1,110       —       1,110  
     
     
     
     
 
   
Total operating expenses
    169,768       128,429       330,768       252,245  
     
     
     
     
 
Income from Operations
     61,393       36,634       115,351       68,941  
Other Income (Expense), net:
                                
 
Interest income
    6,103       2,831       10,185       5,876  
 
Other income (expense), net
    90       (1,209 )     (822 )     (1,256 )
 
Net gain on investments
    —       —       —       145  
     
     
     
     
 
   
Total other income, net
    6,193       1,622       9,363       4,765  
     
     
     
     
 
Income before Income Taxes
     67,586       38,256       124,714       73,706  
Provision for (Benefit from) Income Taxes
     12,257       (10,157 )     22,523       (1,780 )
     
     
     
     
 
Net Income
   $ 55,329     $ 48,413     $ 102,191     $ 75,486  
     
     
     
     
 
Net Income per Share:
                                
 
Basic
  $ 0.15     $ 0.14     $ 0.29     $ 0.22  
     
     
     
     
 
 
Diluted
  $ 0.15     $ 0.13     $ 0.27     $ 0.21  
     
     
     
     
 
Shares Used in per Share Calculations:
                                
 
Basic
    357,787       343,725       357,265       342,706  
     
     
     
     
 
 
Diluted
    375,074       364,715       374,024       361,606  
     
     
     
     
 
(1) Stock compensation includes:
                               
   
Sales and marketing
  $ 570     $ 601     $ 1,080     $ 959  
   
Research and development
    1,355       188       2,739       380  
   
General and administrative
    214       104       424       208  
     
     
     
     
 
    $ 2,139     $ 893     $ 4,243     $ 1,547  
     
     
     
     
 

See accompanying notes to unaudited condensed consolidated financial statements.

3

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NETWORK APPLIANCE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands — unaudited)
                         
Six Months Ended
October 29, 2004 October 31, 2003
Cash Flows from Operating Activities:
                
 
Net income
  $ 102,191     $ 75,486  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Depreciation
    26,640       26,997  
   
Amortization of patents
    901       601  
   
Amortization of intangible assets
    4,666       2,728  
   
Stock compensation
    4,243       1,547  
   
Net (gain) loss on investments
    (29 )     (145 )
   
Net (gain) loss on disposal of equipment
    519       (30 )
   
Allowance for doubtful accounts
    403       (320 )
   
Deferred rent and other
    224       320  
   
Changes in assets and liabilities:
               
     
Accounts receivable
    (25,737 )     (8,904 )
     
Inventories
    (5,993 )     (7,893 )
     
Prepaid expenses and other assets
    4,170       (1,711 )
     
Accounts payable
    5,054       1,454  
     
Income taxes payable
    13,449       (6,452 )
     
Accrued compensation and related benefits
    4,878       4,962  
     
Other accrued liabilities
    2,809       4,179  
     
Deferred revenue
    60,915       34,700  
     
     
 
       
Net cash provided by operating activities
    199,303       127,519  
     
     
 
Cash Flows from Investing Activities:
                
 
Purchases of short and long-term investments
    (180,725 )     (251,720 )
 
Redemptions of short and long-term investments
    83,057       177,604  
 
Purchases of property and equipment
    (49,442 )     (22,041 )
 
Proceeds from disposal of property and equipment
    —       105  
 
Proceeds from sales of investments
    298       419  
 
Purchase of patents
    —       (9,015 )
 
Purchases of equity securities
    —       (325 )
     
     
 
       
Net cash used in investing activities
    (146,812 )     (104,973 )
     
     
 
Cash Flows from Financing Activities:
                
 
Proceeds from sale of common stock related to employee stock transactions
    46,717       53,215