TEXT-S&P assigns NetApp 'BBB+' rating, outlook is stable
Overview -- We are assigning ratings to Sunnyvale, Calif.-based software company NetApp Inc. based on its "satisfactory" business risk position coupled with its "modest" financial risk profile under our criteria. -- We are assigning our 'BBB+' corporate credit rating and stable outlook. -- The stable outlook reflects our expectation that NetApp will maintain its market position and financial profile in line with the current rating over the intermediate term. Rating Action On Dec. 4, 2012, Standard & Poor's Ratings Services assigned its 'BBB+' corporate credit rating to Sunnyvale, Calif.-based software company NetApp Inc. We also assigned our preliminary 'BBB+' rating to its senior unsecured WKSI shelf filing. The outlook is stable. Rationale Our corporate credit rating reflects NetApp's "satisfactory" business risk position coupled with its "modest" financial risk profile under our criteria. Ratings are supported by the company's established and defensible market position, strong cash flow, and consistent earnings growth. These factors are offset partly by its relatively narrow market focus, and the presence of very strong, larger, and more diversified competitors. With fiscal 2012 revenues (ending April) of about $6.2 billion, NetApp is a leading provider of storage and data management solutions. In a solid number two market position, NetApp participates in somewhat fragmented, but highly competitive markets with significant technology risk. However, the company enjoys meaningful recurring revenue streams (from software upgrade and hardware maintenance contracts), a sizable installed customer base, and a business model that includes significant customer switching costs. NetApp generates very strong free cash flow, in the $1 billion area in fiscal 2012, with about 45% of its sales coming from international sources. Standard & Poor's Ratings Services believes NetApp's business profile benefits from favorable trends that we expect will support continued strong demand for data storage, influenced primarily by the proliferation of shared infrastructure and virtualized environments. NetApp differentiates itself by deploying a unified software architecture that allows the company to leverage its R&D more efficiently, coupled with diversified routes to market that includes both a direct and partner channel strategy. New product introductions and strategic alliances with key original equipment manufacturers and system integrators could enhance future performance. We expect the company to maintain its historical level of non-GAAP R&D investment--at about 12% of annual sales--to support new product development. The rating incorporates our view that NetApp will continue to grow its market position, despite highly competitive industry conditions (specifically following EMC Corp.'s acquisition of Data Domain Technologies and Isilon Systems Inc. ) and potentially cyclical IT spending. In our assessment, the company's management and governance is "satisfactory". NetApp has averaged more than $850 million of annual free cash flow over the past five years. Profitability and cash flow measures are solid, with EBITDA margins in the 20% area. We expect the company's acquisition growth strategy to remain moderate, mostly for tuck-in technology purchases. The rating and outlook incorporates our expectation that the company will manage leverage below 2x over the intermediate term. Additionally, the rating incorporates NetApp's redemption of its convertible notes due in June 2013, with its available balance sheet cash. While we expect share repurchase activity to be a significant use of cash flow, we also expect the company to manage its share repurchases as necessary to maintain adequate financial and liquidity profiles for its investment grade rating. Liquidity NetApp has "strong" liquidity, with sources of cash that are likely to substantially exceed uses for the next 24 months, as well as being available to fund the 2013 convertible bond maturity. Cash sources include $5.6 billion of existing cash equivalents and short-term investments (56% resides overseas) and expected annual free operating cash flow generation in the $1 billion area. Outlook The rating outlook is stable. We expect NetApp to maintain its market position and financial profile in line with the current rating over the intermediate term. We don't expect to consider a higher rating over the near term based on the company's relatively narrow market focus, highly competitive industry conditions, and its potential use of financial flexibility to support its growth objectives, which could include debt-financed acquisitions. Debt to EBITDA sustained above 2x could lead to a rating downgrade. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Temporary contact number: Philip Schrank (516-503-1164) Ratings List New Rating NetApp Inc. Corporate Credit Rating BBB+/Stable/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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