NetApp Inc (NTAP) 2002 Q1 法說會逐字稿

NETWORK APPLIANCE Q1 EARNINGS CONFERENCE CALL

Ladies and gentlemen thank you for standing by. Welcome to the Network Appliance Q1 earnings announcement conference call. During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, you will need to press the '1' followed by the '4' on your telephone. As a reminder, this conference is being recorded Tuesday, August 14th, 2001. I would now like to turn the conference over to Mr. Dan Warmenhoven, Chief Executive Officer of Network Appliance. Please go ahead sir.

Good afternoon and welcome to the Network Appliance earnings release conference call for the first quarter of fiscal year 2002. This is Dan Warmenhoven, and it is my pleasure to welcome all of you and to thank for taking the time to join us today. With me today are Tom Mendoza, President of Network Appliance, and Jeff Allen, our Chief Financial Officer and Executive Vice President of Finance and Operations. I would like to point out that today's conference call is being web cast over internet, will be available for replay on our website at www.netapp.com. At this point, I'd like to turn the call over to Jeff who will review the financial portion of the press release we issued today. Following Jeff's comments, I will share my own comments on events during the quarter. Then we will move to the financial outlook and conclude with a question and answer period. Ladies and gentlemen I would now like to introduce Jeff Allen.

Thank you Dan. Good afternoon ladies and gentlemen. In the course of today's conference call, we may make forward-looking statements and projections that involve risk and uncertainty. Actual results may differ materially from our statements or projections. Factors that could cause actual results to differ from our projections include but are not limited to the continuing decline in general economic conditions, customer demand for our products and services. And equally important factors are also detailed in the company's 10-K and 10-Q reports on file with the SEC and accessible through our website. I hope that all of you have received a copy of our earnings press release. However, for the benefit of anyone who may not have received it or who has not had a chance to review it, I will read the first few paragraphs, which capture the financial highlights. Please note that we continue to use our pro forma presentation, which excludes the impact of in-process research and development, amortization of intangibles, and stock compensation expense associated with our acquisition. Network Appliance today announced results for the first quarter of fiscal year 2002. Revenues for the first fiscal quarter were 200.4 million compared to revenues of 231.2 million for the same period a year ago. Pro forma net income for the quarter was 4.7 million or ¢1 per share compared to 32.6 million or ¢9 per share for the same period a year ago. For the first quarter, on an as reported basis, with adjustments for acquisitions and stock based compensation, the net loss for the quarter was $0.5 million or breakeven on a per share basis, compared to $5 million or ¢1 per share for the same period in the prior year.

That concludes the reading from the press release. Now, I'd like to provide some additional information and commentary about our results for the first quarter. As indicated in the press release, revenue for the quarter was 200.4 million. This was down 13% year-over-year and 11% sequentially from Q4. Book-to-bill was slightly above 1:1 for the quarter. North America contributed 61% of total revenue, up a bit as a percentage of revenue from the prior 2 quarters. Europe was 24% of the mix, down from the 28% last quarter, as we saw some economic slowing, while intercontinental was up slightly at 15% of revenue. The company's sequential decline in revenue was primarily a result of reduced revenue from Europe and continued spending reductions in the Internet related segments. Technology companies, an important segment of our business, continues to be cautious in their capital spending as well. Gross margin for the quarter was 56.1%, flat with what was reported in Q4. We were able to maintain gross margins by achieving cost reductions that offset related inventory write-downs and end user price reductions. Add-on software continued at approximately 20% of the revenue mix. Pro forma operating expenses totaled 111 million, down approximately 10 million from the 121 million reported last quarter. We implemented several spending level reductions during the quarter, as well as carefully managed discretionary spending. Headcount at the end of the quarter was approximately 2,400, essentially unchanged from Q4. Bills and marketing expenses were 71.7 million, down 4.8 million compared with last quarter.

During the quarter, we hired very selectively in the sales organizations and have continued to defer marketing program spending. R&D expenses were 29 million, down 5 million from the last quarter. Lower system hardware prototype expenses, as well as spending controls, contributed to the reduction. G&A expenses remained flat at 10.2 million. Pro forma operating income for the quarter was 1.4 million or 7/10th percent of revenue. Pro forma net income for the quarter was 4.7 million or 2.4% of revenue as other income declined due to falling interest rates, partly offset by the tax rate decline to 31% from the 34.5% reported last fiscal year. Pro forma earnings per share were ¢1 based on a weighted average of approximately 350 million shares outstanding. Cash and investments at the end of the quarter were 569 million, up 11 million, with 200 million reflected in the other assets line in the balance sheet as restricted investments. Day sales outstanding of accounts receivables was 70 days compared to 75 days reported last quarter. Accounts receivable in dollars fell approximately 32 million, Q4 levels, reflecting very successful collection efforts during the quarter. We do expect DSO to range between 70 and 80 days until we can build more order backlog and improve shipment linearity during the quarter. Inventory turns for the quarter were 14.8, down from the 17.6 reported in Q4, as we transitioned storage capacity and provided for the product mix uncertainty.

On another note, I'd like to thank 2 of our key suppliers for their contributions this quarter, Cable Circuits for helping extend our manufacturing capabilities into Europe and Seagate for helping ensure a smooth transition to the new high performance 73-gigabyte fiber channel disc. At this point, I'd like to turn the conference call back over to Dan.

Thank you Jeff. During our fiscal first quarter, business across all geographies continued to witness the slowing economic trends. We saw more customers making decisions to spend on key IT initiatives during the last month of the quarter. However, we are not ready to call that a trend or a beginning of a rebound in IT spending. We believe customers continue to evaluate their budgets and spending plans very carefully. During Q1, we booked approximately 475 new accounts in North America, up significantly from the 350 reported last quarter. Dollar value of bookings on new accounts was up just slightly at 45% of total bookings. This new customer mix is at the high end of our historical range and reflects results of our strategy to penetrate new enterprise accounts. Last year we began an expansion of our business including new products, partnerships, marketing programs, and sales strategies that would allow us to extend our value proposition in new market segments. We have been pleased with the market acceptance of our unique center-to-edge enterprise solutions which provide the tools necessary to fully automate distribution and synchronization of content including streaming media, applications and graphics from the data center to the network edge. Key center-to-edge wins during the quarter included Churchill Insurance, General Bandwidth, and Globix Corporation. As our business sense evolved, we have also chosen to focus on several key vertical markets including energy, telecommunications, financial services, manufacturing, and life sciences, in addition to our core verticals including the technology and Internet related enterprises. In order to penetrate these target verticals, we have been investing in key marketing programs and partnerships that support the applications that are commonly used by the enterprises in these industries.

Examples of these applications include business enterprise applications such as ERP, CRM, supply chain management software, technical applications for functions such as CAD, imaging and geological data management, and enabling technologies including databases and collaborative messaging service. I'd like to take a moment to share with you some of the success in a few of these strategic verticals. In the energy market, where massive scalability and low management overhead are particularly important, key account wins during the quarter included our first international deployments for Exxon Mobil, new wins in several organizations at Halliburton Company and Landmark Graphics, and a database deployment at TotalFinaElf, E&P, USA Incorporated. In our financial services vertical where reliability, ease of implementation, and low total cost of ownership are key business drivers, significant wins during the quarter included Edward Jones, JP Morgan Chase, Citigroup Salomon Smith Barney, several new deployments at BNP Paribas, and an important database win at Bank of America. In the manufacturing vertical wins included Tower Automotive and Ford Motor Company, with a database win at Rockford Fosgate, a manufacturer of high performance audio equipment that has data management and data protection functionality and enable manufacturing companies to reduce product introduction cycle times, resulting in reduced overall production cost and enhanced time-to-market advantages. On the telecommunications vertical, key customer wins during the quarter included British Telecom, Deutsch Telecom, and France Telecom; key partners in this space included Accenture and Openwave. These partners help ensure that NetApp products are tightly integrated with the standard billing, monitoring, and messaging applications used throughout the telecommunications industry. NetApp's partners have enabled our success in all of these vertical markets.

I would now like to take a few minutes to talk about recent activities of a few of our partners. NetApp and Cisco released a jointly authored blueprint for high-availability network storage architectures. This paper focuses on high-availability network designs for enterprise campuses, data centers, and wide area networks that enable global enterprises to access and distribute information more efficiently and cost effectively using products from Network Appliance and Cisco. We significantly enhanced our partnership with Lotus during the quarter receiving the "Runs with Lotus Domino" certification and announcing new levels of integration between NetApp and Lotus products. On the security front, the McAfee division of Network Associates announced the availability of anti-virus software for NetApp filers, while Trend Micro and Symantec began shipping products for NetApp filers in caching appliances that were announced in the previous quarter. These products enable NetApp customers to protect valuable business information from data loss related to outbreaks of malicious viruses. Websense and NetApp collaborated during the quarter to launch constant delivery devices that are enabled for employee Internet manager or EIM. These EIM enabled appliances eliminate redundant and unproductive web traffic while greatly reducing the load on the network. We made several announcements with Oracle, including demonstrating the industry's first database DAFS solution at Oracle OpenWorld Berlin, and a new partnership to extend that aim of caching to the edges of the enterprise. We also announced that Oracle Service Industries is deploying NetApp filers in a way to demonstrate various Oracle database applications including Oracle financials in their iCenter customer demo facility. Oracle consulting and network appliance have also just released a high level blueprint document that highlights quick deployment at a much lower total cost of ownership, specifically addressing best practices for deploying NetApp filers in Oracle 8i database and Oracle 11i e-business suite environments.

Filer bookings for database applications are approximately 26% of total filer bookings in Q1, consistent with Q4. We continue to be pleased with our adoption rates for database deployments across all verticals. Windows or CIFS systems continue to be a strong part of our business, contributing approximately 25% of filer product revenue, the same percentage as last quarter. We shipped two new software products for Windows during the quarter, SnapManager 1.1 for Microsoft Exchange, a software product that provides simplified online backup and rapid data recovery for Microsoft Exchange environments, and SecureShare Quota Manager 2.0 a software product that simplifies the management of Windows Quotas on NetApp filers. In addition to these 2 new Windows focus products, several other new products and issues were announced during Q1. NetApp's DataFabric Manager software package for global enterprise and CDN deployment products enables our IT staff to monitor and configure multiple storage and content delivery appliances throughout our network, utilizing a very simple and intuitive interface. NetApp also unveiled new fiber channels, fiber tapes, and backup solutions, underscoring our commitment to an open storage networking approach to data management. Partners for this solution include Brocade, BakBone Software, CommVault Systems, Legato, SyncSort, Quadrotec, Quantum/ATL, Spectra Logic, and StorageTek. This solution allows customers to easily share tape libraries among multiple filers in a large enterprise deployment. We made significant progress during the quarter on a number of strategic initiatives, as I've highlighted throughout this call. Although the IT spending environment continues to be challenging, we remain focused and committed to increasing our penetration in vertical markets on the enterprise, expanding target applications, and developing our relationships with new and existing partners.

These commitments, coupled with our unique and unparallel product benefits, will enable us to continue gaining market share, especially once we see a recovery in the economic environment and IT spending. Before I turn the call over to Jeff to review our financial outlook, I have the very difficult task today to announce that in response to the declining general economic conditions and to manage the business to our current revenue levels, we have reached a point where it's necessary to reduce our workforce. The reduction will affect about 200 employees in all parts of the company worldwide. This has been a very difficult decision for management to make. In fact, we've done everything under our control to avoid such measures. However, at the current revenue levels we must manage our operating expenses accordingly and that unfortunately includes reducing our headcount, for the first time in the company's history. I'll now turn the call over to Jeff.

Thanks Dan. I'd like to take a moment to talk about our Q2 business outlook. This outlook is based on our current business expectations, reflects our pro forma presentation, which excludes the impact of in-process R&D, amortization of intangibles, stock compensation, and restructuring charges. Again, I'll remind you that we're making forward-looking statements and projections that involve risk and uncertainty. We're encouraged by the progress we're making in the enterprise market but remain cautious in the near term and lack clear signs of an overall IT spending recovery. In Q2, we expect limited revenue growth in the range of 0% to 5% sequentially. This, considering seasonality in Europe, continued contraction in the Internet sector, offset by market expansion in the enterprise verticals Dan referred to. We will continue to manage our operating expenses prudently and expect to take a onetime restructuring charge in the range of $6-8 million during the second quarter. We expect pro forma earnings per share in the range ¢1 to ¢2 in fiscal year Q2, a result that balances our investment strategy with the current economic environment.

Thank you Jeff. That concludes our remarks for today. So at this point, I would like to open the conference for questions. We would like to ask that you limit yourself to one question each so we can address everyone in a timely manner. Thank you.

Thank you sir. Ladies and gentlemen if you wish to register a question, you will need to press the '1' followed by the '4' on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the '1' followed by the '3'. If you're using a speakerphone, please pick up your handset before entering your request. One moment please for the first question. Your first question comes from Shebly Seyrafi of AG Edwards. Please go ahead with your question.

Yes. Good afternoon. I am estimating that revenues in Europe were down 21% or so sequentially, that the second quarter, however, was down around that amount. Are you seeing stabilization at all in Europe? Is it going to be another 20% in the second quarter or maybe 10% down? Thank you.

That will be hard to predict. This is traditionally the quarter where there is some seasonal impacts in the month of August into kind of mid September in Europe. So we are not making a specific forecast, but this is generally the quarter where some seasonality is factored into our thinking.

Can you talk about the Internet vertical? What percentage of revenues that represented?

Shelby, this is Dan. We'd like to have only one question per turn so it goes through the entire rotation. I'd be happy to have you ask a second question at the end of the rotation.

Very good.

Your next question comes from Kimberly Alexy of Prudential Securities. Please go ahead with your question.

Yeah, thanks. Dan, in talking to customers, can you just give us a sense in what terms of they are telling you in terms of the timing of pickup and spend, and what you're seeing by vertical? When you strip out the new verticals that you're focusing on, are you seeing any particular trends by customer vertical that are noteworthy, that you could share?

Let's see. First I guess, I would say that most of the customers feel like they now have a budget they can have confidence in. They went through successive budget revisions. I mean, it is quite amazing, for the first half of the year, that customers at middle management levels who thought they had authorized funding, when they went to get final approval found it wasn't there. I think that's now ceased. I think they feel pretty comfortable that that the moneys have been allocated are in fact real, and we saw a general pickup in that regard in July. By vertical, I would say you know even when in some vertical that is kind of mixed for financial services, which I think most of Europe is part of, is that it's been under some pressure lately, but still seem to be investing in information technology, although at a reduced rate from last year. There are certain verticals like the energy sector, oil and gas, that are just cranking along, and have pretty sizable budgets and appetites. As you move more towards major manufacturers, I would say that's where it becomes very mixed. Automotive continues to be very strong for us, and we haven't seen any slowdown there at all. In fact, we got major new initiatives there. So I don't think there is a real trend. I mean the one thing I can say is that the two that are under significant pressure and continue to be are the Internet area and the technology companies.

Thanks again.

Right. Thanks.

Kimberly this is Tom Mendoza. I would just like to add to that. Over the last 6 months it's very clear the financial services are looking for new alternatives to lower the total cost of ownership of the storage. We had a number of wins which we announced on this conference call, which are global in nature, and they will be ruled out over time, but across the board, we are getting accepted and getting deals we never would have had before the last 6 months. And we're seeing tremendous movement, I would say, on a global basis and in the financial sector, both be it in Wall Street type companies and the insurance sector.

Right. Thank you.

Next question comes from Don Young of UBS Warburg. Please go ahead with your question.

Yes. Thank you. Good evening. I am wondering if you could clarify what you are saying about new business, Dan. The 450 new customers sounds like a lot, but it doesn't sound like they were ordering very large configurations or they were doing small orders. Could you comment on sort of how that is playing our? Are you seeing a smaller transaction size? And then the question I would like to ask is about the new product outlook for this fiscal year. As far as, what are the key products that you think can generate some incremental excitements for you in the marketplace? You talked about, Dan, so I'm wondering if you could identify some others and see or go through what you think the ones are that had the most impact on your topline this year.

Which question you would like me to answer Don?

Well, I am calling the first one a clarification.

Let me comment on new business. I think the order size was a little lower than the normal for new accounts. It was characterized largely by deployments in Windows environment, so share tended to be a little smaller. I think a lot of new accounts, first time buyers, bought smaller systems until they get familiar with it. I realize that a he small system these days, a mid-range system, let's say and 820 configured with a terabyte, is significantly smaller in price than the equivalent a couple of years ago. So it's a starter system of the terabyte, which was generally considered to be a pretty good chunk of storage, is well under $100,000. So I guess what you see in terms of the new account mix. On the new products, eventually I would have answer that question anyway. I will make a few comments. We continue to move towards expanding the high, expanding the capacity of our systems, and moving towards a, if you will, virtualized storage environment across multiple filers. Those are going to be the ones that are going to be of most interest.

How do you see DAFS playing out this year?

In this fiscal year, I see it contributing very little. I think this is going to be a reduction year. We don't expect it to contribute to revenues.

Thank you.

If I could make a comment about the new account order side. The other thing that I find interesting is who we're selling to, because a lot of the new accounts we closed this quarter are significant names that obviously are very, very large. And in that vein, they tend to test, this is difference between selling to the tech sector and into the enterprise, they tend to test for quite a long period of time. Once they select you, they're selecting you for infrastructure. We're not being selecting for projects. So even though the initial orders they seem modest or close to where we were before, I do think that a lot of these have tremendous upside over time.

Thank you.

Your next question comes from Andrew Neff of Bear Stearns. Please go ahead with your question.

Here's your question, [_______________] just were there any during the quarter or in the upcoming quarters? Have you made any major changes in the accounting guidelines such as doubtful accounts or write-offs or things like that, just any material impact? My question just has to do with, could you just give us an update on the competitive front and what you are see going on there?

This is Jeff. We haven't made any significant accounting changes to the methodology of reporting or accounting for transactions.

Okay

On the competitive front, the part of the mix stayed about the same. We saw slightly more frequency of competition against Hitachi, but nothing really dramatic. Pricing was a factor in many of the larger deals in particular. It's pretty clear that some of the competitors have said they're going to try to gain share through pricing and have deployed that. I don't think it's had a significant impact across the board, although I've got to tell you, I'm going to reinforce, we are not going to lose anything on price, and our sales force clearly understands that. We think we've got the most attractive solution from a pricing viewpoint and cost of ownership viewpoint, and certainly we should never lose on price. We expect to see going forward that Sun will be representing Hitachi, but I don't think it's going to be a significant increase in terms of frequency of competing against the Hitachi product. I mean it's not going to be deals that are entered against Hitachi through other channels, and that'll be represented by Sun, and I think we continue to have great success against the other NAS products in the marketplace. I personally believe that we have continued to gain share there despite what some of our competitors may have said. Okay.

Okay. Thank you.

Next question comes from Dane Lewis of Robertson Stephens. Please go ahead with your question.

Thank you. Just a followup on that comment about not losing on pricing to any competitors, just regarding gross margins, can you talk about the prevailing price environment? And I was pretty impressed with the flat gross margin sequentially. Jeff, you mentioned some cost cutting. How much room do you have left in cost cutting going forward, and do you see the price pressure that you saw in the last couple of quarters continuing?

Yeah. I see price pressure continuing. I think that our discounts to customers have gone up over the last couple of quarters. Since then, we've made sure we're going to compete effectively. We did see a significant cost reduction in our storage subsystems this quarter, and we would expect to continue to take advantage of the commodity curves. As you know, memory pricing has declined very rapidly, contributing to our cost reduction as well, though that's gotten to the point where that probably doesn't fall significantly from here. So I would say that, as I've said for many, many years, I think margins are more likely to go down moderately than up, and I think we're all committed to making sure that we gain market share with price as one of our weapons.

Any sense or any idea that you care to share in terms of what a long-term gross margin range is for you guys?

Not at this point. I mean there is too much going on at this point. There is volume related, there's economic environment, there's too much capacity chasing end user dollars. So at this point, I'm not sure I could predict anything.

Fair enough. Thanks Jeff.

Your next question comes from Mark Kelleher of First Albany. Please go ahead with your question.

Hi, guys. Most of my questions have been asked, but how about percent of revenue from caching in on the quarter?

Caching, as a percent of revenue, was about 10% down from last quarter. I should comment on it. I think this is becoming less and less meaningful. We now find that more and more of these solutions that we've bid into customer environments there combined cache and filer, and added software on top for content delivery. And it's very difficult for us to track what's going into the full content delivery. It's hard to tell how the filer got deployed. But caching as a product line is 10%. I don't think we ought to be thinking about it as the center point for content delivery going forward.

So it's 10% individually and you sold more caching with systems?

Yes. Exactly.

Okay. Thanks.

Just a comment, this is Tom, the other comment I'd make about that is whereas 2 years ago we would have been talking about caching as an edge device for Telcos to lower bandwidth costs, the vast majority of our wins now are going into enterprises as they go to put out full content delivery networks across the globe. So the look of our caching business is completely different, very much so from frank enterprise sales.

Your next question comes from Dan Renouard from Robert W. Baird & Associates. Please go ahead with your question.

Hi. Can you break out in a little more detail on your customer mix and specifically how much Internet and carrier and the percent of revenue you had this quarter versus high-tech and just free enterprise? Thanks.

Well, that grouping that we have which is both the vertical plus the horizontal of e-commerce on their websites for primarily non-Internet companies was roughly in the 20% range of the total. We don't break out like that for Telco. I think certainly the tech sector was down, although I don't have a specific number on that one either.

What about just a rough cut of how much you have from telecom and Internet this quarter versus last quarter, and if you don't have the number just some sort of ballpark?

This is Jeff. Directionally it's down.

Yeah directionally I think, really directionally it's down. The one comment I would make is that we've continued to penetrate Telco into their data center, which is by major shift, and into their internal operations.

As opposed to just on their, if you will, web services side.

So even within that number you see it's a different application shift. But the four target verticals, financial services, oil and gas, manufacturing, and Telco, they collectively now represent approximately 25% of our business.

Okay. Thanks.

Next question comes from Bill Lewis of JP Morgan H&Q. Please go ahead with your question.

Okay thanks. Lot's of them have been answered, but could you talk about maybe the mix of products; if you can give say total units and maybe a sense for mix between high end, low end, and mid range, and maybe where the suite spot is there? Thanks.

Well, with the number of new accounts this quarter, we saw a shift toward the mid range, which you might expect and is logical. I think we shipped somewhat over 2000 systems in the quarter. Those are just approximates at this point. I don't have those at my fingertips. Caching as a percentage and as a percentage of the units were down quarter-over-quarter, and the storage and filer side as the percentage of the mix increased.

And your expectation for that over the next couple of quarters?

Well, we said that the caching business is lumpy just based on order size and the customers we deal with, and as Dan mentioned, an increasing amount of it's being linked together. So I think that's going to be difficult to break out going forward, but my view is over time, as the technology companies recover, we will see strength back towards our high-end systems as well.

Thanks.

Your next question comes from Bill Shope of ABN Amro. Please go ahead with your question.

Yes thanks. Do you guys see any of the new players in the market like Veritas or Bluelark? Are you seeing any action from them yet?

Not materially. In fact, I can't think of a case where I have seen that we have competed head up against Veritas. We are still looking for the alleged system they sold last quarter. And I guess Bluelark, we see them periodically, primarily in the Silicon Valley area where they're headquartered, but not very extensively.

Okay, great. Thanks a lot.

Your next question comes from George Elling of Deutsche Bank Alex.Brown. Please go ahead with your question.

Thank you. Do you see any change in the long-term secular growth opportunities for either NAS or storage in general? A year ago IDC and Dataquest, etc., had huge numbers for both those marketplaces and now with the slowdown being seen by yourselves and EMC, etc., do you think anything has really changed or do you think this is just strictly economic related and once we come back everything is going to be rosy again?

Hi. This is Dan. I personally believe that what we are seeing is a contraction in IT spending this year, and I personally think it's going to rebound going forward. Does it achieve the fairly high numbers that IDC forecasted? I think it's a function of how long does it take us to recover. I think at some point, couple of years out, it probably does, but I think the recovery is going to be fairly slow over the next few quarters. I don't see any fundamental shift in terms of demand patterns. It's pretty clear that there is a enormous drive to move information to the online environment. So there will be the web environment, your internal network based environments. I see the volume of information continuing to increase at an enormous rate. And so overall, I don't see any significant change in terms of customer patterns. But I do think that they are choosing to try to optimize what they already have, to condense what they currently have online to make space for new data, and to differ additional purchases where possible. We also saw significant uptake this quarter in add-on business, which I view as customers just trying to extend the capability and capacity of the systems they already have rather than buying new ones.

This is Tom. I know that trend at IT is people getting away from buzzwords or buzz phrases like NAS and CN. DNUs aside, what they're really seeing what can you do to allow me to share information or consolidate my data between NT and Unix either alone or together and on what cost can you do it. So where a year ago, we got many more philosophical debates about what was happening, now that every vendor in the world has announced that they are also trying to come out with a NAS solution, nobody's doubting at the big market, and we are finding that we are now getting pass the buzzwords into real benchmarks, real tests, and I think that's one of the main reason we are moving forward in places like financial services.

Your next question comes from Tom Mancino of Pacific Growth. Please go ahead with your question.

Yes, thank you. I like to ask Tom Mendoza a competitive question. First, Tom how often do you see Veritas with a software solution? And can you also comment on EMC's 4700 in the Solara? How frequently you see those guys and talk a little bit about when you win, when you lose? Thank you.

Thank you Tom. On the Veritas situation, I looked through this quarter's analysis. We do a pretty strict win-loss analysis. And to Dan's earlier point, we don't have a single point where we thought that we lost. In fact, we rarely even win. We rarely see them as a competitor. Typically, companies use their products. If they have an infrastructure, they're just trying to enhance a little bit, but if they are looking for a scalable network architecture that they want for storage, I have never seen the customer chose to debate that point with us as the final level, so it's us and other people. As far as EMC, it's very, very clear that they do not lead with the IP/4700, at all. The sales force is not interested. I mean if you break down the numbers that they report, it will be very hard to figure out how they come up with them, simply because if you take the average sale, my understanding of the average configuration we see bids about is terabyte. We figure that's about 70 grand. Unless they are selling a zillion of them, they can't possibly be near the number. Secondarily, the Solara gateway, which has been out for a long time never made a market dent before, apparently has had enormous boost in the last two quarters, according to them, but the only way that's true of course is if you count the symmetrics behind it because the gateway itself doesn't cost very much. So if you just get away from that, what is happening in the market is we can view with the symmetric the vast majority of our accounts issue with symmetric, we had more success against EMC in the last 30 days than we had in any month in my memory at NetApp, in enormous accounts making architecture wins. The only time the IP/4700, there's 2 instances or 2 ways it shows up; one after they've selected network and cache stores and they have selected NetApp, they committed a very, very low cost. As an aside, we don't carry that cost because that is almost universally viewed as core by the customer because they have got to wonder why if that's all their need, at that cost, they didn't see it upfront.

And on the other side of it Tom, on 4 or 5 instances this quarter, we've been asked to take amount of trade and in each case they hadn't been turned on yet, which goes to indicate that they are being put into different accounts by the sales force to meet some kind of goal.

Alright. Thanks Tom.

I think that two quarters ago I said the best thing that can happen to NetApp was to quit shadowboxing and get that product out so we could benchmark it, and I am sticking with that statement.

Okay.

You next question comes from Clinton Vaughan of Salomon Smith Barney. Please go ahead with your question.

Thank you very much. Could you tell me what percentage of your revenues were sent attached with the new product that you offer, as well as how much penetration you had in the enterprise accounts and what percentage of revenue were the costs of failover systems? Thanks a lot.

Yeah, this is Jeff. Virtually all of our storage is fiber channel based now, so I am not sure if that's what you are referring to.

You won't say it's connected to a switch then?

On the upstream side, that is the fiber face of the application servers, none. The SAN attachment was backup.

Right. So how many of your filer units that were shipped in the quarter were attached to a switch, a Brocade switch, or a fiber channel switch?

Let's make sure we're clear. There are 3 styles of attachment, right, one to an application server, none of those went through a SAN switch. To the discs themselves, none of those are through a SAN switch. Then to the tape device, which is strictly for backup, as I guess, I will give you about 20%-25%, especially the high-end systems go out that way these days.

And on the failover, about 30% of our systems went out with that option.

Great and how much of your revenue came from enterprise accounts this quarter?

The best answer I can give you on that one is the four verticals were tracking which on aggregate contributed about 25% of revenue. Enterprise applications are beyond, that but those four target verticals are the ones we are really focused on. Financial services, major manufacturers, Telco, and energy, oil and gas.

Great. Thanks a lot.

Your next question comes from Tom Kramer of Merrill Lynch. Please go ahead with your question.

Jeff, can you talk about where, after you eliminate the head count that you talked about, you think your revenue breakeven level will be, and what you think the total operating expense level will be once you have kind of eliminated this next set of heads?

We're going to comment that it's a first at hand. This is our first layoff we have had...

I think I understand that Dan.

We think we can basically hold operating expenses at about the level we reported this quarter, after that action.

So we should not expect any kind of a step down or net reduction?

Not at this point. We took a number of onetime actions including a one-week shutdown during this quarter, which helped spending levels. We basically want to make sure that our mix of spending on programs, R&D, prototyping, and testing are all in alignment and make good rational sense. So I would just say that expect spending levels roughly flat over the next couple of quarters.

Okay. Thank you.

Your next question comes from Jim Poyner of Unterberg Towbin. Please go ahead with your question.

Thank you. My question has been answered. Thank you.

Next question comes from Andrea Grosz of First Union. Please go ahead with your question.

Thank you. I was hoping that you could give a little more detail on the unit shipped that you gave out last quarter on the F840, F820, and the F85. Thanks.

Yeah, we don't specifically give out unit counts by product. As I mentioned earlier, we shipped a little over 2000 systems during the quarter.

Okay. I guess...

Traditionally our mix has been a third at the low end, a third at the mid range, and a third at the high end. It sort of moves around, the comment I made earlier was it sort of peaked a little in the mid range this quarter. I think that's due to the new customer mix.

Great. Thank you.

I also think in this economy when you have highly scalable systems like we have with one file system that goes from the low end to the high end, customers can start at one place and then upgrade or move to our larger systems very simply. So as budgets are squeezed, they see an opportunity without any kind of big penalty. Join the family in the middle and then go high-end when they want. Before, when money was much simpler and much more available, any time they started at the high end, but I think it's a real advantage to have a scalable family from the low end to the high end with the same file system and allow them the choice.

Your next question comes from Peter Labe of Buckingham Research Group. Please go ahead with your question.

Thanks a lot. Looking at the guidance, I am wondering two things. One is you maybe have seen the worst of the cycle in your opinion in the reported quarter, and related to that is we didn't hear much about ... going forward like for the next two quarters. Do you think that's ... rate or how is that going?

Peter, I'm sorry, you were drowned out by the background buzzer back there. Let me address the first question, which is the guidance. At the risk of sounding like the same message we gave you last quarter, we think we have found the bottom. If you recall, last quarter we gave guidance and said we thought it would be, results would be flat going forward. In fact, we went down about 11%, I think, sequentially in revenues. As we assess the current situation having really interviewed a wide number of people across the sales organization and looked at the forecast and so on and scrubbed them down, I think we have higher confidence that that same guidance we gave last quarter is probably the appropriate guidance to give this quarter. I don't think we are seeing an upturn, but I do feel as though we have found the bottom.

Okay. Dan, can you talk about Europe here in the next quarter or two?

Let me just make a comment on that. This is Tom Mendoza. From I guess around December January on, the thing that caught us most by surprise, and I am guessing up the vendors too, that if you take wins, losses, and delays, we have had a very predictable model over the last 5 years. The wins and losses and when it's delayed, it's delayed to a point, and then we can just put our win rate on top of it and kind of guess our revenues pretty accurately. And what happened is the delay column skyrocketed in around December-January, I guess, and not only did it skyrocket, it moved to an indeterminate place, so we couldn't say what was going to happen in the next quarter. Toward the middle to the latter part of this quarter, we definitely saw, as Dan said in our context of his statements at the beginning, a shift in that, in that the way people made decisions, vast majority went our way in this side, a lot of significant architecture wins, but they made decisions that when they delayed, they delayed it to a point, many this quarter and then at some stage even to a day next quarter, but it was a day. So that was the first time we had seen that. Now as Dan says, we're not going to declare that a trend, and I don't think we should, but it was definitely significant compared to any of the previous four or five months. So we feel like we are starting to get from our sales force and from our customers a sense that they are locking their budget in, a message that we have been, we made this enterprise investment, about a year ago. It is definitely getting the traction that we though, and now we just want to make sure this quarter that we can be as predictable as we used to be and that's what we're focused on.

Yeah Peter, I think Europe slowdown surprised us a bit this quarter, and we wouldn't generally be bullish into the summer quarter for Europe at this point just based on seasonality, but several of the same attributes apply in the European market where we've put a lot of effort into selling into large enterprises, and I think we will have an impact over time.

Okay, thanks.

Next question comes from Steven Denegri of Dain Rauscher Wessels. Please go ahead with your question.

Can you comment on the kind of the month-to-month linearity in July and how the effect is going to look in the October quarter?

I don't think it will be any better. I think August is generally a slow month.

Augusts of every year are our worst months. I don't see how it gets any better.

Roughly what was it, kind of, in the July quarter?

Well we don't get too specific but it's plus 50% in the final month.

Okay, thanks.

Your next question comes from Glenn Hanus of Needham & Co. Please go ahead with your question.

Yes. In terms of, sort of, the excess capacity out there from a storage standpoint, kind of being soaked up here over the last quarter or so, are you hearing from your customers that that capacity has been absorbed at this point and we are getting to a point where they have to be purchasing more just from a capacity standpoint or are we not there yet?

I think we are there. This is Tom. But I also think the phenomena I was commenting on for this last half of this last quarter is people do seem to be moving ahead with new applications too. Things that they've, it took them four or five months to reprioritize, and as Dan said, they are not spending as much, but they have made up their mind on what they are going to roll forward. So many of the things that we were selected for this quarter are things like major NT consolidations because the total cost of ownership is a big benefit to them. In constant delivery stuff drives revenue for them so they're really trying to figure out can you save them money or make them money, and if it falls in that bucket, they're moving forward. As far as just needing more storage for what they have, we did see an uptake in our upgrade business on that side too.

Thank you.

Your next question comes from Laura Conigliaro of Goldman Sachs. Please go ahead with your question.

Yes thank you, actually just a couple of clarifications. You indicated that the four verticals were, I think you said, 25%, but last quarter I think you just gave us the enterprise, which I think was 34%. Can you give us what those four verticals were last quarter, so that we can see a sense of what the progress is? Also, what would gross margins have been without the cost reductions that you took? And finally, did you say Windows was 25%? If so, how is it that the midrange was so dominated by Windows since that was the same percentage you told us last quarter?

Hi, I'm not sure I understood all those questions. I do not have the verticals for last quarter handy. I can give you that in followup. In the Windows market, it was in fact 25%, I think it was about the same last quarter, might have been 26. I'm not sure I understand your question about the midrange there. What we have seen is while these NT server consolidation projects start off with a terabyte or so, and they're a nice fit for the 820.

Okay.

Yeah, a terabyte, terabyte-and-a-half is plenty for somebody to start off with, and that drives him toward what we would consider being a midrange product. I am not sure about that 34% number. I'm having trouble remembering the context.

I don't think that's the number we reported specifically.

Okay.

I can't refer back to everything in my daily sheet here Laura. I'd be happy to have a followup discussion with you on that one as well.

Okay, and then going to...

As far as the cost reduction and pricing, I think they were both roughly equivalent. We probably got a couple of points out of cost reduction and a couple of points out of the other way from price reductions.

Thank you.

Your next question comes from Shaw Wu of Banc of America Securities. Please go ahead with your question.

Yeah, thanks, one clarification and another long-term question. What's in restricted investments, restricted cash, Jeff?

Basically, the cash that we have helped use to finance the corporate headquarters here.

Okay that is fine. DAFS timing, and second question is on DAFS and just the timing. I think you talked about it a little bit, but also like how do you try to position it against CIFS and NFS and how does that whole thing work? Thanks.

That is a great question. DAFS is going through I think a number of evolutions right now in the standards will roll and so on. I think you are going to see the first DAFS implementations in conjunction with application specific solutions such as the one we demonstrated with Oracle in Berlin. That is a, if you will, a block-style transfer interface over a file kind of protocol that it kind of unique to Oracle. So I think that's where you are going to see the first implementations because it provides significant efficiency in economies. That is why I gave the answer, and I don't think you're going to be able to break it out as a percent of revenues. You are going to see it buried within certain application segments.

Does it compete with, I mean, another file access protocol like, does it compete with CIFS or...?

No, in fact, one way to think about this in a database role in particular, you are going to have to start thinking about this as being application specific, and the database roll in particular, there are certain class of applications where the server performance, not the filar performance, but the application server performance is negatively impacted by the TCP overhead, and DAFS is a way of eliminating that overhead with a more efficient transfer mechanism. But until you see a virtual memory interface in the VI world, all the rest full promise of DAFS won't be realized. So in the near time, we are going to see the more application specific environments.

Okay, and timing?

Because of what I just said, that it's application specific, it requires a supporting application vendor like Oracle, and the timing largely is determined by their product release cycles. I still believe you'll see products emerge in this calendar year, but I would be doubtful if you'll see them be in any way higher volume until next year.

Okay, thanks.

Your next question comes from Kevin Hunt of Thomas Weisel Partners. Please go ahead with your question.

Yes, I just want to clarify, I think said 50% was the Asia, rest of the world sales. If that's the case, looks like you might have had a slight sequential increase there. I want to see, maybe Tom, if you have any comments about trends over there?

Interestingly, we are seeing that business stay solid. Even Japan's economy is obviously struggling, but it's no different than it has been from our perspective for a very long time. The channel partners that we have, have invested aggressively over the last, I'd say, 12 to 18 months, and that is definitely paying off. The OEM relationship with Fujitsu has solidified and is bringing us into the enterprise world better than we thought actually. But the distribution throughout the Asia has been set up very well, and it is performing to our expectations.

Thanks.

Doug Van Dorsten of Thomas Weisel Partners. Please go ahead with your question.

Thank you. Just a point of clarification on this upcoming risk, could you talk about current headcount in the sales organization and what you anticipate the risk will mean for the sales organization?

What we've said is that this is spread across the company, focused on infrastructure, management structures, as well as kind of making sure that we get the right sales coverage in the right markets, and that's the essence of it. So I don't think it'll have a dramatic impact on our strategy for sales coverage, and it won't have a dramatic impact on our product plan either.

We downsized in some areas where we were focused on technology sector strength since we don't, but we've increased our investment where we think that's appropriate. We've been doing that. So really, the capacity has not been really effective very much.

It is about 8% of our current headcount.

Great, thank you.

If there are any additional questions please press the '1' followed by the '4' at this time. Dane Lewis of Robertson Stephens please go ahead with your question.

A clarification and then a question. The 31% tax rate, is that good for the balance of this fiscal year Jeff?

Yes, we only change it when we're sure it's good for a whole fiscal year.

And then, I notice that on the backup announcement that you guys made with 9 names that Veritas' name was absent, can we read anything into that? And can you just comment on your relationship with Veritas?

First of all, we'll add again to it. I'm not sure why they weren't on the list. Yeah, I'm really sure that Veritas is very mixed right. In one sense, in the backup side of the business, they are the most common backup solution our customers choose to use in our systems. And so in that regard they are a partner. If you go to the other end of the spectrum, right, the NAS software that somebody asked about earlier, that's going to be viewed as a head-on competitor. In the middle zone, it is kind of an indirect form of competition in that they add value to environments that we compete against. They add value to the older model of direct attached storage and certain other environments in the file sets and volume manager. In that sense, when we compete against the total solution, Veritas is a component in that. So it is kind of a mixed kind of a relationship. I think we have a very positive relationship from the backup side, which is what that announcement was in particular.

Thanks Dan.

Your next question comes from Glen Ingalls of Wit SoundView. Please go ahead with your question. Mr. Ingalls please go ahead with your question.

Can you hear me?

Yes.

Okay. Thanks. Could you give out revenue from direct sales as opposed to resellers and OEMS? And any sense as to how much product is sitting with resellers would be helpful.

Direct revenue mix was about the same as last quarter, about 80% roughly.

There is no significant inventory with our partners. Nearly all of that business is directly identified to end-users.

Great, thanks.

Your next question comes from Don Young of UBS Warburg. Please go ahead with your question.

Great, thank you. I am wondering about the guidance Jeff. I think in the last call you talked about a desire to try to build backlog somewhere in the process here given more visibility. On your expectations on the next quarter, are you assuming or are you hoping for some buildup in backlog or that just reflecting a continuation of basically selling and billing in one quarter?

That is a very good question Don. Our hope would be that we could build some backlog in the coming quarter.

Okay. So basically then we are back to a book-to-bill level of one is what you're looking for?

I am not guaranteeing that. I think we have more confidence that we can achieve the revenue number and that we can add to the backlog certainly. But certainly our goal as we go forward is to rebuild the backlog.

Great. Thank you very much.

Your next question comes from Amit Chopra of Credit Suisse First Boston. Please go ahead with your question.

Thanks. Dan you mentioned the sort of the thought of not losing any deals in pricing. Has there been more of an attention been paid to sort of favorable financing terms for certain verticals or extended payment programs? And hopefully, I am not reading into it too much, but Jeff, is that possibly a reason for that 70 to 80 day DSO guidance? Thanks.

No absolutely not. In fact, we are very aggressive in deferring revenues that may have expanded payment terms. So you never see it. We are being very aggressive and have put a lot of energy into creating leasing and financing products for our large customers, and that would include technology upgrades and refreshes and those kinds of things, but I think that is more a matter of evolving into the enterprise and nothing dramatic.

Thank you.

Your next question comes from Tom Kramer of Merrill Lynch. Please go ahead with your question.

Yeah, just as a quick followup. Can you give us a sense of how the database did to sort of sequentially over the past couple of quarters, either as a percentage of revenue would be terrific? And also, can you talk about what if anything you've done with quarters for sales force and give us a sense of that statement revised downward?

Yeah, the percent of database has been very, very consistent, so as a percent of bookings is the way we look at it, it has been 25%-26%. So, I mean it's been tenths of a percent fluctuation. Sales force, we did rebuild down the sales force. We have reset our operating plan for the year downward, and consequently passed on those reduced numbers to the sales force.

Okay, great, thanks Dan.

Your next question comes from Andrew Neff of Bear Stearns. Please go ahead with your question.

Sure. You may have alluded to this before, but in terms of what you're looking at, in terms of you've indicated before that you felt this may be a bottom but not an upturn, but what would you be looking at that would tell you that things are turning up? And from your sense, what do you think will pull things out of this type of environment?

First metric I would look at internally to see a turn up is sales productivity in individual sales reps. When things are booming along, we saw a much higher productivity rate per person than we see now. I would think that that would be one of the first signs that we've started to see an improvement.

Secondarily, the fact that it would be consistent and predictable, which it was for 5 years, yes that would definitely tell us the run rate track again.

And any sense about on either of those metrics?

As I mentioned, at the end of this quarter, across the globe, we saw an uptake as far as the winds of significant architecture deals that are going to be deployed globally, as well as most of the sales force, as their productivity goes up fairly dramatically. So again, this quarter is going to be very important to see if we can sustain some kind of predictability for us still. That's how we've built this company from the beginning and that's what we're focused on.

Thank you.

Next question comes from Jim Poyner of Unterberg Towbin. Please go ahead with your question.

Yes, given what you said directly and indirectly about guidance and pricing, is the guidance for the quarter, have you baked into that some assumption that gross margin falls a bit from the 56% in Q1?

We won't say anything specifically. I just issue my standard statement is it's more likely to moderate than to go up at this point, and that we have a focus on making sure that we are competitive.

All right. Thank you.

I think that we are going to also to interpret that remark is a dependant-independent variable here right. The independent variable is all it takes to go get the business. The dependent variables lam at the gross margins as a result.

One of the things I will comment on that though is we see our competitors give enormous discounts, specifically EMC, to get competitive, whereas from our standard pricing we're not far off to start with. That's why I think our margins have stayed up when we've stayed competitive. Our products are very aggressively priced to start with and we've been successful, I believe, in having customers look at total cost of ownership, which means you don't have to all of a sudden dramatically shift your pricing at the end of the deals to get reasonable. So that's one of the reason I think we've been able sustain. I think just being conservative because of the economy being in general, it's not the competitive factors that are really driving any significant difference in our behaviors. You can tell from that result.

So basically, you don't think there's much elasticity in terms of market share.

Well, I think we're testing that, and we are, in different parts of the world, I think it's different. We had some opportunities to test that and we are.

All right. Thank you.

Next question comes from Bill Lewis of JP Morgan H&Q. Please go ahead with your question.

Thanks. Could you just talk about some longer-term trends here in terms of what might be some new ways of growth drivers that would push customers to Network Appliance Solutions? Historically, it's been sharing of resources, whether it be clients or compute resources on the same filer. What new trends, you talked about DAFS, in the new term might help drive people in your direction over the longer term? Thanks.

Well, I just think the fundamental trend is storage network storage, and I think as Tom mentioned earlier, customers are beginning to look past the NAS versus SAN and think about network storage and how they reduce their cost of ownership. Now that is the fundamental trend I see. It's not a technology trend. It's a trend in how they're thinking about the problems that they've got to solve and then finding the most efficient and flexible solution for it with the lowest cost of ownership.

Second component to that is it's clear that rich storage, rich media, is being content, is out there now, and customers have concluded that's a storage issue. As you are putting terabytes at the edge at an enterprise, it's clearly a storage problem and a storage opportunity. So I saw a well-known CIO say the only reason you see vendors say they either raise the bridge or lower the water, raise the bridge is the content delivery piece that allows many of the financial institutions that decide to offer services at the edge that they couldn't offer before. So that is something we talked about. We thought it would happen a year ago. It is clearly happening in opening big doors for us. Secondarily, as people are starting to think about costs, when you look at the database sector, we have had people say if I perfectly tune an application it works very well. When I keep my edge in though, in the database environment with people realizing they have many, many databases that are not perfectly tuned, and it costs them an arm and a leg to administer, and they're starting to look for different ways of putting in information available at less costs, and we're enabling that. So the drivers are, are you reducing costs or are you raising revenues. The last what I'd say to you is many companies are still trying to figure out the disaster recovery strategies, and what seemed to make sense 6-12 months ago no longer makes sense from a pure extent of complexity. Our solutions are definitely being adapted there at a fairly rate, holding good, for that they weren't open even 6 months ago.

And Tom, just real quick on a followup on that costs equation, what's working from a sales standpoint and what's not? Is TCO and return on investment over the long term or are people saying forget that, what can save me today? And does that at all help your sale?

Well first of all, let me be very clear that even on a pure acquisition cost, we are very, very competitive. So it's not like you are way out of whack and you have to go sell. No, give me 10 million, I will give you 20, on the cost of downtime type stuff, that kind of stuff, kind of, what had a bogus strata in tandem. That's the reason they are no longer here. What people are really looking for is a competitive price upfront, which we don't have, but total cost of ownership is at the top of their minds. The fact of the matter is their budgets are still large, but they have come down appreciably. Now they are solidifying. They now are starting to say okay I no longer continue to expand without thinking of cost. What is the total cost of ownership? What is the acquisition cost? What is the cost to admit a service? What's the cost of service? And virtually every company is leading with that. That is what, if you can solve that, you can meet with any CIO in America. A year ago it was a technology discussion. Now it is can you either make me money or reduce my cost? And it is the whole package.

Right. Thank you.

Your next question comes from Tom Mancino of Pacific Growth. Please go ahead with your question.

Yeah, could you guys comment on the F85? Give me some quotes of a few of the acceptance, kind of how it is selling channel versus direct? Has it made you more effective in a CIFS market? Just comment on the platform and what you have learnt from it so far. Thank you.

This is Dan. I think we've learnt a lot many things about it. It's been moderately successful from my vantage point. It has allowed us to gather some branch office environment. In the survey, the volume in the US is driven by direct sales, quantity sales. The volume icon is driven primarily through resellers, and I would say it is representative of the size of your market. We experimented on certain issues with the F85, and I think we have learnt a lot. There is a classic customer that definitely wants to be able to upgrade those systems, and those with the internal drives, that are skuzzy drives, are difficult to upgrade. There is a classic customer at low end that still like to have failover, and the F85 doesn't support that either. So in many cases, we have found the need for an entry-level enterprise solution, in addition to the F85, to complete the product line up.

Dan the SnapMirror, SnapRestore run on as options on that platform as provided on the memo.

Yeah SnapMirror and SnapRestore are supported, but things like cluster failover are not, and where to a degree its accepted, it as an icon.

Great. Thanks guys.

Your next question comes from Dan Renouard of Robert W. Baird. Please go ahead with your question.

Sure, just a quick followup on the inventory. Jeff, can you just give us some more feedback on how much inventory you wrote down this quarter and then how much you expect the quarter we are in right now? And then if the charge you are going to take this quarter is all related to the headcount reduction? Thanks.

Yeah. The inventory write-down was more a revaluing related to cost reduction. So I would just say those two always go together. As far as the restructuring estimates, material write-downs or inventory write-downs are not a substantial part of that, if at all. Though I would just say that that is not one of our significant issues at this point.

Is it all headcount related? Are there other...?

Pretty much, yeah.

Okay, thanks.

Next question comes from Shebly Seyrafi of AG Edwards. Please go ahead with your question.

Yes, thank you. Can you give us some color on your HDS meet rate and win rate and how that has changed over the last say year or 6 months? Thank you.

Yeah, not the HDS that much, because obviously, they have no NAS offering even the one they announced I don't think is considered competitive. So they tend to be very much up against EMC in data centers where they have been in the mainframe centric piece of it. And where we have competed with them, I think we have done well. But in general, it seems like they are head-to-head with EMC at lower-cost better product type stuff, is how would pitch it. And where we have made our case, we haven't hit them as much. We have competed much more with EMC I think that is because of position in the market.

One more, do you have a specific timetable for the reduction of the 200 employees at your company? Should we expect it to be completed by the end of the October quarter or the January quarter? Or what?

It will be completed during this quarter.

Thank you.

Your next question comes from Tom Kramer of Merrill lynch. Please go ahead with your question.

Just a quick followup on the reduction in headcount. I just wanted to sort of square that with the demand comments that you have been making. Because I would assume that if you are seeing stability in orders right now and this really is the bottom, you would not want to actually be reducing headcount, and yet you are seeing kind of a nice pickup in July. I was just wondering if you could talk a little bit about your thinking in the timing of this reduction given that it does seem like demand turned somewhat in July?

Yeah, I think we're expecting it to actually be currently flat going forward which is what the forecast was, and you should understand we scaled the company to achieve basically about $350-400 million capacity level starting in roughly the first of this calendar year. If you look at the estimates I think we are prevalent for our fourth fiscal quarter, the expectations run excess to 300 million. We are currently running at 200 million, so we would have to resize the infrastructure first, see the largest percent reductions in the infrastructure areas, and the lowest percentage reductions are engineering and sales. As you might expect, in the sales case, as Tom mentioned, some of it was just rebalancing. We have more people in certain areas than there is opportunity, so we've decided to free up their research, to redeploy as appropriate.

Okay great. Thanks.

The other thing Tom is, we have focused on our partnerships, global partners, pretty aggressively over the last 9 months, and we are seeing a number of them, specifically IBM Global Services, kick in and bring us more coverage than we would have had before and specifically in the areas we want to go. So we're really focusing our team in making sure we get market leverage out of some of these big partnerships, and I think that is an area that we can continue to succeed more and more in, in the future.

Okay. Thanks Tom.

Your next question comes from Laura Conigliaro of Goldman Sachs. Please go ahead with your question.

Yes, thank you. Just a quick followup, and that is, a number of companies, actually both in the past and also now in this economic downturn, have really concluded that, partly by accident because of the way the market is driving and partly little bit by design, they are going to focus on changes in their business mix, in their business model, and in the mix of products that they are selling, so for example, dramatic increases in the sales of terabytes in order to sell more software. Is there any consideration being given not to just the moderate change or experimentation with elasticity, but rather a more dramatic one so that you can take advantage of your software sales?

No Laura. This is Dan. We've looked at many alternatives and concluded that we like the structure we've got right now. We think it allows us to win head-to-head in new customer environments and the win share. We don't have the kind of problems those other companies had that they're trying to react to.

Yeah. Laura my comment would be, this is Tom, after traveling extensively over the last 2 months and watching what happened at the latter part of this quarter, as far as meeting with CIO's and watching the deals that we did get selected for, I think our message is right on what they want to hear. And they basically say if you could prove that to me, we are going to do business with you. So now where we were at, is we really want to make sure that we take advantage of the sales campaigns we have in order and close, but I don't think it's like we got to go find a new strategy at all. I think if this economy didn't hit a wall, we'd be having a very different conversation. So we are not searching for strategy whatsoever. We are just going to execute the one we have very, very efficiently.

I guess one other thing I guess I should add is we ran kind of pushed terabytes and then followed with software there, actually increased the number of solution bundles we have, which wrapped together a complete system solution including the software, for mirroring environments and failover environments and a variety of others. So we have actually created more sophisticated bundles where the hardware and software are included together in a single wrapper.

We have put a significant amount of effort, as Dan kind of described in the conference call, to understand the customer environments, what is driving their business initiatives. And he outlined some of the things that were important in each of the vertical market sectors, and I think that is reflective of how we are focusing on this.

Thank you.

Gentlemen I'm showing no further question at this time, please continue with your presentation or any closing remarks.

Well thank you ladies and gentlemen for joining us today, and we look forward to seeing you at this time next quarter. Thank you again.

Ladies and gentlemen that does conclude your conference call for today. You may all disconnect, and thank you for participating.