NetApp Inc NTAP
Q4 2013 Earnings Call Transcript
Transcript Call Date 05/21/2013

Operator: Welcome to the NetApp Fourth Quarter and Fiscal Year 2013 Earnings Call. My name is Elaine, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session at the conclusion of the conference. Please note that this conference is being recorded.

I will now like to turn the call over to Kris Newton, Senior Director, Investor Relations. Ms. Newton, you may begin.

Kris Newton - Director, Analyst Relations: Hello and thank you for joining us. With me on today's call are CEO, Tom Georgens and our CFO, Nick Noviello. This call is being webcast live and will be available for replay on our website at, along with the earnings release, the supplemental commentary, our financial tables and the non-GAAP to GAAP reconciliation.

As reminder, during today's call, we will make forward-looking statements with respect to our financial outlook and future prospects all of which involve risk and uncertainty. Actual results may differ materially from our statements and projections for a variety of reasons. We describe some of these reasons in our accompanying press release which we have furnished to the SEC on an 8-K. A detailed discussion of the reasons is included in our risk factors included in our most recent 10-K and subsequent 10-Q reports also on file with the SEC and available on our website, all of which are incorporated by reference in today's discussion.

All numbers discussed today are GAAP unless stated otherwise. To see the reconciling items between non-GAAP and GAAP, you may refer to the table in our press release, our supplemental commentary, or on our website. In a moment, Nick will walk you through some additional color on our financial results, and then Tom will walk you through his perspective on the business for this quarter.

I will now turn the call over to Nick.

Nick Noviello - EVP, Finance and CFO: Thank you, Kris, thanks everyone for joining us. Q4 represented another quarter of solid financial performance by NetApp. Net revenue of $1.72 billion was inside our prior guidance range driven by branded revenue growth. We achieved a strong non-GAAP gross margin of 61.3% and non-GAAP operating margin of 17% underscoring our continued execution focus. Non-GAAP EPS of $0.69 was just under the high end of our Q4 guidance range and we generated $392 million of free cash flow in the quarter approximately 23% of revenue.

Starting with revenue; Q4 revenue increased 5% sequentially and 1% over Q4 last year. Q4 deferred revenue increased by $134 million from Q3. Branded revenue was up 9% from Q3 and 3% from Q4 last year, while OEM revenue declined 19% sequentially and 18% from Q4 year ago. For fiscal year 2013 revenue of $6.33 billion increased 2% from fiscal year 2012 with branded revenue up almost 4% and OEM revenue down 12% from the prior fiscal year.

For fiscal year 2013, revenue for all geographies was flat to up 1% from fiscal year 2012 with the exception of APAC, which was up 11%. Non-GAAP gross margin of 61.3% in Q4 exceeded our previous guidance driven by strong product gross margin. Product gross margin of 55.8% was up both sequentially and year-over-year fueled by branded revenue growth and sales of more highly configured systems. Service gross margin of 56.2% decreased both sequentially and year-over-year due to increased investments in our service and support infrastructure which we expect to continue as our installed base grows.

For the full year, gross margin of 60.7% was about at the midpoint of our targeted financial model. Non-GAAP operating margin of 17% in Q4 was in line with our prior guidance and down slightly from Q3. Non-GAAP operating margin for fiscal 2013 was down 2.5 points from fiscal 2012, impacted heavily by lower revenue and operating profit in the first half of the fiscal year.

Non-GAAP other income, net was down substantially from Q3, driven by higher interest expense related to our senior notes which were issued in December. Our non-GAAP effective tax rate was 13.4% for Q4 and 15.1% for the fiscal year, slightly lower than prior guidance reflecting year end true-ups related to the full year mix of revenue and profits from our overseas and domestic business.

Q4 non-GAAP EPS of $0.69 was just under the high-end of our previous guidance range. For the full-year, EPS of $2.28 was down 5% from fiscal year 2012, despite a 4% reduction in the average diluted share count due to lower revenue and operating profit in the first half of the year.

Our balance sheet remains healthy, ending the year with approximately $7 billion in cash and investments. Accounts receivable days sales outstanding increased to 42 days consistent with our seasonal expectations and improved from Q4 last year. Inventory improved to 19 turns.

Cash generation continues to be a highlight, with cash from operations of $456 million in Q4 and free cash flow of $392 million, roughly 23% of revenue. Overall cash reflects the repurchase of approximately $180 million of stock in the quarter, about three times the amount in Q3, and is consistent with the expectations we laid out on our last earnings call.

Diluted share count increased in Q4 by 3.5 million shares, 3 million of which were related to the accounting for shares associated with our convertible notes. The notes are now fully convertible and will mature on June 1 with final settlement on June 3. We expect to settle the notes with $1.265 billion of U.S. cash paid to noteholders and to the extent the average share price is over the strike price of $31.85, shares of common stock associated with the conversion feature of the notes. This dilution will be partially offset by existing note hedges. And as you may recall 80% of the convertible notes are hedged.

Separately our related warrants will come due in Q2 fiscal 2014. The warrants may also create dilution if our share price is over $41.28 at maturity. We expect to repurchase shares to offset any remaining dilution associated with the maturity of our convertible notes, as well as our warrants. Capital allocation is the topic that we continually evaluate and was an area of particular focus over the course of fiscal year 2013 both internally and with our shareholders. At our financial Analyst Day last June, I highlighted the strong cash generation of NetApp over a five-year period, as well as the balance we have maintained in both investing in the business and returning capital to shareholders.

In fiscal year 2013, we continued to demonstrate that same balance. We invested $410 million in the business in the form of capital expenditures and technology tuck-in M&A and repurchased $590 million of our stock out of the almost $1.4 billion of cash we generated from operations. We also spent the year planning, listening to our shareholders, and enhancing our capital structure through important activities such as achieving an investment grade credit rating, completing a $1 billion debut investment-grade bond offering at historically low rates, executing a new five-year $250 million revolving credit facility, paying off all of our remaining real estate synthetic leases and announcing our intent to retire our convertible note that maturity in June.

We are now entering the next phase of our capital allocation process. NetApp is increasing its current stock repurchase program of which $1.4 billion remains outstanding by an additional $1.6 billion. We intent to commence a $3 billion share repurchase program to complete over the next three years. We intend $2 billion of repurchases to be completed within the 12 months, of which $1 billion is planned to be completed during the next four months.

I'm also pleased to announce the initiation of a quarterly cash dividend of $0.15 per share of the company's common stock, which we expect to increase over time. These capital initiatives reflect our confidence in the underlying long-term strength of NetApp's business as well as our commitment to enhancing shareholder value. We have carefully structured the program to ensure full flexibility to support innovation and growth initiatives both organic and inorganic.

The timing and amount of repurchase transactions under the program in future dividends and dividend increases will depend on market conditions, corporate business and financial considerations and regulatory requirements. And as you would expect we will provide updates on our progress each quarter.

Separately, we recently commenced a realignment exercise across the company, which we expect upon completion to result in the elimination of just over 900 jobs and result in a GAAP restructuring charge of approximately $50 million to $60 million. We took this action to better align our resources and investment to our most strategic initiatives. While difficult, we believe these decisions position us well for the future, enabling us to achieve our business objectives, profitability and profit growth expectations.

Turning to guidance, we expect our Q1 target revenue to range between $1.475 billion to $1.575 billion, which at the midpoint implies 11% sequential decline and 6% year-over-year increase in revenue. The sequential decline reflects a combination of our typical Q4 to Q1 seasonal revenue dynamics continued reduction in OEM revenue and a bit of conservatism relative to the low growth IT spending environment. We expect consolidated non-GAAP gross margins of approximately 61% almost a point of improvement from a year ago and non-GAAP operating margins of approximately 13.5% to 14%, 1 to 1.5 points better than a year ago reflecting partial benefits to be realized from our realignment activities. We expect our blended consolidated non-GAAP effective tax rate to increase to approximately 18% for Q1 and fiscal year 2014 and our diluted share count for Q1 to decrease slightly to approximately 367 million shares based on our average stock price of $35.11 for the first 10 days of the quarter, as well as the expected remaining impact from the convertible notes. We expect non-GAAP earnings per share for Q1 to range from approximately $0.45 to $0.50 per share about 7% to 19% from operations alone versus Q1 last year.

As we look at Q1 and beyond into the rest of fiscal year 2014, I have a couple of closing thoughts to which I'm sure Tom will speak as well. We believe we are in a strong position to gain market share based on the power of our innovation. That said, we must be cognizant of the macro and IT spending environment and have taken carefully planned steps to ensure we have directed our investments and resources to our biggest opportunities within our targeted business model.

We are reiterating the guidance given in our 2012 Analyst Day presentation, including target ranges for non-GAAP gross margin of 60% to 62% on average and non-GAAP operating margin of 17% to 19% on average for the period fiscal year 2013 to 2015. However, both measures are ultimately dependent on revenue mix and growth. For fiscal 2014 specifically, we expect gross margin at the midpoint of this range, operating margin at the low end of this range, EPS growth from operations before our capital allocation actions in the mid-teens, and finally continued strong cash flow generation.

At this point, I'll turn the call over to Tom for his thoughts. Tom?

Tom Georgens - President and CEO: Thanks, Nick and welcome, everyone. Despite a challenging IT spending environment, NetApp performed well in Q4. Our revenue was within our guidance range, EPS was towards the high-end of our range, and we increased gross margin.

In the quarter, we achieved record bookings with branded bookings growing double-digits year-over-year, our highest branded growth in five quarters.

As (others and tech) experienced, the quarter was heavily back-end loaded and it impact our bookings to revenue conversions. Nonetheless, we saw a strong customer demand in all geographies as well as an increase in the number of deals over $1 million and a record number of deals over $5 million. As Nick pointed out, this was another branded-led quarter with 9% sequential growth in branded revenue.

With a complex product transition behind us, we are now accelerating out pace of innovation introduced in the market. We are seeing rapid uptake of clustered ONTAP as well as our new platform. We recently announced a family of all-flash array and started shipping Flash Accel our solution for flash on the host.

We also saw a record quarter for branded E-Series products and expansion of our FlexPod solution set. NetApp has more innovative technology at the early stages of its product lifecycle than in any time in our history and we believe NetApp is better positioned than ever to take advantage of the substantial opportunities presented by the emerging customer technology trends that are transforming the industry such as cloud, flash and converge systems.

Private cloud environments will see the greatest growth in IT spending in the term. For private cloud deployments, IT organizations need flexible storage resources that can be deployed on a wide range of hardware and provision then consumed based on policy directly by the application and development teams. This concept has been point software defined storage. NetApp pioneered its value proposition with our Data ONTAP operating system and on command portfolio.

For the last decade, we have been able to run ONTAP on our hardware and other peoples to hardware through V-Series. Today, we have extended this capability into the cloud with NetApp private storage for Amazon Web services, as well as enabled ONTAP to run on commodity servers with ONTAP Edge and have the ability to bring data on server-side flash into the ONTAP management framework with Flash Accel.

Through storage virtual machines, ONTAP abstracts the data access and services to provide data mobility, granular quality of service and integrated data protection for direct consumption and use within applications across a diverse set of physical storage options. Only NetApp can deliver on the promise of software defined storage today.

NetApp provides compelling value to both the enterprise private cloud and public cloud service providers with the scale, performance and non-disruptive operations of clustered Data ONTAP. The momentum of clustered Data ONTAP has grown over the course of fiscal year '13 with a 4X increase in cluster nodes from fiscal year '12.

Sales of clustered nodes in Q4 increased 95% from Q3 on top of sequential increases of almost 70% Q2 to Q3 and 120% Q1 to Q2. The install base includes almost a thousand unique customers, of which one-third are repeat clustered ONTAP customer.

In Q4, 18% of mid-range and high end system ship are running clustered ONTAP. In addition, over half of our install base has migrated the data ONTAP 8, the industry's most innovative storage operating system and we will continue to enhance it. You can expect to hear more about the next version of data ONTAP in the near future.

We strengthened our leadership position in flash with the introduction of the EF540 all-flash array and a preview of the FlashRay product family, which will deliver rich scale out and storage efficiency features to maximize the benefit of all-flash array. Since the introduction of our flash program, NetApp has shipped 44 petabytes of flash and accelerated almost 4 exabyte of hard disk.

Q4 saw a record unit sales of Flash Cache and Flash Pool. Flash Cache is attached to 54% of mid-range and high end systems. Approximately 11% of systems with Flash Pool are deployed in clustered environment and Q4 Flash Pool deployments grew 32% from Q3. NetApp now has the broadest portfolio of flash in the market. Offering Flash Cache in the server, controller and array, as well as all-flash arrays to meet extreme performance needs.

The EF540 and all-flash array built on each E-Series that we have discussed with you on prior calls was introduced in Q4 and we are seeing good customer demand. Overall, our branded E-Series products, including the EF540 are performing well with an increase of 17% in units shipped from Q3. Also in Q4 we refreshed the FAS6000 family. FAS6000 units were up slightly from last quarter with new generation systems representing almost a third of total FAS6000 units shipped. FAS6000 systems running in cluster deployment also increased from last quarter with 28% of FAS6000 shipped in Q4 running clustered ONTAP.

FAS3000 units were up 13% sequentially new generation systems represented almost 70% of the total FAS3000 shipments in the quarter and FAS3000 units shipped running in cluster environments more than double from Q3. FAS2000 units were down slightly on a sequential basis. Unit shipped from the V-Series family comprised of both V3000, V6000 also increased up 15% from last quarter.

As we have discussed over the course of fiscal year '13 partnering continues to be key to our strategy. We gained leverage in terms of sales and solution reach by working closely with our partners. Our indirect and OEM business represented 81% of Q4 revenue, up 6% sequentially. Together Arrow and Avnet grew 19% from Q3 contributing a record 37% of total revenue. OEM was 10% of total revenue, down both sequentially and year-over-year. Our OEM revenue was settling to the level we expected when we made the Engenio acquisition. We have some partners that are looking to rely more on their own IT, while others are looking to rely more on NetApp, and we are selectively adding new partners.

FlexPod is another excellent example of the advantage we can achieve through the depth of our partnerships. Our FlexPod business continues to grow as measured on every metric; partners, customers, and sales. We expanded the partner ecosystem with the introduction of new FlexPod solutions for Oracle and Microsoft. We've grown the FlexPod customer base almost 150% from fiscal year '12, and in Q4, we more than doubled book business from Q4 a year ago. Most notably, clustered deployments represented 39% of our Q4 FlexPod business. Fiscal year '13 was highlighted by progress on our key initiatives; adoption of clustered ONTAP, leadership in the Flash space, and leverage through our channel and alliance partners.

As Nick called out, we continue to make progress towards our target financial model and maintain our strong cash generation capability. We saw a strong branded revenue growth in the second half of the year and gross margins were within our guidance range each quarter of fiscal year '13.

The capital allocation and realignment announcements we made today are designed to simultaneously focus resources on our growth opportunities while growing earnings and shareholder value. Whether through share gains from our innovation and partnerships, leverage from our (OpenStack) or capital return to shareholders, NetApp has multiple avenues to achieve sustained double-digit annual EPS growth.

Finally, I would like to thank the NetApp team for their passion and commitment to achieving our strategic goals. I want to acknowledge that last week was a difficult one for employees, but I remain confident in our future. We are faced with the challenge of continuing to execute against our growth strategy, while achieving our business and financial objectives in the context of a low growth IT spending environment. This requires difficult decisions that will ultimately make the Company stronger.

Despite the impact of last week's action, we all remain committed to creating a model company and building a unique culture that enables the success of our employees, partners, and customers.

At this point I will open up the call for Q&A.

As always I'll ask that you be respectful of your peers on the call and limit yourself to one question, so we can try to address everyone in our allotted time today. Thank you. Operator?

Transcript Call Date 05/21/2013

Operator: Kulbinder Garcha, Credit Suisse.

Kulbinder Garcha - Credit Suisse: My question is just to kind of a clarification around OpEx for Nick and Tom. Nick, did you say that this year you expect a mid-teens earnings growth rate for the full fiscal year. My question around that is what is that tell us about how you're managing OpEx in the balance of the year, together earnings growth is a case of OpEx to sales coming down even in a low growth IT environment, so this further cost cutting you guys are considering. Kind of linked to that, this is maybe for Tom more philosophical. Previously I always got the message Tom that you guys would – you look for the co-OpEx projects because you had such significant share opportunity. I don't know you have 10% storage share, the number one vendor has 30% and a so much lend out revenue to gain has something changed in your thinking around them.

Nick Noviello - EVP, Finance and CFO: This is Nick, I'll start and I'm sure Tom will ray in as well. So, in terms of the go forward for the year, what we are looking at is aiming at that 17% Op margin and based upon a 61% gross margin for the year, those are the targets we are aiming at. Obviously, the first quarter is going to be a little light of that certainly on the operating margin side because of the sequential down from Q4 to Q1 in terms of revenue. But for the year driving for that 17%, we're obviously conscious of the macro, we are obviously conscious of our investments. One of the reasons why we made this realignment decision, but our investments are going to the areas we think have the best opportunity, they are focused on clustered Data ONTAP, they are focused on flash etcetera. 17% is the operating margin we are aiming at for the year, that yield on an operational level that yield to mid-teens EPS growth before any of the capital activities or the capital allocation activities we talked about.

Tom Georgens - President and CEO: Yes, I think philosophically in terms of the opportunity in front of us, I don't think that has changed. We led through this an activity similar to this several years back, and the after-math is that we had a 30% year-over-year organic growth year. So, I don't think that taken this action now is basically signaling anything about the confidence about the future. I think it's a pragmatic point of view and that is we are in a period where IT spending is constrained, and certainly has impact on our growth rate. We have a number of very, very key initiatives that we need to make sure that we get staffed and funded and we need to do all of that in the context of generating shareholder return. So, I think, balancing all that forces us into a situation of reprioritizing and realigning to get our resources connected to the most important things that we have going on in the Company and things that are going to sow the seeds for the future growth. So, one thing I would say as we go forward we are not frozen, in fact we have more open (rex) today than we did a month ago. So we are looking to continue to reinvest around the priorities that we set as a Company and should we see revenue not come out the way we think where the market deteriorate further clearly will modulate that. But right now our expectation is that we are continuing to invest around the key initiatives and we basically did the restructure and to basically free up those resources for reassignment.

Operator: Shebly Seyrafi, FBN Securities.

Shebly Seyrafi - FBN Securities: So you branded revenue growth was 3%, but you said your branded bookings were up double digits. So, I am wondering do you expect branded revenue growth to accelerate because of that strong bookings number to the high-single digits percentage or double digits over the next few quarters.

Nick Noviello - EVP, Finance and CFO: I think one of the things about the quarter is on the branded side I think we are pretty pleased with how it played out. I think we saw growth in all the deals and it was very, very broad based across all the segments. So, I think we finished exceptionally strong. I think we are very, very happy with all of that. Margins stayed strong along the way. So, we are able to protect our value proposition and we liked the growth and back-end loaded. So, one of the things that we do see is you saw that $130 million plus went to deferred revenue build so some of that growth went into deferred revenue and some of it came too late in the quarter for us to convert. So, while I don't want to talk about growth in terms of beyond next quarter certainly we are well aware of the earnings cycle and what we've heard from other players in this industry and other bellwethers about their expectations, I think, we're going to be tempered by that. I think we have our own dynamics in Q4. We have our own incentives, our own sales force perhaps overpower some of the seasonality. We need to be cognizant of what we see from the other companies out there. But that said, I think (indiscernible) strong. I think we've brought home the big deals in the end. We can see a lot of deals push out of the year and out of the quarter, and I think the team enters 2014 with some confidence. But I think all of that is tempered by a backdrop that we're all pretty concerned about.

Operator: Brian Marshall, ISI Group.

Brian Marshall - ISI Group: Obviously, the investment community (indiscernible) the initiation of the dividend here at 170 basis points and growing. But can you walk us through sort of your methodology or your framework for determining your capital allocation, because when you look at across M&A, share repurchases, dividend et cetera it looks like for the next 120 days on average you are going to be in the market buying 3% of the shares that trade every day, so just wanted to get sense of the methodology behind the initial allocation?

Nick Noviello - EVP, Finance and CFO: This is Nick. So first of all, in terms of the how we do it will employ a variety of means to be in the market with this first tranche that we talked about over the next four months. But the overall of the program is last year, if you dial back a year and look at what I showed at the Analyst Day last year, we talked about strong cash generation and balanced deployment of cash over a period of time, and we spent a full year looking at and working on capital allocation as a company. We've taken on the debt. We've announced that we're going to retire the convertible notes, not till the very beginning of June. We put a revolver in place. We cleaned up all of the off-balance-sheet stuff, so there has been a lot of activity that's gone on over the course of the year. That's really gotten off to this point. When we look at the end of the year and that $7 billion of cash investments, about 50% of that's domestic, we're looking at a combination of that. We're looking at that less the converge; we're also looking at our expected cash generation over time. I look at the last year and say in a year with 2% revenue growth, we generated $1 billion, plus a free cash flow of third year in a row. So, we've looked at all of those factors and coming up with this dividend and the announcement of the dividend and the repurchase program that we have put out there. And obviously we're not only doing the buyback to offset dilution, but obviously more than that. That is all coming out of U.S. cash and what we have looked at in the past as excess U.S. cash.

Operator: Aaron Rakers, Stifel Nicolaus.

Aaron Rakers - Stifel Nicolaus: My question is on the gross margin line. Obviously, you were able to attain the north of 55% targeted gross margin on product. Obviously that was a bit offset by the services gross margin down quite a bit. Can you talk a little bit about the trajectory of the gross margin? What your options are underlying that 61% target for the full year, as it relates to those two line items?

Nick Noviello - EVP, Finance and CFO: So, first of all on the gross margin line. I think what you're seeing in Q4, is the power of that branded revenue growth that Tom talked about, both flowing through on the product gross margin line. It was obviously a strong quarter with lower OEM mix, frankly, contributing as well to that. As we look forward into '14. I gave that overall view of about 61% on the gross margin side and that being the view for Q1. That would imply pretty close to the types of ranges we saw in Q4 moving forward. So, that type of 54, 55 type of range on product gross margin and a little lower than what we have seen in the past, so 55, 56 types of range on service. And the service side is really about investment. And we talked about this in the past where when we look at our install base, when we look at the size of our install base and the growth in our install base we have to put the service investments in place to support that. So, obviously we make those investments ahead of the revenue coming through. So, we build all of those things together in terms of really looking at that guidance and building that guidance.

Operator: Katy Huberty, Morgan Stanley.

Katy Huberty - Morgan Stanley: Federal declined double-digits this quarter after good growth last quarter, do you think there were spending delays around the sequester and if so, would you expect some recovery in that segment over the next couple of quarters?

Tom Georgens - President and CEO: Yes, I do, in fact that’s probably the area where the bookings performance and the revenue performance are the most divergent. In fact from a bookings perspective the federal is actually very, very strong. So, I think we were quite pleased with that. So, certainly we see the sequester, certainly we see perhaps a testing (indiscernible) yet again in our future. But nonetheless, I think we are clearly the number one market share player in the federal space and I think we continue to win business. So, we took some nice size deals out of Department of Defense, sequester notwithstanding, we also opened up other opportunity. So, I read the same headlines you do on the federal side, but I think that team is executing really well and I think our federal business will be okay, in fact better than okay as the year progress. So, I am not expecting to be a significant reversal in that business I think that we will continue to gain share and barring some significant disruption I still think that will be a meaningful part of our business both from a profit perspective and a growth perspective.

Operator: Amit Daryanani, RBC Capital Markets.

Amit Daryanani - RBC Capital Markets: I just want to understand maybe a little bit on the guide for July and the fiscal '14 comments out. I think for July guide your guidance assume share count will be flattish at about 367 million shares, but you are I think doing $1 billion worth of buyback in the next fourth months that would imply share count could be down 5% I think. So, could you maybe just talk about that delta? And then same thing for fiscal '14 if you are able to execute the entire $2 billion buyback that could lower your share count by about 13%, 14% gross of dilution so that mid-teens EPS comment do we think about an additional take of 10% to 14% with the buybacks coming in?

Nick Noviello - EVP, Finance and CFO: You are right. For Q1 that does not assume any incremental repurchase. So, when we gave the guidance for Q1 we talked about operationally and when we talked about mid-teens for the year that's also operationally. So, that's a mid-teens EPS growth for the year and strong EPS growth for the first quarter all driven through operations. Anything we do on the capital side of the fence will be incremental to that, but we wanted to give you the perspective on just what the operations of the business will be do before the capital side of the fence. Obviously, depending upon the timing it will impacted and benefited it.

Amit Daryanani - RBC Capital Markets: I think overall, I think we want to separate those two so that becomes more clear but as I look at the business and I look at what we are trying to do and to go back to Nick's presentation at financial Analyst Day about EPS growth. I think between the capital plan now extended over three years plus the dividend, plus the opportunity for growth and plus our managing of the OpEx stack, I think there's multiple avenues and multiple paths to get to double-digit operating income growth on a multiyear basis. So that's really what we're driving for. I think we have a lot more optionality than we had a year ago, and I feel pretty confident that we've got various different ways to deliver on that for our shareholders.

Operator: Maynard Um, Wells Fargo.

Maynard Um - Wells Fargo: I just want to follow-up on the U.S. cash. If I just run through the math, I'm just curious if you're planning – if you have this sufficient U.S. cash to the fund dividends and the billing remaining share purchases or do you expect to repatriate cash or raise more debt? Just when you run through that math, it looks like you are utilizing all of the U.S. cash, and then should we assume that given that that M&A more broadly is off the board at least on the U.S.?

Nick Noviello - EVP, Finance and CFO: Sure, Maynard. Let me make few comments on that and Tom may want to weigh in as well. If I look at that U.S. cash in that 49%, that's about 3.4 in changed billion, take the convert out of that, which is U.S. (settle) which gets me down to $2 billion unchanged, take out cash we need to run the business. We're still at a $1.5 billion right there and that's before what we generate, right, which is let's call it, 50-50. So we have excess cash. We're employing excess cash. On the debt side of the fence, that's something we may or may not do, but that's not something that is absolutely eminent and something we must do. On the repatriation side, there is no need at this point in time to repatriate funds that are overseas, that are permanently reinvested overseas. So these will be things that we continue to look at, but I wanted to at least walk you through the math on how we get there. And certainly again, I'll go back to in the year FY '13 with very low top line growth we were able to generate – and the low business model margins we were able to generate over $1 billion of free cash flow. So, certainly this is a business that continues to generate a lot of cash, and that is obviously something we've looked at in terms of coming up with this dividend and looking at this overall repurchase plan.

Tom Georgens - President and CEO: On the M&A question. I think that one of the things that we did over the course of the year is clearly established a debt rating for ourselves and establish much easier access to the debt markets than we had prior. So, as we think about M&A activity, I don't think that our thoughts are really changed materially at all. I think that we've got optionality now not to fund M&As purely by cash on the balance sheet, we've got other ways to fund M&A, given that we've got more access to the capital market. So I think how we play that out will depend on how we think interest rates are going to play, whether we take the cash now or how that plays out over the rest of the year, but fundamentally I think that without tapping the debt we can fund both, the capital repurchase plan that we just talked about and our M&A activity that we have contemplated or at least certainly, our previous run rate and in fact even better than our previous run rate if necessary. So, all-in-all, I think we are liquid enough to basically accomplish what we need to accomplish both strategically and in terms of return to our shareholders.

Operator: Louis Miscioscia, CLSA.

Louis Miscioscia - CLSA: Tom, if you look back over the last 12 months there is a lot of things going on in the storage space, some of the areas you are actually participating in, like in Flash, but then there is also cloud, there is storage systems, which obviously looks less positive, there is also storage efficiencies, object storage and your petabytes only grew 4%. So maybe you can put all this into perspective, how much do you think some of these things impacted you from a product growth standpoint in the last 12 months and where do you see going forward with recent trends?

Tom Georgens - President and CEO: Well I think first and foremost on the capacity growth. Interestingly enough that’s not a metric we follow that closely. That’s really not what we are focused on as a company. I think we have been very consistent in our messaging that were really about selling Data ONTAP. And we went through a whole six month of conservation about flash and the host and how selling those bits in the host in flash is not the business that we are in. We want to be the software that manages all of that. So, historically we sold V-Series which is basically a product without disk drive that saves Data ONTAP at our premium software, flash and the host like the entire FAS story is based on that. So, for us we are looking for Data ONTAP footprints and some of that footprint will be managing storage that we sell, it's not what we're managing storage that we don't sell. So, I think first and foremost capacity is not necessarily a relevant question and that’s not a metric that we individually track on a weekly basis. Certainly, there are other factors of play, I think the efficiency story particularly in difficult economic times is encouraging customers to perhaps sweat the asset more or deploy some of the efficiency technologies and perhaps they hadn't done in the past or perhaps they have not felt the pressure to do so. And then likewise, I think certainly the low utilization workloads or temporary workloads that are in the cloud, I think that’s a factor as well. But I think overall as far as NetApp is concerned I think footprints of Data ONTAP is key to our strategy an asset they never going to push, and asset that they were most interested in. So, clustered ONTAP adoption, for settle those workloads that you talked about plus our ONTAP adoption for virtualization, for big data. We have also done some very interesting things with Amazon as an alliance partner, around that our primary storage for AWS, and that generate a lot of customer interest and this quarter the first transactions in that area. So, I think from our view I mean the big picture as we see it is I think customers are looking for a broad enterprise-wide data management solution which is ONTAP or clustered ONTAP. And they may have multiple different storage in carnations whether it would be Flash, whether it would be Amazon, whether it would be commodity disc or whether it would be NetApp (arrays) and our view is that we want to manage all of that and the value proposition we are going to drive to the enterprise is basically a single set of tools, a single set of processes that are very, very efficient, very automated to basically simplify enterprise wide data management for all of the application classes.

Operator: Keith Bachman, BMO Capital Markets.

Keith Bachman - BMO Capital Markets: Tom or Nick, I want to go back over the restructuring in the operating margin target forFY'14 you taken out 900 people and just making some base assumption on fully loaded costs it seems like that's could be anywhere around $130 million of savings and I benchmark that against operating margins that you reported for this year – fiscal year rather it seems like you could do over 17% operating margins for FY '14. So, I just want to try and understand a little bit are you – is there additional expense going to be layered in on top of those headcount reduction side, let's say, of state it is not net savings or is there some element of conservatism in there if you could just talk about perhaps the timing of the restructuring and perhaps the net investments that go in over the top of that?

Tom Georgens - President and CEO: I think first and foremost this is not effectively a cut and freeze strategy here. I think this is fundamentally realignment. There are set of things that we need to do to be successful whether it would be driving adoption clustered ONTAP whether it would be the success of our Flash offerings and the introduction of FlashRay and whether it would be other things that are on the road map that are not public. Likewise, the go-to-market activity needs to be aligned around the alliance partners as that heats up not just Cisco and we just won a Microsoft Partner of the Year Award yesterday and that continues to heat up for us. So there are clearly investment areas that we want to go after, and we need to go after that in such a way that is cognizant of the fact that it's going to be a low-growth environment and we're not going to see a lot of expansion of the operating expense envelope. So yeah, we cut back and that's freed up resource to redeploy. Some of those resources are part of the Company and we can redeploy them and some of them are not and we need to add over time, and that's why we still expect to be hiring this quarter, we still expect to be hire in each of the quarters the rest of the way. So, obviously, if the top line doesn't materialize and this business industry slows down even more than we're concerned about now, we'll modulate that, but right now, we do have an investment plan to basically align around the key initiatives that's built into our plan for the year, and that's what's driving the estimates that Nick put out for the full year numbers.

Keith Bachman - BMO Capital Markets: Tom, is the OEM business part of those anticipated cuts?

Tom Georgens - President and CEO: Well, let's be clear, they're not anticipated for the most part, where allowed by law, they are in fact complete. So – and one of the those things that we don't like to have that hanging over are our employee base, so we'd like to do that – when we do this, we'd like to do this quickly. On the OEM side, recognize that the E-Series branded business is actually moving along quite nicely, not just the Flash side, but in general. So technology is the same, but nonetheless, I think that there's OEM specific activities both on the development side and the go-to-market side that are part of the restructuring, and that would fall into the category of realignment, and that is, there are some things that we're not going on invest in to free up resources to invest in another places, including the OEM side, both on the technical side to go-to-market side and the support side clearly fall into that category.

Operator: Alex Kurtz, Sterne Agee.

Alex Kurtz - Sterne Agee: Just on the outlook for the OEM business into fiscal '14 here from modeling perspective. Should we be building from this Q4 levels, sort of the base and maybe some -- a couple of points of growth or is there going to be still some issues with partners coming in and out of the program?

Nick Noviello - EVP, Finance and CFO: So, first of all in terms of the modeling of it. When we first talked about the OEM business in Q3, the business was down significantly in Q3. We said that Q4 was going to be a branded led quarter and what we felt was happening was that the OEM business was starting to come down to the net normal. We had expected actually when we did the Engenio transaction two years ago now that, that pretty quickly that would occur and probably around a year delay. But starting in Q3, we saw the decline, so we'd expect to see a continued decline certainly on a year-over-year basis as we go into Q1 and Q2 and now normalize that business going forward. In terms of the parties we work with we're always looking to selectively expand partners and then also partners make decisions in terms of whether they want to do more business with us or not that part of that business, the overall OEM business that we're in.

Tom Georgens - President and CEO: I think the OEM business really falls into three categories that drive the number. One of them is, how is their business doing overall and that's something that you guys know for well. Obviously that share shift within the existing OEMs, which ones want to do more do with us, which ones want to push their own intellectual-property. Then the other one is selectively adding new OEMs and pretty much all of those things are factors going forward. So, over the past year, we've seen share shift in terms of focusing on their own IP, clearly at IBM and that's been a factor, and that's probably the biggest factor in the number as we go forward. We have some new wins to potentially offset that, but probably two things to recognize that, in the OEM business it's not just the E-Series at Engenio, it also includes the prior FAS business, the N-Series is part of the OEM calculation. And the other side is that we are seeing the branded side of E-Series pickup. So, with some stabilization of the OEM business overtime and the branded business continuing on its trajectory, we actually see that in the aggregate E-Series being a growth business for us in next fiscal year.

Operator: Brian White, Topeka.

Brian White - Topeka: Tom, I wonder if you could talk a little bit about Europe, it was the only geography to fall quarter-on-quarter and year-over-year well obviously it's been challenged but maybe just some color on Europe please.

Tom Georgens - President and CEO: Well, in currency. So, currency took about half a point of the total number for the entire year-over-year and actually took several points off the Europe number. So, all things considered I think Europe held up reasonably well. As I indicated the booking performance is a little bit stronger than the revenue performance in every geography. So, Europe was kind of mid-single-digits, so not tremendous not the double-digit growth we saw in the Americas and public sector. But nonetheless, I think in light of the headlines I think we have a little bit less exposure to some of those areas that were hit harder than others, but we actually finished with some strength in Germany. We had a strong year in France. So, I think it's a tough environment certainly I believe that aggregate GDP of the EU is negative, at least from a growth perspective. But I think the team is executing well. So, it's hard to be optimistic about Europe but I think that’s an area where we are doing better than the competition in aggregate, and I think overall the team is basically dealing with the tough environment and actually doing reasonably well. But the strength particularly in Germany to finish on the strength of France all year has been notable and I think we got little bit less exposure for some of the places that have been weak.

Operator: Brian Alexander, Raymond James.

Brian Alexander - Raymond James: If the EPS grows mid-teens before taking into account the buyback, Nick, and assuming a 17% operating margin for the year, I'm backing into roughly 5% revenue growth for fiscal '14 and that would imply no acceleration from what you are expecting in Q1 for your guidance. So, can you just confirm that and put that into context of what's your branded growth expectations are and whether you expect that to accelerate off of Q1? And just related to that, given your previous comments about growing 2x the market from your Analyst Day a year ago, would this suggest you are assuming the storage market grows 2% to 3% or would it suggest a lower growth premium for NetApp?

Nick Noviello - EVP, Finance and CFO: Yeah, so let me start on that one. So certainly we are not giving full year revenue guidance, right? What we are giving you is from a gross margin and operating margin and EPS perspective, those things that we are aiming, right. Obviously, there is a set of revenue numbers that we are working through, but in terms of giving specific revenue guidance beyond Q1, we're not doing that. All of those things, we will report to you and we will come out and discuss with you on a quarterly basis. On the Q1 as an example, right, the $1.475 billion to $1.575 billion is 2% to 9% growth, 6% at the midpoint, right, and when we look at the sequential decline in the business, that 11% sequential decline at the midpoint. If we look at our historical sequential for a three-year period or a five-year period of time, those numbers are in the 9% to 10%. So, the Q1 revenue at the midpoint is pretty reasonable with respect to a normal sequential historical reduction. Obviously, there's a little bit more conservatism in there based upon the realignment action and wanted to get rolling there quickly and a little bit of conservatism based around the ongoing OEM and what's happening on that piece of the business, but that's Q1 and we'll go quarter-to-quarter from there.

Tom Georgens - President and CEO: Yeah. I think overall, I think one of the things about trying to ride back from the operating profit also is the assumption about operating expense, and I think the key component here is that, it's our intention to invest in the business, that we do see opportunity. We're certainly not in hunker-down mode. As I indicated, we have more (rex) open today than we did a month ago. So we are looking to invest and we're looking to go forward. So perhaps in terms of your modeling, if you are conservative on operating expense, you become necessarily conservative on the top line. As far as the overall growth of the market, I think, that there is a lot of moving parts, and certainly the forecast for 2013 from the industry analysts is lower than it was for 2012, and we've certainly taken that into account. But nonetheless, I think I see us as a share-gainer, as I said, when I say internal for the Company is the same as that I say external, and that is, we are focused on share gain, because share gain is share gain, when the market is up or the market is down. And if we're gaining share, then we're winning and we're going to continue to invest. But clearly, the absolute magnitude of that investment is going to be modulated by IT spending and the growth of the storage industry, which nobody is predicting to be particularly robust or at least a significant rebound in the near-term.

Operator: Jayson Noland, Robert Baird.

Jayson Noland - Robert Baird: Just to clarify, Nick, if you could help with the headcount reduction and how it would be split across R&D and sales and marketing? Tom, more broadly, NetApp has historically invested into macroeconomic weakness. So, are you saying you expect this to continue for quite some time or are there components of the business, which is run inefficiently, you're saying it's not competitive and not secular, so what caused the change of direction here.

Nick Noviello - EVP, Finance and CFO: So quickly in terms of the reductions or the disinvestment if you will. The disinvestment has parts and sales, parts and engineering, and parts and the G&A line. So, it will show up across the income statement and then as Tom indicated, this is also realignment and a reinvestment into the areas of growth certainly in terms of product, in terms of where we're going and in terms of our go-to-market side of the trend.

Tom Georgens - President and CEO: Like I said earlier is that I don't see this as any change of strategy. I think that we need to be cognizant of the world around us. I think as we came out of Q4 and obviously build the AOP or the annual plan for this current year, obviously we need to be cognizant of what the analysts are saying what we see, but that said, I think we came out of Q4 strong. I think the team felt good about where we were, certainly they still believe that they're winning and has a fair amount of confidence. Is that our own Q4 dynamics or becoming the seasonality that we see. But clearly been a tough earning season in the last 45 days. We see what other people are saying out there as well. So for us, I think we probably saw more business pushed out of Q3 than we saw pushed out of Q4. We've brought the business in. I think we have some momentum, but I think we need to be careful. We see what the IT environment is, obviously maybe for another (indiscernible) we already brought up Europe on this call. Obviously, we have some restructuring activity. But in terms of customer facing carrying people, there has not been much of a change on that front. In terms of engineering on the key projects that are going to drive our growth going forward that investment is only increasing. So, I think for us -- I would consider that we are investing in the key areas into this environment. We are by no means into a status quo or a freeze. In fact we're trying to aggressively move resources into the things that matter most. And the feeling was as we enter the New Year, we will reinstate incentive comp, we plan our capital. This is the time to basically take the reset and build the plan that we can all believe in and gives us multiple ways to get to double-digit EPS growth. I don’t think we had that optionality a year ago, but we have it now and that's why we're committed to deliver even if the macro continues to stay constant or in fact deteriorates.

Operator: Ananda Baruah, Brean Murray.

Ananda Baruah - Brean Murray: Nick, I just had a follow-up and a little bit of a clarification on the prior question, the earlier question on I guess, share repurchase impact and that was distinct from the operational guidance that you're giving. I guess the clarification is, so there's no, I guess, share repurchase impact in the 367 million share guidance for the July quarter, but it sounds like you will be pretty active in the market. So whatever you do would be in addition to that and that's kind of the clarification. And then I guess as I do the sort of the math just back at the envelope, we're seeing that you buy back the shares ratably through the year, it comes out though. The thing on share count, I don't know, like 12.5 million to 14 million shares out per quarter, if I lag that by a quarter, it would actually seem to suggest above the mid-teens operational growth that you can probably do. I don't know maybe 500 basis points more of EPS growth which would get to the high-teens in that range. Are we reading that right? So, is EPS actually more – EPS guidance of fiscal year '14, really more high-teens type of growth? I know that's a lot, but I'd appreciate any insight. Thanks.

Nick Noviello - EVP, Finance and CFO: Let me work you through that. So, first of all remember I indicated that this first tranche would be over the next three months, so it's not necessarily all in the first quarter, and it's actually four months from today. The 367 million shares for the first quarter is in fact without repurchase, okay? We will obviously give you update as we go here and give you very clear view of what we've repurchased in a quarter, but you can imagine that the repurchases don't all happen necessarily at once, they're not all necessarily at the front-end, they're generally spread around. So, we'll give you that color, but we wanted to make very, very clear, and as Tom indicated before distinguished operational results, right, from results that we are achieving on the capital side of the fence. And part of the whole capital allocation philosophy here is a benefit over time from the redeployment of cash into repurchase, so really focusing today on the operational is what we want to do.

Tom Georgens - President and CEO: As we think about this plan, it's $3 billion over three years and likewise the dividend. So the view that we're trying to convey here is that, a, we've got some optionality from a capital standpoint and that we can think about the capital in terms return to shareholders. But the other component to this is that it's got an element over time that we think that the cash flow of this Company is sustainable, in fact we see with growth ability to continue to grow our free cash flow as a Company and we're looking to make a commitment over three years both on the dividend side and on the buyback side to basically return that capital to shareholders (indiscernible) going forward. So overall, I think from our perspective is this is not just a four month phenomenon, this is a three-year commitment and – to basically return capital to shareholders as NetApp continues it's very, very strong cash flow generation.

Tom Georgens - President and CEO: So I think we've come to the end of our time. I'd like to thank everybody on the call for their interest in NetApp and for attending today and we look forward to seeing you again in about 90 days. Thank you.

Operator: Thank you, ladies and gentlemen. This concludes today's conference.