NetApp, Inc.: Form 10-Q for the period ended Jan 24, 2025

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 of NetApp, Inc. ("NetApp," “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 Annual Report on Form 10-K for the year ended April 26, 2024 ("2024 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 ended April 26, 2024, and the notes thereto, contained in our 2024 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.

Overview

Our Company

NetApp helps customers make their data infrastructure more seamless, more dynamic, and higher performing. We were incorporated in 1992 and are headquartered in San Jose, California. Building on over three decades of innovation, we combine unified data storage, integrated data services, and CloudOps solutions to make data infrastructure intelligent. Our broad portfolio addresses customer priorities: modernizing legacy infrastructure, improving resiliency against ransomware attacks, and building scalable, high-performance data pipelines for artificial intelligence (AI) workloads.

With NetApp, customers can better leverage their data to accelerate innovation, improve operations, and drive competitive advantage. Our unified data storage delivers flexibility to our customers, enabling them to simply and consistently store any data type and power any workload. As the only enterprise-grade storage service natively embedded in the world’s largest clouds, we power data across AWS, Microsoft Azure, and Google Cloud. Our integrated data services enable active data management, security, protection, governance, and sustainability. Finally, our CloudOps solutions enable adaptive operations across infrastructure, applications, and teams.

Our operations are organized into two segments: Hybrid Cloud and Public Cloud.

Hybrid Cloud offers a unified data storage portfolio of storage management and infrastructure solutions that help customers modernize their data centers. Our Hybrid Cloud portfolio supports structured and unstructured data with unified storage optimized for flash, disk, and cloud storage to handle data-intensive workloads and applications. 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 CloudOps services. These solutions and services are generally available on the leading public clouds, including Amazon AWS, Microsoft Azure, and Google Cloud Platform.

Stock Repurchase and Dividend Activity

During the first nine months of fiscal 2025, we repurchased approximately 7.4 million shares of our common stock at an average price of $121.46 per share, for an aggregate purchase price of $900 million. We also declared aggregate cash dividends of $1.56 per share in that period, for which we paid $319 million.

Restructuring Events

In the first nine months of fiscal 2025, we approved restructuring plans to redirect resources to highest return activities and reduce costs. Aggregate charges recorded from the restructuring plans during the third quarter and first nine months of fiscal 2025 totaled $9 million and $38 million, respectively.

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 2025 and 2024, ending on April 25, 2025 and April 26, 2024, 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:

Percentages may not add due to rounding

Discussion and Analysis of Results of Operations

Net Revenues (in millions, except percentages):

The increase in net revenues for the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of fiscal 2024 was due to an increase in both product revenues and services revenues. Product revenues as a percentage of net revenues decreased by one percentage point during the three months ended January 24, 2025 and increased by one percentage point during the nine months ended January 24, 2025, as compared to the corresponding periods of fiscal 2024.

Product Revenues (in millions, except percentages):

Hybrid Cloud

In prior periods, we presented the hardware and software components of our GAAP product revenues to illustrate the significance and value of the Company’s software. 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, hardware and software components of our product revenues are considered non-GAAP measures. Effective in fiscal 2025, we are no longer presenting the non-GAAP hardware and software components of our product revenues, as management no longer considers them to be key financial measures. The Company’s current strategy is expected to deliver investor value through growth in total revenues, including product revenues, while maintaining operational discipline to drive earnings leverage. While software continues to be the primary value driver of our products, NetApp is primarily focused on driving growth in total product revenues, through the sale of configured storage systems comprised of both hardware and software, with less focus on the pricing of each component. Additionally, the Company is considering potential opportunities to simplify pricing for certain products in the future, which may eliminate the existence of separate prices for hardware and software components and/or impact our ability to allocate between them.

Product revenues are derived through the sale of our Hybrid Cloud solutions and consist of sales of configured all-flash array systems (including All-Flash FAS A-Series and All-Flash FAS C-Series with capacity flash) and hybrid systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, StorageGrid, OEM products, NetApp HCI and add-on optional software.

Total product revenues increased in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year due to higher sales of C-Series all-flash array systems.

Services Revenues (in millions, except percentages):

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 decreased marginally in the third quarter of fiscal 2025 and increased marginally in the first nine months of fiscal 2025, compared to the corresponding periods of the prior year.

Professional and other services revenues increased by $11 million and $24 million in the third quarter and first nine months of fiscal 2025, respectively, compared to the corresponding periods of the prior year.

Public Cloud

Public Cloud revenues are derived from the sale of public cloud offerings delivered primarily as-a-service, which include cloud storage and CloudOps services.

Public Cloud revenues increased in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year, due to higher customer demand, driven by NetApp’s diversified cloud offerings and an overall growth in the cloud market.

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

(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):

Hybrid Cloud

Cost of Hybrid Cloud product revenues represented approximately 43% and 41% of product revenues for the third quarter and first nine months of fiscal 2025, respectively, compared to 37% and 40%, respectively, for the corresponding periods of fiscal 2024. Materials costs represented 89% of cost of Hybrid Cloud product revenues for the third quarter and first nine months of fiscal 2025, compared to 89% and 88%, respectively, for the corresponding periods of fiscal 2024.

Materials costs increased by $42 million and $80 million, respectively, in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year.

Hybrid Cloud product gross margins decreased by approximately six percentage points and one percentage point in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year due to higher component and freight costs.

Unallocated

Unallocated cost of product revenues were relatively flat in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year.

Cost of Services Revenues (in millions, except percentages):

Hybrid Cloud

Cost of Hybrid Cloud services revenues, which are composed of the costs of support and professional and other services, increased in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of fiscal 2024. Cost of Hybrid Cloud services revenues represented approximately 16% of Hybrid Cloud services revenues for the third quarter and first nine months of fiscal 2025 compared to 15% for the corresponding periods of fiscal 2024.

Hybrid Cloud support gross margins were relatively flat in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year. Hybrid Cloud professional and other services gross margins increased by approximately four percentage points and one percentage point, respectively, in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of fiscal 2024 due to the mix of services provided.

Public Cloud

Cost of Public Cloud revenues decreased in each the third quarter and first nine months of fiscal 2025. Public Cloud gross margins increased by eleven percentage points and eight percentage points, respectively, in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of fiscal 2024. The decrease in cost of Public Cloud revenues and improved gross margins was due to cost optimization that included a decrease in fixed assets depreciation, and the mix of offerings provided.

Unallocated

Unallocated cost of services revenues were relatively flat in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year.

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 third quarter and first nine months of fiscal 2025 totaled $772 million, or 47% of net revenues, and $2,389 million, or 49% of net revenues, respectively, reflecting a decrease of one and two percentage points, respectively, compared to the corresponding periods of fiscal 2024, primarily due to the increase in net revenues.

Compensation costs represent the largest component of sales and marketing, research and development and general and administrative 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 sales and marketing, research and development and general and administrative expenses in the third quarter and first nine months of fiscal 2025, were relatively flat compared to the corresponding periods of the prior year.

Sales and Marketing (in millions, except percentages):

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 increase in sales and marketing expenses in the third quarter of fiscal 2025 compared to the corresponding period of the prior year were primarily due to higher compensation costs and higher spend on outside services.

The increase in sales and marketing expenses in the first nine months of fiscal 2025 compared to the corresponding period of the prior year were primarily due to an increase in sales commissions expenses.

Research and Development (in millions, except percentages):

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.

Research and development expenses remained relatively flat in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year.

General and Administrative (in millions, except percentages):

31

General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and facilities and IT support costs.

General and administrative expenses decreased in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year, primarily attributable to lower spend on certain business transformation projects.

Restructuring Charges (in millions, except percentages):

In the first nine months of fiscal 2025, management approved restructuring plans to redirect resources to highest return activities and reduce costs, which included a reduction of our global workforce by approximately 4%. This includes, in the third quarter of fiscal 2025, a plan approved related to the anticipated sale of our cloud optimization and management software business known as Spot by NetApp, resulting in the elimination of certain roles. Charges related to the plans consisted primarily of employee severance-related costs. The activities under the plans are expected to be substantially complete by the end of fiscal 2025.

In the first nine months of fiscal 2024, management executed restructuring plans to redirect resources to highest return activities, and to optimize our global office space for our hybrid work model. In connection with these plans, we reduced our global workforce by approximately 2% and terminated certain real estate leases in various countries, resulting in restructuring charges comprised primarily of employee severance-related expenses and lease termination charges. The activities under these plans were substantially complete by the end of fiscal 2024.

Acquisition-related Expense (in millions, except percentages):

Acquisition-related expenses decreased by $1 million and $5 million, respectively, in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of the prior year.

Other Income, Net (in millions, except percentages)

The components of other income, net were as follows:

NM – Not Meaningful

Interest income decreased in the third quarter of fiscal 2025 primarily due to the lower average outstanding balances of our cash and investments and lower yields thereon, compared to the corresponding period of the prior year. Interest income increased in the first nine months of fiscal 2025 compared to the corresponding period of the prior year, primarily due to higher yields earned.

Interest expense decreased in the third quarter and first nine months of fiscal 2025 compared to the corresponding periods of fiscal 2024, due to the repayment of our 3.30% Senior Notes in September 2024.

Provision for Income Taxes (in millions, except percentages):

Our effective tax rate reflects the impact of a significant amount of earnings being taxed in foreign jurisdictions at rates below the United States (U.S.) statutory rate. Our effective tax rate for the three and nine months ended January 24, 2025 includes an increase in discrete tax benefits related to stock compensation compared to the corresponding periods of the prior year. Our effective tax rate for the three months ended January 24, 2025 also includes an increase in discrete tax expense related to prior period adjustments compared to the corresponding period of the prior year. Our effective tax rate for the three and nine months ended January 26, 2024 included a benefit for increased fiscal 2024 foreign tax credits resulting from legislative guidance for those periods partially offset by an increase in stock compensation for which no tax benefit is recorded.

As of January 24, 2025, we had $228 million of gross unrecognized tax benefits. Inclusive of penalties, interest and certain income tax benefits, $169 million would affect our provision for income taxes if recognized. Net unrecognized tax benefits of $169 million have been recorded in other long-term liabilities.

Liquidity, Capital Resources and Cash Requirements

(In millions)

The following is a summary of our cash flow activities:

(In millions)

Cash Flows

As of January 24, 2025, our cash, cash equivalents and short-term investments were $2.3 billion, which represents a decrease of $1.0 billion during the first nine months of fiscal 2025. The decrease was primarily due to $900 million used for the repurchase of our common stock, a $400 million principal repayment of our 3.30% Senior Notes due September 2024, $319 million used for the payment of dividends, $168 million used for payment of taxes related to net share settlement of stock awards and $133 million used for purchases of property and equipment, offset by $831 million provided by operating activities and $108 million in proceeds from the issuance of common stock under employee stock award plans. Our net working capital deficit was $287 million as of January 24, 2025, a reduction of $1.1 billion when compared to April 26, 2024, primarily due to the decrease in cash, cash equivalents and short-term investments discussed above and the net increase in the current portion of long-term debt after the repayment of our 3.30% Senior Notes and the reclassification of $750 million principal amount of our Senior Notes from long-term to current liabilities.

Cash Flows from Operating Activities

During the first nine months of fiscal 2025, we generated cash from operating activities of $831 million, reflecting net income of $846 million which was adjusted for non-cash depreciation and amortization expense of $190 million and non-cash stock-based compensation expense of $291 million, compared to $1.1 billion of cash generated from operating activities during the first nine months of fiscal 2024.

Significant changes in assets and liabilities in the first nine months of fiscal 2025 included the following:

• Accounts receivable decreased $104 million, reflecting more favorable invoicing linearity in the first nine months of fiscal 2025 compared to the last nine months of fiscal 2024.
• Inventory increased by $82 million, primarily due to higher raw materials purchases.
• Accrued expenses decreased by $94 million, primarily due to employee compensation payments related to our fiscal 2024 incentive compensation plan accrual.
• Deferred revenue and financed unearned services revenue decreased by $92 million, due to a decrease in deferred revenue for software and hardware support contracts.

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 nine months of fiscal 2025, we generated $590 million from maturities and sales of investments, net of purchases and paid $133 million for capital expenditures, as compared to the same period of fiscal 2024, in which we used $329 million for the purchases of investments, net of maturities and sales, and paid $109 million for capital expenditures.

We expect the sale of our Spot by NetApp business to close in the fourth quarter of fiscal 2025 resulting in estimated up-front cash proceeds of approximately $70 million before certain transaction costs and customary closing adjustments.

Cash Flows from Financing Activities

During the first nine months of fiscal 2025, cash flows used in financing activities totaled $1.7 billion and included $900 million for the repurchase of approximately 7.4 million shares of common stock, $400 million principal repayment upon maturity of our 3.30% Senior Notes due in September 2024 and $319 million for the payment of dividends. During the first nine months of fiscal 2024, cash flows used in financing activities totaled $1.1 billion and included $800 million for the repurchase of approximately 11 million shares of common stock and $312 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 and thereafter for the foreseeable future. We may choose to periodically raise additional debt capital based on certain conditions, including the refinancing of upcoming maturities and/or for potential strategic acquisitions and investments. Our ability to obtain this or any additional financing that we may pursue or need, will depend on, among other things, our business plans, operating performance and the condition of the capital markets at the time we seek financing. We may not be able to obtain such financing on terms acceptable to us or at all. In the event our liquidity is insufficient and we are unable to enter into new financing arrangements, we may be required to curtail spending and implement additional cost saving measures and restructuring actions. We cannot be certain that we will continue to generate cash flows at or above current levels. For further discussion of factors that could affect our cash flows and liquidity requirements, see Item 1A. Risk Factors.

Liquidity

Our principal sources of liquidity as of January 24, 2025 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):

34

As of January 24, 2025 and April 26, 2024, $2.0 billion and $2.1 billion, respectively, of cash, cash equivalents and short-term investments were held by various foreign subsidiaries and were generally based in U.S. dollar-denominated holdings, while $0.3 billion and $1.2 billion, respectively, were available in the U.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 of January 24, 2025.

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 the U.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 January 24, 2025 (in millions):

Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 6 – Financing Arrangements of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

On September 30, 2024, upon maturity, we repaid our 3.30% Senior Notes due September 2024 for an aggregate amount of $407 million, comprised of the principal and unpaid interest.

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 of January 24, 2025.

In connection with the Program, we have a senior unsecured credit agreement with a syndicated group of lenders. The credit agreement, which was amended in May 2023, 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 on January 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 of January 24, 2025, 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 2025 to be between approximately $30 million and $60 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 to U.S. income tax. As of January 24, 2025, the outstanding payment related to the transition tax is estimated to be approximately $100 million which is expected to be paid during fiscal 2026. Our estimates for future transition tax payments, however, could change with further guidance or review from U.S. federal and state tax authorities or other regulatory bodies.

Dividends and Stock Repurchase Program

On February 20, 2025, we declared a cash dividend of $0.52 per share of common stock, payable on April 23, 2025, to holders of record as of the close of business on April 4, 2025.

In the first quarter of fiscal 2025, our Board of Directors authorized the repurchase of an additional $1.0 billion of our common stock. As of January 24, 2025, our Board of Directors had authorized cumulative repurchases of up to $17.1 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 the May 13, 2003 inception of this program through January 24, 2025, we repurchased a total of 379 million shares of our common stock at an average price of $43.59 per share, for an aggregate purchase price of $16.5 billion. As of January 24, 2025, the remaining authorized amount for stock repurchases under this program was $0.6 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 $1.1 billion at January 24, 2025.

Financing Guarantees

We have and continue to enter into financing and leasing contracts through the ordinary course of business. These arrangements and related financing guarantees are described in Note 14 – Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1. There has been no material change in our financing guarantees as described in our 2024 Annual Report on Form 10-K.

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 14 – Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates as described in our 2024 Annual Report on Form 10-K.

There have been no material changes in our market risk exposures for the nine months ended January 24, 2025, as compared to those discussed in our Annual Report on Form 10-K for the year ended April 26, 2024.

Disclosure Controls and Procedures

The phrase “disclosure controls and procedures” refers to controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (SEC). Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of January 24, 2025, the end of the fiscal period covered by this Quarterly Report on Form 10-Q (the Evaluation Date). Based on this evaluation, our CEO and CFO concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information required to be disclosed in our SEC reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the third quarter of 2025, we completed the first phase of our new global enterprise resource planning (ERP) system implementation which impacted certain processes and procedures, resulting in changes to our internal control over financial reporting. As we continue our ERP implementation, which we expect to substantially complete in fiscal 2026, additional changes are anticipated. We expect this implementation to strengthen our internal control over financial reporting by automating certain manual processes and standardizing business processes and reporting across our organization, and we will continue to evaluate and monitor our internal control over financial reporting as processes and procedures in the affected areas evolve.

With the exception of the implementation described above, there have been no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with our evaluation that occurred during the third quarter of fiscal 2025 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Our future business, operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended April 26, 2024, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock. Except as set forth below, there have been no material changes to the Company’s risk factors since our Annual Report on Form 10-K for the year ended April 26, 2024.

Risks Related to Our Business and Industry

Due to the global nature of our business, risks inherent in our international operations could materially harm our business.

A significant portion of our operations are located, and a significant portion of our revenues are derived, outside of the U.S. In addition, most of our products are manufactured outside of the U.S., and we have research and development, sales and service centers overseas. Accordingly, our international operations, business and future operating results could be adversely impacted by economic, business, regulatory, social and political factors in foreign countries including, among other things, the imposition of government controls, local political or economic conditions including recessionary cycles, inflationary conditions and political uncertainty, economic sanctions, trade protections and regulations and export and import requirements, tariffs, investment restrictions, tax policies, treaties or laws, local labor conditions, transportation costs, government spending patterns, geopolitical tensions and uncertainties, acts of terrorism, international conflicts and natural disasters in areas with limited infrastructure and adverse public health developments.

Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we source and/or manufacture products, including, the impact on our suppliers and contract manufacturers who may look to pass-through additional costs imposed on them, could have a material adverse effect on our business and financial results. The U.S. government has recently signaled its intention to change U.S. trade policy, including potentially renegotiating or terminating existing trade agreements and leveraging tariffs. For example, the Trump administration recently confirmed its intent to impose heavy tariffs on imports from several nations, including Mexico, Canada and China. If effected, these additional tariffs and policies, particularly with respect to the proposed tariffs on Mexico, could have a significant impact on our business and results of operations. Although we have historically relied on the WTO (World Trade Organization) Information Technology Agreement (“ITA”), which eliminates duties on certain information and communication technology products, there is no guarantee that the ITA can be relied upon to obtain duty-free status for products that are otherwise subject to the additional tariffs proposed by the Trump administration. The exact magnitude of any potential impact remains uncertain, as there may be further changes to tariffs and policies and, consequently, potential increased tension between the U.S. and targeted countries. Our risk exposure may increase further if any countries levy retaliatory tariffs, taxes, or other trade restrictions or penalties against the United States or U.S. companies.

Additionally, ongoing trade tensions between the U.S. and China and recent investment restrictions, such as the U.S. Outbound Investments Rule, could impact our business and operating results. Any increase in tensions between China and Taiwan, including threats of military actions or escalation of military activities, could adversely affect our or our contract manufacturers’ ability to source key supply chain components included in our products. As a result of Russia’s actions in Ukraine, numerous countries and organizations have imposed sanctions and export controls, while businesses, including the Company, have limited or suspended Russian operations. Russia has likewise imposed currency restrictions and regulations and may further take retaliatory trade or other actions, including the nationalization of foreign businesses. These actions could impact our supply chain, pricing, business and operating results and expose us to cyberattacks. In addition, due to the global nature of our business, we are subject to complex legal and regulatory requirements in the U.S. and the foreign jurisdictions in which we operate and sell our products, including antitrust and anti-competition laws, and regulations related to data privacy, data protection, and cybersecurity. We are also subject to the potential loss of proprietary information due to piracy, misappropriation, or laws that may be less protective of our intellectual property rights than U.S. laws. Such factors have or could have an adverse impact on our business, operating results, financial condition and cash flows.

We face exposure to adverse movements in foreign currency exchange rates as a result of our international operations. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our operating results, financial condition and cash flows. We utilize forward and option contracts in an attempt to reduce the adverse earnings impact from the effect of exchange rate fluctuations on certain assets and liabilities. Our hedging strategies may not be successful, and currency exchange rate fluctuations could have a material adverse effect on our operating results and cash flows. In addition, our foreign currency exposure on assets, liabilities, and cash flows that we do not hedge could have a material impact on our financial results in periods when the U.S. dollar significantly fluctuates in relation to foreign currencies.

Moreover, in many foreign countries, particularly in those with developing economies, it is a common business practice to engage in activities that are prohibited by NetApp's internal policies and procedures, or laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act of 1977. There can be no assurance that all our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, will comply with these policies, procedures, laws and/or regulations. Any such violation could subject us to fines and other penalties, which could have a material adverse effect on our business, operating results, financial condition and cash flows.