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Taylor Vasicek
OGL 260
Final Paper

Company: NetApp
Report Title: Fiscal Year 2018 Form 10-K Annual Report
Corporate Status: Public
Standards: GAAP
Assurance Provider: Deloitte & Touche LLP

1. Purpose

The purpose of this analysis is to examine the current resources NetApp possesses and their
future goals for value creation. Additionally, this paper will address and analyze how NetApp
can remain a competitive corporation in the ever-changing Integrated Technologies market by
expanding their resources and taking advantage of the changing marketplace.

2. Who is the Company?

The company chosen for this final project analysis is NetApp, Inc. This organization is based out
of Sunnyvale, California and was founded in 1992. NetApp has 10,300 employees as of the
2018 Annual Report, and consistently ranks in the Fortune 500. The company focuses on data
management and cloud storage services across multiple countries and within a variety of
different markets. NetApp is a publicly traded company since 1995, and their 2018 Annual 10-K
Report will be the focus of this analysis. The financial statements within the report have been
prepared in accordance with GAAP, and Deloitte & Touche LLP performed an audit of the
consolidated balance sheets as recently as April 28, 2018. In their opinion on the financial
statements, Deloitte & Touche LLP state, “the financial statements present fairly, in all material
respects, the financial position of the Company… and the results of its operations and its cash
flows… [are] in conformity with accounting principles generally accepted in the United States of
America,” (NetApp 2018 Annual Report, p. 87).
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3. Value Creation Process

Figure 1: NetApp Value Creation Flowchart

NetApp operates in a competitive market with wide range of clients, each with unique data
storage needs. Within the annual report, the executives at NetApp believe that value creation
resides in the company’s success in digital transformation, creating new customer touch points,
reinventing customer experiences, and perfecting the business-oriented approach to data storage
and manipulation (NetApp 2018 Annual Report, p. 5). The report separates the way data has
changed over the past decade into three categories: distribution, dynamic, and diverse. The
discussion of these categories states that data is constantly changing, includes more information
that is unique to each client, and can be located in several places within an organization. Thus,
the goal of NetApp is to take a, “holistic approach,” to company growth by maintaining
efficiency and security while also allowing clients the freedom of choice and providing them
proof of success. At the core of their value creation story are advancements in NetApp’s final
products in the fields of data management and cloud storage, which require strong investments in
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their intellectual and human capital, through aggressive hiring and a successful research and
development department. This is accompanied by third-party contracts and a strong reputation
by clients and stakeholders that NetApp produces competitive products at a fair market value.

4. Resources
4.1 Financial Capital:

NetApp discusses their financial resources through a consolidated financial statement that uses
both single year and multi-year metrics. Figure 2 shows their stock valuation over the past five
years in comparison to the S&P 500, S&P Information and Technology Index and the S&P 1500
Technology Hardware & Equipment Index. When looking at this graph the most relevant
comparison is to the S&P Information and Technology Index, and the S&P 1500 Technology
Hardware & Equipment Index as the stocks within these companies operate in the same field as
NetApp. It is clear that in 2016 there was a stark decline in NetApp’s evaluation, along with
those companies defined within the Technology Hardware & Equipment sector. Currently,
NetApp stock is in line with S&P projections and has seen substantial dividend returns over the
past two years. Net revenues for NetApp increased 7% in 2018 compared to 2017 primarily due
to an increase of 15% in product revenues (NetApp 2018 Annual Report, p. 29-32).
Figure 2: Five Year Stock Return Comparison

Retrieved from NetApp 2018 Annual Report, p. 27

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4.2 Manufactured Capital:

NetApp currently owns approximately 0.7 million square feet of facilities at their main
headquarter located in Sunnyvale, California. This site supports a variety of operations including
research and development, sales and marketing, and global services and operations. Separate
from the California headquarters location, NetApp owns approximately 1.1 million square feet of
facilities located in both Research Triangle Park (RTP), North Carolina and in Wichita,
Kansas. These two locations support the same functions performed at the California office.
Outside of the United States, NetApp owns approximately 0.7 million square feet of facilities in
Bangalore, India to further support research and development and global marketing. Other
locations throughout the US and internationally are leased facilities with the expectation that
existing facilities are suitable and adequate for necessary requirements for the next two years,
and additional space can be purchased as needed (NetApp 2018 Annual Report, p. 25).

4.3 Natural Capital:

NetApp discusses its efforts toward sustainability on its website, though those commitments are
somewhat vague. NetApp’s Corporate Environmental Policy Statement asserts that, “...NetApp
is committed to comply with applicable legal, customer and other requirements to prevent
pollution and minimize environmental impact of our activities, products, and services through
the continual improvement of our environmental management system,” (NetApp,
2018). However, this commitment is not accompanied by quantifiable measures of
environmental or natural capital within the Annual Report. On NetApp’s website, it is also
stated that the company’s Sunnyvale and Research Triangle Park buildings have received
ENERGY STAR recognition, and its Sunnyvale buildings have received LEED Certifications. In
order to receive ENERGY STAR rating, “a building must earn an ENERGY STAR score of 75
or higher, indicating that it performs better than at least 75 percent of similar buildings
nationwide,” (ENERGY STAR). NetApp’s website also mentions the organization’s dedication
to creating sustainable and accessible products.
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4.4 Human Capital:

NetApp currently has approximately 10,300 employees worldwide represented by a strong labor
union. From those 10,300 employees, about half are managers, sales representatives, and
technical support personnel. Notably, technical personnel within the industry is highly
competitive and a large focus is placed on recruiting individuals with this area of expertise.
NetApp states that their future success is highly dependent on their ability to hire, assimilate, and
retain qualified individuals. To help meet these goals NetApp has in place upward mobility and
retention programs that outline paths incoming employees can take along with competitive
training courses. NetApp also states that is difficult to assure continued success but is working
closely with labor unions to meet the needs of employees and maintain a high level of
satisfaction. A large percentage of employees hired by NetApp remain with the company for the
majority of their working career and these individuals are strong representatives of the company
both within and outside the organization (NetApp 2018 Annual Report, p. 10-11).

4.5 Relationship Capital:

NetApp makes a point to enumerate their Community and Philanthropy efforts on their
website. Their relationship capital is increased by their outreach through grants and charitable
contributions. In 2018, NetApp donated $1 million in grants to non-profit and educational
institutions, (ESG). They also provide paid, “Volunteer Time Off,” of 40 hours a year to full-
time employees in order to improve their relationship with the communities surrounding their
local offices. NetApp employees donated 60,000 hours of time in 2017, (ESG). NetApp also
states they value diversity in their workforce. The reports indicate that about 75% of employees
are white men.

4.6 Intellectual Capital:

The intellectual capital reported by NetApp range from their technological advancements made
through their large investments in the research and development departments to their proficient
third-party contract management. This was evidenced by their near $100 million increase in the
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budget for their research and development team, from $779 million to $861 million from 2017 to
2018. NetApp also recognizes that all advancements may not come from within the company,
seen in their practice of licensing third-parties to aid in their development process. Aside from
these developments and investments, the annual report mentions the high value placed on
intellectual capital with regards to patents, trademarks, copyrights, licenses and other property
rights. NetApp has been granted, or owns, over one-thousand US patents along with a multitude
of patent-pending applications. A large focus is placed on maintaining these intellectual rights as
a rapidly changing environment requires consistent adaptations, and the companies that are able
to adapt quickly are those that are most successful (NetApp 2018 Annual Report, p. 10-11).

5. Stakeholders & Accountability:

NetApp’s stakeholders include employees, customers, global enterprises, media, and

shareholders. NetApp maintains a strong relationship with employees by providing strong,
competitive benefits through their health insurance, vacation allotment, and training
programs. Also, NetApp has a selective and exhaustive hiring process ensuring the employees
chosen for the company exhibit characteristics that will benefit the company’s long-term goals.
They maintain positive interactions with the media through their website and social media
presence. It is clear from their involvement statement of being “committed to being outstanding
global corporate citizens by contributing time, talent, products, services and money to non-profit
organizations and schools in the vicinity of major global NetApp employee population centers”
they have a goal of maintaining these positive interactions long term (Cycyota, Ferrante, &
Schroeder, 2016). Their high-quality products maintains strong customer relationship and their
competitive advancements with other corporations increase their global enterprise. Most
importantly, NetApp holds frequent retreats, corporate events, and discussions with their
shareholders while also providing detailed quarterly and annual reports.
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Figure 3: NetApp Stakeholder Analysis

6. Risks and Externalities:

The NetApp report identifies several risk factors within their annual that must be addressed and
recognized before tackling value creation. NetApp’s Annual Report acknowledges that the
business may be harmed by trends in the network storage hardware market, or if the company
falls behind in this realm in comparison with its competitors or the market as a whole. NetApp’s
business as a whole would be impacted if the market refuses to accept their very specific Data
Fabric strategy. In the same vein, the report acknowledges risk generated by consistently
transitioning old products out of the marketplace in favor of new technologies. If NetApp
manages that transition inefficiently or is unable to provide the expected level of service or
support to new or existing customers, significant risk is posed to their operations, financial
capital, and business model. An externality of this is the receptiveness of the clients and
consumers to new and different products being developed and released. Even if NetApp releases
a top-quality range of products and services and does so efficiently and with strong support, the
market reception is a near-unpredictable externality. Another interesting risk identified is the
actual method of sales and distribution within NetApp, which makes forecasting revenue
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inherently difficult. There is, already in place, a variety of sales cycles, which creates some
variability and unpredictability in revenue. NetApp also recently reorganized their sales
resources with the goal of providing better service and maximizing profitability by allocating
sales resources to correspond with client needs. Because this reorganization was so recent, and
the model is so indirect, NetApp is unable to forecast their revenue confidently for any specific
reporting period. They also need to ensure their relationships with channel partners and indirect
channel partners are solid, as are the relationships of those partners to customers, in order to
maintain profitability (NetApp 2018 Annual Report, p. 14-22).

NetApp’s Annual Report also highlights another externality, increasing consolidation within the
industry and intra-market competition. NetApp cannot control which companies merge and
consolidate, creating powerhouses with greater revenue streams and horizontal
dominance. Despite its size, NetApp is not among the largest information technology
companies, and is at greater risk of market domination and technological obsoleting from
competitors than a conglomerate or industry-leading company might be. Additional externalities
noted by the report were regulatory and financial. The regulatory externalities were changing
laws and regulations which have the propensity to affect NetApp’s revenue because of their large
public sector client-base. The financial externalities listed were related to market fluctuations
which can influence interest rates, borrowing power, and international trade, due to sovereign
relations, all of which affect a publicly-traded and international organization like NetApp
(NetApp 2018 Annual Report, p. 14-22).

7. Recommendations:

As a global company, NetApp has extensive experience in world markets. Despite their
international reach, they have an opportunity to greatly increase diversity domestically, by
expanding and modifying their hiring processes. NetApp’s 2018 Diversity Demographics Report
shows a predominately white workforce, with the highest percentage of white and male
employees at the most executive level. While employee diversity is increasing year over year,
NetApp should make a dedicated effort to develop this aspect of their organization. The
suggestion is to increase University Recruiting efforts at the Nation’s more diverse colleges as
well as abroad, and create job fair programs specifically aimed at drawing women and people of
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color to employment at NetApp. A more diverse workforce would increase NetApp’s human
capital and allow the corporation to gain insight through internal collaboration of a variety of
perspectives and backgrounds.

NetApp also has the opportunity to expand their capital gains to include improvements to social
capital and relational accountability. While NetApp has a well-defined corporate structure, the
established hierarchy has a propensity for vertical accountability and increases the possibility of
disengagement from subordinate employees. NetApp should seek ways to keep their company
fluid, as they require new hires to be well educated and top-level graduates. With this goal, it is
necessary to provide not only competitive salaries, but also a competitive work environment that
is engaging and welcoming as soon as a new employee is introduced. Increasing team projects
that meld managers and new-hires together outside of their normal hierarchical structure could
help alleviate these concerns. Other social events within the company would also bridge the gap
between those that have been employed by NetApp for a number of years, and the incoming
employee pool.

As a corporation that participates in such a competitive field, it is necessary that NetApp

acknowledges their shortcomings when attempting to draw top-level graduates. NetApp could
increase their intellectual capital by increasing their presence at top level universities, whether in
the form of career fairs or grants given to research departments. Since NetApp is competing
with Dell, IBM, and Google, it is necessary the new graduates are made aware of the
employment opportunities NetApp offers with their competitive salaries and retention programs.
NetApp has the ability to greatly improve their acknowledgement of the importance of
intellectual capital and take important steps to grow their corporation through a revamped new-
hire program.

An area that is not mentioned in depth within the annual report, but could be critical for future
success, are the third-party contracting and partnerships NetApp participates in. NetApp has the
disadvantage of being a smaller company in a market where large corporations have a greater
number of resources; thus, it is critical that strong partnerships be made whenever possible for
continued growth in the research and design departments. It is unrealistic to expect a
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corporation of this size to consistently create breakthrough technology, meaning a heavy

reliance and focus should be placed on strong relationships with those companies that develop
successful products. Growing global and domestic partnerships is a critical focus that is lacking
the most recent annual report. It is even possible that by partnering with these large
corporations it will increase recognition of NetApp’s brand to become synonymous with other
competitors in the market.

Integrated Reporting would be a beneficial change to NetApp’s discussion tools. This is because
as a company, NetApp works within a market that is constantly evolving which requires frequent
changes in their development, marketing, and product deliverables. With such a multitude of
moving parts it is important to have an encompassing reporting metric that accurately measures
the successes and failures that occur on a yearly basis. For example, it is possible that NetApp
has a successful fiscal quarter due to high margins of sales, but if there is a lag in development,
patents, or hiring it could lead to a steep decline in coming months. Integrated Reporting allows
for NetApp to better understand customers current and future needs, which then allows them to
be better prepared for subsequent adaptations.
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References:

Cataldo, P. (2011). Focusing on employee engagement: how to measure it and improve it. White

Paper, UNC Kenan-F lagler Business School, UNC Executive Development, North

Carolina.

Cycyota, C. S., Ferrante, C. J., & Schroeder, J. M. (2016). Corporate social responsibility and

employee volunteerism: What do the best companies do?. Business Horizons, 59(3), 321-

329

ENERGY STAR certification for your building. (n.d.). Retrieved April 30, 2019, from

https://www.energystar.gov/buildings/facility-owners-and-managers/existing-
buildings/earn-recognition/energy-star-certification

Environment, Social, and Governance (ESG). (n.d.). Retrieved April 30, 2019, from

https://www.netapp.com/us/company/environment-social-governance.aspx

Information Taken From NetApp Annual Report: Retrieved from

http://investors.netapp.com/static-files/61920887-c2f1-4f61-8ab5-e07b9495bd47

NetApp - Great culture and great leadership. (n.d.). Retrieved April 21, 2019, from

https://www.glassdoor.com/Reviews/Employee-Review-NetApp-RVW17279855.htm

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