-- 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.
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.
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.
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.
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)
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