NetApp Inc (NTAP) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Network Appliance first-quarter conference call.

At this time, all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question-and-answer session.

As a reminder, the conference is being recorded today, Tuesday, the 19th of August, 2003.

I'd like to turn the conference over to Mr. Dan Warmenhoven with Network Appliance.

Thank you.

Good afternoon and welcome to the Network Appliance earnings release conference call for the first quarter of fiscal year 2004.

This is Dan Warmenhoven, and it is my pleasure to welcome all of you and to thank you for taking the time to join us today.

Today's conference call is being webcast over the Internet and will also be available for replay on our web site at www.netapp.com.

With me on today's call they are Tom Mendoza, President of Network Appliance and Steve Como, our Senior Vice President of Finance and Chief Financial Officer, and also Ed Denehan (ph), recently promoted to Executive Vice President of Customer Satisfaction, which all of us are very excited about.

I am very pleased to announce Ed has moved into this new position.

Many of you met Ed at our analyst day last year and are familiar with his success in leading the sales force transition and the enterprise over the last three years.

Prior to joining Network Appliance, Ed spent 12 years at EDS and a number of senior management positions developing and delivering programs and professional services to enterprises, most recently as President of the EDS technology's sector strategic business unit.

Ed is uniquely qualified to fill this newly created role.

We are also very fortunate to have another uniquely qualified individual assuming the leadership of our worldwide sales team.

Mr. Rob Salmon (ph) has been promoted to Senior Vice President, Worldwide Sales at Network Appliance.

Prior to stepping into this worldwide role, Rob led our North American sales organization over the last three years and was instrumental in developing the company's named account program, has been a key contributor to the company since it's very early days.

Ed and Rob were partners in transitioning our sales team into the enterprise and they're now partnering to drive an internal companywide initiative called total customer experience, which is designed to ensure that customer satisfaction is always the number one measurement of success at Network Appliance.

I would like to congratulate both Ed and Rob on their new roles in Network Appliance.

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 statement or projections.

Factors that could cause actual results to differ from our projections include, but are not limited to, customer demand for products and services and any decline in general economic conditions.

Other equally important factors are detailed in the company's 10-K and 10-Q reports on file with the SEC and also accessible through our web site, all of which factors are incorporated by reference in today's discussion.

At this point, I'd like to turn the call over to Steve Gomo, who will review the financial portion of the press release we issued today.

Following Steve's comments, I will share my own comments on events during the quarter.

We'll then move to a financial outlook and conclude with a question and answer period.

At this point, I'd like to introduce Mr. Steve Gomo.

Thanks, Dan, and good afternoon, everyone.

Our press release is available on the business wire and our web site.

I'd now like to provide some commentary about our results for the first quarter of fiscal year 2004.

We experienced very strong revenue growth during Q1.

As indicated in the press release, revenue for the quarter $260.5 million, up 26 percent year-over-year from the $206.8 million reported in the first quarter of last year.

Revenues increased 8 percent sequentially from the $241.6 million reported in the fourth quarter, resulting in our seventh consecutive quarter of sequential growth.

The impact of currency on sequential growth was approximately 1 percentage point, significantly lower than last quarter as a result of our new currency hedging program.

The currency impact on the yearly growth was just under 4 percent.

Revenue from services, which includes hardware support, professional services and educational services, was about 9.5 percent of total revenue, down slightly from the 10 percent reported in Q4.

North America contributed approximately 58 percent of total revenue, coming down from the 62 percent reported in Q4.

Europe contributed 26 percent of total revenue, about the same as the prior quarter.

Asia-Pacific had a particularly strong quarter, growing 40 present sequentially to contribute 16 percent of revenue, up from 12 percent in Q4.

Software as a percentage of total revenue was approximately 27 percent, about a percentage point lower than 28 percentage points we reported in Q4.

The add-on software products were approximately 18 percent of total revenue and software subscription upgrades were approximately 9 percent of total revenue.

Gross margin for the quarter was 60.5 percent, down from the 61.4 percent reported last quarter.

This is due to three factors.

First, half of a percentage point was related to onetime or unusual effects that are not expected to reoccur.

These items include transitional costs related to the rollout of our new Oracle ERP system and other miscellaneous minor expenses.

Second, about 3/10ths of a percentage point was related to nominal mix shift, including the slight decrease in add-on software, an increase in near-store (ph) units and capacity and increased storage capacity for the filer product line.

Finally, a decrease of service margins contributed about a tenth of a percentage point to the decline.

Service margins were 21.7 percent, down 1.5 percentage points from the 23.2 percentage points reported in Q4.

This change in services margins this quarter reflects a little over $300,000 in additional service cost and investments, primarily in professional service and service partnerships.

That's a relatively small number in terms of our overall business.

As an example of these investments, we've grown our professional service organization headcount by almost 25 percent over the past year in an environment where overall headcount has been relatively flat.

We plan to meet our customers' and partners' expectations that we will continue to invest in these areas and as a result, we expect service margins to stay in the low to mid-20s for the remainder of the fiscal year.

Pro forma operating expenses totaled $123.2 million, increasing $5.3 million from the $117.9 million reported last quarter.

Expressed as a percentage of revenue, operating expenses were reduced to 47.3 percent, an improvement of 1.5 percentage points from the fourth quarter.

This is the third consecutive quarter of improvement in pro forma OpEx as a percentage of revenue, even as we make selective, strategic investments which will benefit us over the long term.

Other income was $3 million, up approximately 13 percent from the $2.7 million we reported in Q4.

Pro forma tax income for the quarter was $37.3 million, or 14.3 percent of revenue, up 6/10ths of a percentage point from the prior quarter.

The effective tax rate for the quarter was 23 percent.

Pro forma net income for the quarter was $28.7 million, or approximately 11 percent of revenue, up 4/10ths of a percentage point from the prior quarter.

Pro forma net income per share was 8 cents based on a weighted average of approximately 358.5 million shares outstanding.

This quarter, we reported GAAP net income of $27.1 million, or 8 cents per share.

We have provided a reconciliation between pro forma and GAAP net income in the condensed, consolidated statement of operations of our press release.

The difference between GAAP and pro forma includes amortization of intangible assets, stock compensation, net gain or loss on investments, gain on the sale of intangible assets and the related effects on income taxes, as shown in the reconciliation on the investor relations section of our web site at investors.netapp.com.

Now turning our attention to the balance sheet, cash and cash investments at the end of the quarter were $650 million, up $31 million from the previous quarter.

Cash generated from operations during the quarter was $56.8 million.

Capital purchases of plant, property and equipment were $12.3 million during the quarter, while depreciation and amortization was $13.5 million.

Last quarter, we announced a stock repurchase program under which up to $150 million of outstanding common stock may be repurchased.

We repurchased approximately 2.2 million shares of outstanding common stock during the quarter at an average price of $15.83 for a total of $34.8 million.

Days sales outstanding of accounts receivable were 54 days, down from the 57 days reported last quarter as collections in Europe were particularly strong.

Inventory turns for the quarter were 10.6 times, down from 11.8 in the prior quarter.

The deferred revenue balance is $189.3 million, up $14.9 million, or 8.6 percent quarter-over-quarter, and up 64 percent from the $115.4 million reported a year ago.

Headcount at the end of the quarter was 2359 employees, and that is up 14 people from last quarter.

In closing, we made great progress during the quarter.

Revenue growth was very strong, particularly in the Asia-Pacific geography.

This revenue growth has allowed us to make selective strategic investments in our services organizations and in our new engineering operations located in Bangalore, India.

We made solid progress towards our target business model as gross margins remained strong, operating expenses declined as a percentage of revenue, operating leverage improved for the third quarter in a row and cash generation was strong.

I am very pleased with these results.

Dan, I'm going to turn the call back over to you.

Thank you, Steve.

I'm also very pleased with the strong performance during the quarter, which represents our fifth consecutive quarter of accelerating growth based on year-over-year comparisons.

Significant customers during the quarter included Ball State University, Ford Motor Europe, John Deere, the Special Operations Command and Ticketmaster. (indiscernible) Nissan selected NetApp for global multisite Windows file server consolidation project.

Continental Airlines chose to deploy a Net App (indiscernible) 900 base solution to house fare and schedule information for a Linux-based booking engine intended to help Continental achieve significant new cost of ownership advantages while maintaining current service levels.

Near store (ph) had another great quarter, accounting for a little over 10 percent of revenue.

We shipped approximately 2.7 petabytes (ph) of near store ATA storage during the quarter, reflecting a quarterly growth rate in bytes shipped over 40 percent.

Initial sales of our SnapLock product designed to meet the regulated data requirements of the SEC and other regulatory agencies were very strong during the quarter.

We are very pleased with the new mobile information protection service being offered by EDS based on Near Store.

The managed service provides information protection and on-demand recovery service that allows enterprises to easily and cost effectively protect data stored on desktops, laptops and PDAs.

A solution which, as I said, is based on the Net App Near Store product is as connected software and EDS managed services and would typically include thousands of clients and several hundred terabytes of storage.

EDS launched the service in July and has already deployed 50,000 seats in six countries around the world. (indiscernible) customers during the quarter included Visa debit processing services and Siemens business systems.

Siemens business services deployed our FAS-940 cluster SAM (ph) solution with Snap Manager from Microsoft Exchange 2000, along with a near store R100 for remote data protection.

We now support (indiscernible) full family of multicable storage networking products for the Net App FAS-900 and F-800 series filers and fiber channel SAN deployments.

In addition, the partnership has also delivered the ability to back up data on NetApp's storage systems through a McData storage area network to tape libraries or near store.

We've recently begun a program to (indiscernible) SCSI adapter vendors can self-qualify of Net App support solutions, in conjunction with the Net App target I-SCSI storage systems.

Program uses an independent third-party company Finisar (ph) to supervise qualification testing, which is carried out at Finisar's Medusa (ph) Labs facility in Austin, Texas.

I-SCSI adapter vendors whose products complete testing can be marketed as NetApp supported.

The Intel Pro 1000 IP storage adapter was the first to complete the program and recently Adaptec 7211-ISCSI HPA completed the program.

Other vendors ISCSI adapters are currently in the testing process.

We're also the first company to support Windows, Novell Net Ware and Linux negative I-SCSI initiators on Intel-based platforms.

Microsoft's I-SCSI initiators software driver supports Microsoft Windows 2000 client and server versions Windows XP and the recently launched Windows Server 2003 family of products as available via Web download at no charge from Microsoft's web site.

Novell's I-SCSI initiator software supported a Net Wear 5.1, 6.0 and 6.5 as available for download at Novell's web site.

The Linux I-SCSI software initiator was originally developed by the Open Source community on the source forge (ph) developer's site and is now being supported by the leading Linux distributor for Red Hat and Susie (ph).

Customer acceptance of I-SCSI target license for Net App filers has been outstanding and over 20 percent of the currently shipping filer models that reported uses statistics (ph) back top us have enabled the I-SCSI protocol.

I-SCSI is clearly something our customers are interested in using to migrate captive direct attached storage to the network and we're leading the market in making the process as simple as possible on platforms that are appropriate for these environments.

This quarter, we expanded our commitment to enable inflexible interoperable management solutions for enterprise network storage environments while providing the open access to our managed on-tap suite of applications programming interfaces, or APIs.

The managed on tap EPI suite and software developer's kit are being offered free of charge through the NetApp advantage developer program to any company wishing to develop tighter integration with data on tap, the highly optimized and scalable microkernel that powers all of our platforms.

In response to enterprise customer demand to support solutions for Network Appliance, more than 40 companies have applied for the advantage developer program.

The early adopters of the managed on tap EPIs include leading storage management vendors, such as APPIQ, BMC Software, Computer Associates, Creek Path, Fujitsu SofTec, NewView, NPP, Storability, Tech Tools, Terra Cloud and Veritas.

We were very pleased to announce last week our expanded strategic partnership with Veritas software.

After a number of years of successfully integrating our joint solutions for advanced data protection, high availability and storage resource management, Veritas and Network Appliance have expanded our partnership to cooperatively develop and deliver integrated solutions to customers through joint sales and marketing, product integration, and qualification and cooperative technical support.

By combining our offerings in a robust solutions, together we can help our customers gain greater performance and value from their storage infrastructures.

During the quarter, we announced new distribution agreements with the North American computer products group of Aero (ph) Electronics Inc. and Avnet Hallmark, value-added distributors of enterprise servers, storage, software and services.

These distribution agreements enable Arrow (ph) Electronics and Advent (ph) Hallmark (ph) to help a broad range of value-added resellers market and sell NetApp enterprise storage solutions.

Both distributors will offer their respective VARs, business building tools, training, marketing, sales and technical services, allowing them to achieve competitive advantage and improve profitability through the design implementation of innovative storage solutions from NetApp.

In summary, this was a terrific quarter for Network Appliance.

As Steve mentioned, our strong undergrowth is allowing us to make strategic investments to fuel future growth and market expansion, while continuing to steadily return to our target business model.

Our business, our customer mix, our expanding partnerships and our leadership position in network storage are all clearly strengthening.

I would like to invite each of each to learn more about the progress we're making by attending our annual financial analyst and investor event on December 3rd, 2003 in Santa Clara, California.

For more information or to be added to the invitation list, please contact our investor relations department.

At this point, I would like to turn the call over to Steve for the guidance.

Thanks, Dan.

Now I will comment on our business outlook.

This outlook is based on our current business expectations and reflects our pro forma presentation.

Again, I will remind you that we're making forward-looking statements and projections that involve risks and uncertainties.

Actual results may differ materially from our statements or projection.

We expect our momentum in the marketplace to continue and project second-quarter revenue to grow sequentially by 3-7 percent.

This projection reflects year-over-year growth rates of 25-30 percent.

Gross margins percent should be about flat with the 60.5 percent we reported this quarter.

We expect to see continued improvement in operating leverage going forward, and we expect that income to grow but (ph) second-quarter pro forma earnings per share of 9-10 cents, depending on the revenue levels achieved.

Now I will turn the conference back to you.

That concludes our remarks for today, so at this point, I'd like to open the conference call for questions.

I'd like to ask that each of you limit yourself to one question so we can go through the rotation expeditiously and address everyone in a timely manner and keep the call to one hour.

Thank you.

Harry Blount, Lehman Brothers.

Thanks, guys.

Good quarter.

One thing that I did not catch during the commentary, and if you said it, I apologize for asking the question.

But I wanted to get a little bit of a better sense on contribution from some of the new initiatives, i.e., the new lower end product Arrow Avnet potentially, as well as Hitachi and any comment on verticals?

Let me rattle off a couple.

The vertical contribution was about the same as last quarter in aggregate, (indiscernible) the six we track.

We're no longer able to pull the data precisely like we did prior because of the change in our ERP system.

We don't quite get access to the vertical category, but it looks like it was, at least on anecdotal, of a pretty consistent.

If anything, the life sciences area was a little weak.

The financial services area continued to lead the pack, major manufacturers were up significantly in the mix.

There's puts and takes, but it was generally pretty good, and aggregate came out about the same in terms of percentage.

On the FAS-200, which I'm sure is part of the question, I think we shipped somewhere a little over 200 units of revenue, and it generated roughly a little under $5 million, or about 2 percent of the total revenue, and actually just getting off the ground.

There is virtually no contribution this quarter through either the two reseller partners, which were Arrow Electronics and Avnet.

They were really just getting ramped up and getting started.

I expect that to start kicking in next quarter.

HDS, we basically doubled the unit volume, but it is still in the double-digit category (indiscernible) it was up a pretty small base.

The funnel looks very good.

But as I think you know, we started selling that product jointly I think in the April timeframe, and we're just now getting near the end of the normal sales cycle for that.

So I expect to see additional closures in the upcoming quarter.

It was a good quarter, program's going well, not a big number in revenue.

Great, thanks.

Dan Renouard, Robert W. Baird.

Thanks.

Wondering if you could maybe give us some help on where you are seeing the strength, what kind of areas?

Is it still mostly financially driven or maybe you're starting to see some freeing up on the app side?

If you can help us, that would be appreciated.

Actually, I don't see much difference on the apps side.

One of the things that we bet on about a year ago is that people will invest in the following areas.

One was (indiscernible) consolidation, second one Windows consolidation, which is one of the primary reasons we're winning so much in the financial institutions.

We've won (ph) every Windows consolidation on Wall Street I believe in the last 18 months, and a lot of them are very, very big global deployments.

The third one, database consolidation.

Clearly, we are gaining tremendous ground with Oracle 9 Iraq (ph) around the world.

We announced last quarter that NTT data, Net App and Oracle would push Linux 9 Iraq (ph) into Japan in a big way.

That is one of the reasons the strength is there.

And the last one is Linux consolidation, which we're seeing quite a bit on Wall Street and in energy.

And we obviously -- that is basically data center and network attached storage.

And we have 4000 in Linux (indiscernible) a company called Nvidia (ph).

We have thousands of others at the companies.

So Wall Street is very aware of that and we're winning that.

Once you start to do all that consolidation, what you get is not adding money, it's saving money.

The next question is how do I recover?

And that is where our Near Store family's strength.

That's why you see that is becoming extraordinarily popular, the fact that they can use the same architecture to consolidate and then recover from.

And of course, if you can recover quickly from disk (indiscernible) tape, you can do more consolidation.

But the third piece, the area that most companies look at and don't invest in is -- how do I do is disaster recovery?

And that's because it typically is expensive disk to expensive disk over dedicated wire, mirrored on both sides at least twice, maybe three times.

With our recent announcement of a product called Snap Balt (ph), it allows expensive disk of NetApp or other peoples' make to come to our inexpensive disk and get backed up and recovered from, and we can do DR from our own sites for (indiscernible) expensive disk to inexpensive disk.

All the same file system, all of the same family.

So now, a customer says -- if I have this right, I can consolidate more, I can recover more.

A lot of information that wasn't being protected can be protected and I can backup other people's stuff to that same device.

We say yes.

That is a tremendous driver within the enterprise.

That is what -- I really believe that -- and if I could add one more.

Many companies are now looking at their remote sites as if they looked at data centers.

There's a lot more data there, they've spent a lot more to manage that information than they ever thought.

We have won a lot of deals where -- this is why Windows consolidation is so popular NetApp.

They can put us out in management (ph) as black boxes.

The reality is our systems are simple enough they can cut down how many people they need to manage it secondarily to coming back to our Near Stores and backing it up centrally and taking the dollars that were used for backup out of the equation for big savings.

Those are the four areas I think we're in a lot of value of basically driving our growth.

If I could follow-up real quick on that.

How would you characterize the installed base, the penetration on the installed base of Near Store?

Is it 5, 10, 15 percent -- where are we in that process?

Scratching the surface.

If you look at the NetApp installed base, the Near Store population of presentation of that is probably less that 10 percent.

But as Tom said, with the addition of Open System Snap Vault, the market we're targeting has a lot of non-NetApp installed equipment, so we're just really scratching the surface on that.

Thanks a lot.

Robert Montague, RBC Capital Markets.

Congratulations, great quarter.

I wondered if you can comment on the dynamics of the federal government pattern?

And also, are you seeing any particular competition from the new file-enabled Clarion?

Thank you.

The federal business is actually down a little bit this quarter.

A lot of our federal business is to the intelligence community and others, we saw a surge in the buildup prior to Iraq.

And if you look at our Q1 performance, it actually came off a little bit.

But it is still very nice and it is still very good.

The government's fiscal year ends in September, so we would expect to see their end-of-year buying patterns.

I might want to point out -- we are now also kind of almost a global standard for the allies.

We have now basically become the standard in Australia (ph), which has got a major piece of the intelligence gathering community, you know, satellite tracking, etc.

That's all now based on Network Appliance, a link back into the U.S. (indiscernible).

I'm not sure I understand the question on the Clarion family.

Are you referring to the ATA drives in there?

Not necessarily the drive, but it seems like they have been adding file capabilities to the previous block positioning of the Clarion and (MULTIPLE SPEAKERS).

We haven't really seen that.

The mass solution that they have really has not really been pleasant much in the competitive engagement so far.

I guess maybe since the mass version of the Clarion on family -- is that what you're referring to?

Correct.

We've not seen that much in field.

I would say, typically, when we confront their product, the reason that people like our stuff is that it is simpler.

People have figured out that network attached storage is not simple.

Network Appliance's network of storage products is simple.

So when they bring it in, and this has been true from every offering that they have put out so far, they find it is much more difficult and complicated than they expected, it does not perform as well as our stuff and you can't scale it like our stuff.

So very quickly, unless they try to just win on a low price point, but we have a tremendous advantage when you go through one family that goes top to bottom.

And onto Dan's thing on the defense thing, just as an aside, the Australia win was a humongous win.

I just got back from there.

That affected the whole country.

You saw that Asia-Pacific was up (indiscernible) Australia was leading the charge in numbers of accounts, like Telstra and some others.

But that defense one was huge.

We also have a huge penetration over the last year, anyway, or six months into Israel and in England.

To round out Dan's comment about the allies.

And all those intelligence communities are very connected, as you know, and the NetApp appliance that can scale very well and you can manage it simply and you don't have to put a lot people around it is very, very important (indiscernible).

Just pull up the competitive data on the NS600, which is the device you're referring to.

And during the quarter, we saw it only a single digit number of times in terms of deals.

Great, thanks.

Glenn Hanus, Needham & Company.

Maybe more broadly, you could comment on the geographic trends and expand a little bit on the strength you saw in Asia, and sort of how much of this is sort of company specific by region, and then talk about more generally where you're seeing strength and weakness from a sort of an IT spending standpoint and sort of give us the color on company specific, and then sort of general by IT spending strength and weakness?

Thank you.

That's a great question.

I'll try to eat that one myself, how much is driven by demand versus how much is just share gain.

I'll give you kind of my sense of it.

In Asia-Pacific, Japan is on a rebound relative to spending.

I'm not sure we have any significant share gain there, but the market in general is coming back and getting a little bit stronger and we're rebounding with it.

So our Japan business was up.

Different story in Australia.

I think the spending in the market is kind of flat and I think we're significantly gaining share, as Tom said.

Similar situation exists in Europe.

The Central European area, which Germany is kind of the center point of that, is very weak.

It is very sluggish in an economic sense at the moment.

The rest of Europe is doing extremely well, including the Latin countries -- France, Spain, Italy and also UK and northern Europe.

In those areas, I think it is largely relatively flat markets where we're gaining share.

I feel very comfortable that that's the case in northern Europe, in particular.

I think it's just an outright share gain.

In the U.S., I think the markets are pretty flat.

Our business is up only 1 or 2 percent quarter-over-quarter, which given it is our first fiscal quarter, it is actually a positive sign.

North America normally slumps in Q1 after a big Q4 finish.

And here, I think it is again mostly share gain.

I don't see any particular change in the relative strength of verticals and others.

I don't sense that there is a buying spree going on, although I do sense that there is some pent-up demand.

You hear a lot more discussion these days in North America from customers about replacement cycles and upgrades and things like that.

But I think it is a combination of both share gain and some increased market demand in specific countries, like Japan.

I do think that there is a caveat to that Japan.

Last year (ph) our largest resellers was Fujitsu and TGC (ph) and they have arms into everything there.

It's very clear that our competitors' business fell off dramatically last year.

Huge, 40 percent or more in almost every case.

What I was told by both of them -- the only business for them that's growing is Network Appliance.

So we grew our business last year in a very tough economy.

And what that has caused is big, big channel partners like NTG (ph) Data adding on last month, it was not insignificant.

I believe there's 50 percent of EMG's business in Japan.

So for them to come on on the front page of the paper with me, the President of Oracle and their President to say they're going to put a major emphasis on Oracle 9 Iraq after coming over here and visiting with Oracle, a major data company that uses us for database, was huge for that market.

Our big resellers are now making it very clear - they're putting their resource and demands behind NetApp.

And the reason is that you cannot save people money -- if you don't have scalable architecture, you cannot sell it in Japan.

One of those people told me they were offered an exclusive on the E-10K (ph), and they said they did not want it.

Neither did the other company.

And the reason is there is no high-end market.

You don't see big, big boxes rolled in.

So anybody who has followed the NetApp story knows this is right down the pike of what we have always sold.

And I believe that Linux will be a very big player in Japan.

It hasn't been, but when you get NTT data pushing it, it will be.

Thanks.

If you want to expand any more on -- you have had a number of press releases on Linux and Red Hat and kind of give us a sense of the kind that market opportunity and the growth potential related to Linux, that would be helpful?

At the moment, the market is very small.

Linux is a very small piece of the total server market.

But we think we're uniquely positioned to really be the preferred solution for the storage on Linux and we do think that that is gaining popularity.

At the moment, we think most customers are evaluating how far it can go, but they seem to be very comfortable with the fact that Linux has a major role in their future.

And I see that across the tech sector, semiconductors and software companies, the energy sector for seismic exploration, financial services, including things like derivative analysis and other sophisticated apps.

And we think that Linux takes on a significant piece of the -- a disproportionate amount of storage, let's put it that way, relative to the server revenues.

Linux servers are inexpensive, but they use the same storage as the high-priced servers and they have a preference also for mass, because of the broad connectivity.

So we're really focused on making sure that Linux is extremely efficient in its utilization of storage and that we are I think conjoined with that to be the preferred solutions.

And to broaden that comment -- if people were to look at the market over the last couple of years, you would have said in the data centers, you typically see SAN, and the distributive (indiscernible), you see (indiscernible).

When you bring Linux blades in, thousands of them for development, that is now data center mass (ph).

That's how everybody views it, because you have to share it.

And the other thing is I-SCSI coming now gives you distributed SAN.

If you buy a Linux blade, if you're in a data center and it cost an awful lot to connect to big Sun plus (ph), so you don't care.

If you go outside that data center, you don't have filer, for number one.

And number two, you're not going to pay a lot to connect to Linux blade.

So it leads you right back to NetApp, to Ethernet.

And the same thing with our I-SCSI, as Dan pointed out, being given away by Microsoft, we're seeing now in a distributed environment, people are able to move away from directed attached storage, so here's where they look at NetApp.

Now they can -- nobody wants direct-attached storage, yet we haven't moved as fast as we expected as industry, why? (ph) Those are the reasons.

They haven't been able to go outside the data center with SAN, they don't know about (indiscernible) in many cases, and it is too expensive to connect to SAN.

Now they have strategies in place at many, many big companies, including most of Wall Street, pushing I-SCSI outside the data center, taking advantage of network-attached storage capabilities, bringing Linux into the data center to complement the other offering.

Basically, people are getting away from technology evangelical arguments and saying what can save me money, move me away from direct attached storage to allow me to lower my cost.

That's the net net of what is going on and the flexibility of our architecture is planned very well.

Thank you.

Laura Conigliaro, Goldman, Sachs & Co.

Actually, it is Brendon.

Laura's on HP right now.

A couple of questions.

First, with software subscriptions declining a bit and services growth slowing down, how much stronger could this quarter really have been if we saw the normal patterns on those lines?

And secondly, given the momentum you guys have here, is there any chance we're going to start seeing you be a lot more aggressive on driving pricing down to gain volume through the back part of the year?

Brendon, part of the reason the software as a percent of revenue is down is because the product revenues are up, it's just a mix issue.

The subscription rate in bookings was higher than the revenue contribution.

Those subscriptions are amortized essentially over the life of the subscription agreement, so you see a smaller percentage flowing in.

So as product revenues surge up, the mix shifts because the subscriptions go down.

And to a certain degree, that's the same impact on service.

But we're not really trying to manage the mix as we've said before.

We're really trying to really just push the strategy that we're the leading product provider and the software and services are in support of that primary strategy.

I am very happy with where we're at this quarter, relative to the mix.

On the pricing question, we're trying to drive the pricing down.

We've cut prices on the disk drives.

We have introduced a new low-end system.

The FAS-250 is off to a great start.

For the first time, we have an ASP that is right around the 20 K range for a very attractive offering.

And it is pushing down the entry point quite nicely.

I think it's the first really channel-ready product we've ever had in our history.

So we're not looking to get incredibly more aggressive on pricing beyond where we're already at.

We've typically got about a 2-3 times advantage in price, relative to most of our competitors for completely configured and deployed solutions.

And price is not the obstacle relative to us gaining additional shares.

We're not going to whack the prices, we're going to cut the entry prices, going to keep the disk prices down.

But I think we're going to grind down the cost of the ATA systems pretty good.

We're at the 24 terabyte level of Near Store.

I think we're now down at well under a penny a megabyte.

So we're going to keep rushing on those fronts.

But you won't see a sharpness in gross margin impacts, that's for sure.

We think we have the wherewithal to keep the margins in the 60-plus range and still not have that be a (indiscernible) revenue expansion.

Thanks a lot, guys.

Shebly Seyrafi, A.G. Edwards.

Thank you very much, and nice quarter, Dan.

I may have missed the (indiscernible) cashing (ph) breakout.

If you can repeat that, that is one.

But my question is -- do you sense any disruptions due to your distribution channel changes to Aero and Avnet over the next quarter?

You said that that did not fully play itself out yet.

And additionally, do you recognize any sales to borrowers or distributors based on sell-in?

Let me deal with the reseller one first.

We've really seen no volume through or Aero or Avnet yet.

Let's just get ramped up.

We do not recognize revenue on sell-in.

In fact, this is almost a virtual two-tier.

Aero and Avnet manage the VAR interface and the credit risk, but the systems are still a build-to-order.

Basically, the order is placed on us directly from the VAR, and it is shifting (ph) to the VAR end-user directly and Aero and Avnet are the financial middlemen.

And there is intended obviously to always have a contractual PO.

But the credit risk from our vantage point, as with Aero and Avnet, and the box is ordered directly from the end user or VAR and goes directly to that end user or VAR.

So it is completely configured.

So there is really no stocking or anything else, there's no sell-in.

The first question on the mix, Near Store is a little over 10 percent.

The cashing pieces were down a little bit.

I think it's on the 6 percent range.

I think last quarter, it was either 6 or 7, so it's pretty flat with the mix last quarter.

And we're very satisfied with that kind of mix, so the rest is basically filers.

The other part of your question was -- do we anticipate any disruption because of that channel, and the answer is no.

Let me tell you how this thing has shifted.

About a year ago, Ed Denehan and Rob led a strategic partners meeting -- global partners, excuse me -- for large resellers.

IBM Global Services, Forsyth (ph) Systems, Accenture in some cases, but some big, big resellers for us.

And that has actually taken off tremendously well.

We also have a lot of other resellers who don't do anywhere near that volume, but ended up it is in aggregate quite a bit of volume.

So we said why don't we get two big companies in the middle to help manage that mix and add others of that level.

And we believe that we can get to a large part of the market that we have not been able to get to.

We focused our sales force down to mostly major accounts in some geography, and we have been pushing the resellers towards the rest of it.

And I think resellers like us for two reasons.

Obviously, we're not overdistributed, and two, we allow them to add things around our product in the services away that allows them to increase their margins.

I think we can help them get more margin on the front end than any other vendor because we have better margins than any of our competitors.

And they have ways to help other customers integrate in applications, things like that, around our equipment that make them very, very happy with the end result.

So I think the biggest shift for NetApps in the last two years is it used to be very difficult, it was a push scenario for us to add partners, both as we're talking about -- plus Veritas, plus Oracle.

Now, it's completely the opposite.

People see that we can help save money and they want to be on our side.

(indiscernible) the total global mix of direct to indirect this quarter was more indirect than direct for I think the first time ever.

It was like 51/49, but the point is we've been building up the indirect support for quite some time.

And at this point, it's already 50-50.

Is that one of the reasons that your expenses came down as a percentage of revenue, that increased percentage to the distribution channel?

Not particularly.

I think it was just driven by -- and in fact, when you look at the sales line, there's actually some onetime events in there that kind of drive it up.

Like our annual sales kickoff was $2 million worth of expense or something like that, 2-plus.

So it's almost 1 percent of revenue all by itself.

That occurred in May.

Also, the sales club is partially in there.

This is just gaining efficiencies across the board.

Part of it is obviously as the revenue goes up, right, if you hold expenses flat, the percentage of revenue comes down.

But it is really across the board kind of efficiencies.

A lot of it is tied to the Oracle system.

We have reengineered a lot of our sales order processes, we've rolled out a Seibel system to try to get more efficiency there, we've pre-engineered the back end of that system this quarter.

I don't know if you realize it, but we did not make a big deal about it, but we changed our ERP system in the middle of the quarter.

One of our partners referred to it as a pianist doing a brain transplant in the middle of a concert.

It was a challenge to say the least, and it kind of slowed down the business (indiscernible) during fiscal June (ph).

But all of that is reflected and we're just trying to reengineer our business processes and everything else, getting more leverage to the channel to the small piece of that, but that is not where the primary leverage comes from.

I think that a lot of it just had to do with a very disciplined approach to managing our expenses, which actually and frankly, we've been employing now for several quarters.

And I think the results are not shown just in this quarter, but if you look back, there's kind of a trend developing here.

At the same time, I think as Dan has mentioned, we certainly mentioned in the script, we continue to make selective investments that are going to help us out over the long haul.

So those are the trade-offs that we're making as we go forward.

Thank you.

Peter Labe, Nutmeg Securities.

Thanks a lot.

I guess I wanted a little bit more amplification on some of the things.

One, book to bill.

Maybe you could tell us a little bit about that.

Second, if you break out services from products, your product revenue has been accelerating.

Do you feel that is due to application, due to industries served, or maybe you could explain that a little bit better.

And it looks like more of the same in the upcoming quarter, is that correct?

We don't give out the book-to-bill ratio per se, but the bookings exceeded revenues in the quarter.

A large chunk of the differential (indiscernible) in the deferred.

As Steve mentioned, the deferred was up significantly.

That is really driven by both the software subscriptions, and also service and maintenance contracts.

That mix has been shifting more and more to deferred.

I think as he said in there, the deferred revenue has grown like 64 percent year-over-year, which was very significant.

And I think that is going to continue.

That's sort of a reflection more of the nature of our customer base shifting more to enterprises that want to have the guaranteed support and ability to upgrade all of the rest.

On the product going faster in the services, I think as the growth rate accelerates, you're really going to see it show up on the revenue line in the product category before you see it in the service category, because the services are so long term in nature.

We put it on the book as -- on the balance sheet, rather, as deferred revenue, and it flows off ratably over time.

So the faster we grow, the more the mix is going to shift towards product.

And maybe you will see more deferred grow at the same time.

I think there's one thing -- Peter, I know you've followed us for a long time.

People who have followed us, if you understand what (indiscernible) doing right two years ago, I remember we had an outside firm look at us, and they said -- customers, we clearly customers and people who didn't buy it, and they would say, especially if they didn't buy it, your sales force is too evangelical.

I remember thinking, well, if you only have one product, you're going to be angelical.

We tell them that's the answer, what's the problem, right?

Well today, we walk in in a whole different tone.

We can sell you -- we don't care what wire you choose to go over.

It could be a SAN, it could be NAS (ph), you could do it all on the same box, you could go top to bottom.

You want to go I-SCSI, that would be great.

If you want to use our DAPS (ph) interface, that would be great.

However you want to do it.

I can tell you that that has dramatically shifted, because I haven't been in a debate like that with a customer in over a year.

What they tell us is what I like about you guys, no matter what range I want to look in, I can buy one, I can change my mind, I have investment protection for the future.

Taking that off the table has done more to increase the productivity of our sales force and make us look like an enterprise player than any other thing we've done.

So sometimes people try to say, well, how much is in this bucket and how much is in that bucket, saying (indiscernible) we don't even think about it that way anymore, except to make each product successful.

But at the end of the day, we want the customer to know that he can go whichever direction he wants, we can run whichever programs he wants, we have good relationships with his backup vendors.

Obviously, Veritas is the key one you want to be with, Oracle is the database you want to be with.

My SAP is on NetApp.

It is being pushed by Fujitsu Siemens, primarily in Germany and actually all over the world.

So these are the kind of things we didn't have years ago.

We're always answering these questions.

We never have to that in front of a customer anymore.

Great answer.

Thanks.

Naveen Bobba, Bear Stearns.

Thank you.

Very nice (indiscernible).

Just a couple of things.

First in pricing, Dan, you mentioned your pricing actions.

But what are you seeing from your competition?

Are you seeing continued rate of price declines, or have you seen some moderation in rate of declines?

And second, do you plan to continue the shared buyback program?

On the competition, we have seen a fairly continual decline in the pricing.

There's many ways to look at this particular question.

We've felt for some time it has been coming down at about 40 percent per year in cost per megabyte, and I mean for an extended period.

Some years, it's a little faster, some a little bit slower, but kind of nominally, 40 percent.

I think that trend line kind of continues.

At the moment, it's not coming down so much on the fiber channel server drives, but the mix is shifting more towards ATA, and that's creating a decline for the total solution.

But a megabyte is a megabyte, right?

I don't care what style it is.

And I think you are seeing the same thing basically across the industry.

We think we've been able to maintain the same price separation advantage to ratio between us and the other suppliers for several years.

And our prices have declined consistently with theirs.

The mix issue you see reflected in the gross margin is not a reflection of discounts and that things like that.

Let me answer the question that way.

The discounts have actually trended down a little bit.

What we saw is more heavily configured servers going out, so storage increasing on the GPA family, more 24 terabyte Near Stores, storage going up on the filer family, the 960s going up by about 20, 25 percent of the average capacity, things of that nature, which kind of drove the mix.

But for me, from my viewpoint, that's all good news.

But the point is it is not driven by competition and price declines.

It's really driven by just basic mix shift.

On the buyback status?

I think we will still participate.

We had a target price set.

Right now at the moment, we're probably above that.

I think we executed it a little under $16 -- 15.50 or so, $15.58.

We're going to have to reassess.

But the objective of the buyback was to retire a certain number of shares, and we'll have to figure out what price we would enter the market at, but yes, we're still on that program.

In terms of cash, you said investment (indiscernible) is down.

Given the product momentum that you're seeing, why not invest more in the business?

Why not (indiscernible) more sales capacity?

That's a good question.

Getting back to our target expense models.

We would like to be in the midteens for operating income.

Right now, I think we're just slightly under 14 -- 13.2 -- and I'd like to be at least 15, 16.

I think we have the capacity out at the moment to continue the growth.

There are many companies in any tech sector right now are pouring 25 percent year-over-year growth.

I'm sure most of you have already done the math, given our guidance, so we're expecting about 25 percent year-over-year growth next quarter, too.

Point is, we have the capacity on board right now to drive that kind of a revenue growth.

And until we recover our target model, I think that is the appropriate thing to do.

We're making a balance between selective investments, like Steve said, including some of the channel programs and new products and things like that, partner programs.

And at the moment, I don't think we have to invest in sales capacity.

If anything, I would choose to invest in service capacity.

I think our ability to provide the level of enterprise class services our customers are looking for is still trailing the demand.

And that is part of why we asked Ed to move.

And you have heard the headcount numbers where we invested more in professional services engineers than anywhere else in the company, and that's the area we're going to choose to invest in.

You might want to look also at the P&L of our close (ph).

I think we're up $3 million quarter-over-quarter in R&D.

So it is not as though we've been trying to squeeze the expense back.

We've been trying to kind of meter it out between what goes to the bottom-line and what goes back into the business, and we think we're on a very healthy balance between those two.

To add onto that, and I think your concern is right down the pike of what we thought about choosing, we said we want to make sure we keep our expenses flat, but we have to get more coverage in the market, and that's why we invested so aggressively in a channeled partner program.

To be more concise than that.

In Asia, we are channeled completely, except Australia, which we're about 50-50.

In Asia, we actually did add more direct headcount to do more high touch.

That has paid off.

We landed Honda as an aside, this last quarter, for over 100 terabytes in Japan.

That was done by our direct Dutch (ph) model with a big reseller, so that was a great new win.

In the U.S., we have consolidated our salesforce.

A large percentage of our sales force now is on a small number of accounts.

Very, very large accounts, big, big dollars.

That leaves a big part of the market that we ask resellers to help us fill.

They love the fact that they have a big playing field to play on.

We're not just telling them smaller accounts.

Big playing fields, the rest of the market, and these are big resellers who are very successful, like Forsyth (ph).

They are clearly turning their energies toward NetApps.

So we have added (indiscernible) to them, but I don't think we have to add a lot of new engines (ph) in sales force to get where we want to go.

In Europe, we're already 50-50.

We have (indiscernible) coverage.

And to Dan's point, here is our simple vision.

We have better products than the other guys, we can deliver them at a lot less money, the overall total cost of ownership is compelling and a lot more people know it now.

They know it because of the (indiscernible) not only of our company and our resellers (indiscernible) Veritas of Oracle and others.

So if we can provide world-class service as good or better than anybody else, we win.

Because they don't have anything else to push on, and we're doing a good job on it.

We did a great job for our former market.

Now our invest (indiscernible) and making sure we're world-class at the enterprise service and Ed is all over that.

So that is where we're going to invest.

If that argument is off the table, there is nowhere else for people to hide.

Thank you and (indiscernible) again.

Joel Wagenfeld (ph), Bank of America Securities.

Hi, this is Ed Granardi (ph) on behalf of Joel.

I just want to know -- you guys guided to this quarter with an extra week.

How much contribution you got from this this extra week?

Let me give this one a try.

I was waiting for extra week question to come up, the 14-week question, so I don't know.

I will give you a way of thinking about it.

If you were to take our guidance forward, and then do the compounded quarterly growth rate, so take out the specifics of the 14-week quarter for a moment, but look at Q4 of last year to what we've guided you to Q2, which is the upcoming quarter, and did a compounded growth rate, so they could out somewhere between 5.5 percent compounded and 7.5 percent compounded.

This quarter, we happened to put in 7.8 I think was literally the quarter-over-quarter growth rate.

What was the effect of the extra quarter?

On the top line, my view is it was probably 1 or 2 percent, but not really material.

This was also the quarter, don't forget, where we had the annual sales club, the sales kickoff (indiscernible) more impact on expense than it had on revenue.

But even so, if you just do that topline interpolation, as I said, you would probably come out somewhere to between 6 and 6.5 percent, kind of in the midrange on compounded quarterly growth.

So that's the only way I can help you think about the question.

Another question with respect to Japan.

Your APAC overall went up like 43 percent sequentially.

Would you say that's (indiscernible) was most of the sales that you got from HES (ph) were in Japan?

No, most of the HDS sales were in North America, with a couple in Europe.

HDS just picked up the product in Japan this last quarter and has not actually released it to the market.

They are certifying right now.

They just made -- that was specifically done outside of Japan first.

They are a reseller of ours in Japan already for specific vertical markets.

That was before this ever happened, they're a normal reseller.

But they are now doing what we call a G filer (ph) in Japan.

That will hit later.

So the momentum we're building so far is in North America and Europe.

Realize that HDS as an entity has the marketing for all of the world, except Japan, and that is the organization we did the deal with.

So it's now, as Tom said, flowing back into the parent corporation of Hitachi inside Japan.

Then if you could possibly share with us any commentary about what you see, as far as the demand environment, and what your customers are telling you?

I really do think that the market globally is only going to move at a couple of percent.

I just don't see -- nobody is getting large, starry eyes about what they're going to do at the end of the year or anything like that.

I just think it is going to be a fairly -- very slow growth.

If anything, customers are talking about an uplift next year.

They're starting to talk about projects for next year.

But through this year, I think it's going to be a couple 3 percent maybe.

So the demand environment, with the exception that I mentioned of we're seeing an incremental demand in Japan and softer demand in Germany, etc.

The demand environment globally I think is pretty flat.

I do think that most of our growth is strictly share gain.

If you've looked at some historical perspectives, in the '80s when that recession hit in the early '80s, digital equipment looked unstoppable, 1985.

When that recession hit, Sun and Apollo got an audience they never dreamt of having in the enterprise, drove their solutions home, and Deck (ph) was in deep trouble and then out of business.

And now going into the '90s, IBM looked unstoppable, unstoppable.

By '95, they lost the disk business to EMC (ph), they lost their network business to Cisco.

We're now in a recession again, we've been in a recession.

People now will look for new alternatives where they would not before.

Enterprises do not look when they have all of the money they want and what they have worked they don't look.

In each case, I have had that -- Cisco (indiscernible) they felt the recession was the main thing that opened the enterprise door.

The enterprise doors are wide open to NetApp now where they were not three years ago, even though our results were great.

We now are installed in virtually all of the financial institutions in New York, all of the big energy companies.

We couldn't get there before, so what does that mean.

I'm suggesting that when people have money -- I can't tell you when -- but they're not going to go back to the expensive way of doing it.

That's just never happened.

Once you start buying something that does the job for you and you realize you can save a tremendous amount of money, you buy more of it when you get more money.

So our goal right now is to be entrenched in more and more big companies so that when we have these opportunities come to us for the new applications, at a minimum, they will compete with us.

But we weren't in that spot before the recession, we're clearly there now.

Thanks, guys.

Harry Blount, Lehman Brothers.

Thanks.

Just coming back to the guidance real quick, actually two questions, one is more of a housekeeping question I always ask is -- could you give us some profile on the competitive engagements.

But then the second question is on the guidance.

Obviously, the strength in APAC did account for a significant portion of the sequential revenue growth and you got a little bit of help in the 14-week, but now you're going back to 13-week quarter, you're still giving some very, very strong growth.

What do you see in that specifically that is giving you the confidence in that?

Obviously, you get a strong federal quarter probably coming up, but is a lot of the visibility and confidence you have related to the rollout of the FAS-200, the rollout of Avnet Aero, additional strength coming from the intelligence community and things like that?

You just hit the high point.

Around the globe, we're actually seeing most of our sales team forecast significant quarter on quarter growth.

You asked, yes, you hit it on the head.

Federal's going to have a good quarter, I think.

The Pac Rim area has been really slow for us over the last year, they really started to come on.

We've made significant strides in Japan and Australia, which are the two most significant markets.

We're starting to get contributions out of India and China.

North America -- we have had great success with our strategic accounts.

The named account program we've put in place this year is really starting to get momentum, which is kind of like the top 100, if you will, after -- or maybe the second 100.

It's like the Russell 2000.

We have the top 25 strategic and then the next 100 names.

That is really moving.

So it is just a lot of different things.

Near Store is strong and picking up a lot of momentum.

I think the FAS-200 series, the 250 and its twin to be announced here soon are really come on.

The I-SCSI stuff is hot.

And 20 percent of the servers we shipped this quarter are running I-SCSI.

That is from the customer auto support data.

It's not just they downloaded it, they are actually running it.

That is amazing to me.

So we've just got a lot of things clicking.

And the sales team is energized.

They feel as though of opportunity ahead of them, and that's what's driving the growth forecast.

I remember during the big, big boom, people said you guys have a great culture, and I say, you know, we'll never know until we have a downturn.

In these last couple of years, we've had less turnover than any other time in the company's history.

That is not true of our competitors.

Number two is to three years ago, we said one of the things that was not right about our sales organization -- and during the boom when you're going 100 percent year-over-year, you cannot exactly build out your teams and educate them and do all of the things you'd like to do, as far as management training.

We said we have got to build more bench strength, such that we can scale our organization.

When we promoted Ed, we were (indiscernible) big challenge as a company.

We promoted Rob Salmon, there were five other promotions that followed that.

George (indiscernible) -- we moved some of the -- North American sales was from the central area, we moved three different people in Asia, all straight up, all within a week.

They were heavily applauded around the company.

They're all super respected leaders.

We did not blink.

We've built a bench strength of sales talent that is pretty extraordinary, number one.

Number two, at any other time in NetApp's history, and I've been here nine years, we had some sales area we said we needed a fix.

We weren't -- at a leadership level, you build top-down, right?

You pick (indiscernible).

We had to pick something.

There's not a single area in the world today that we feel like we need to make a change at a top level.

We have the right leaders in the right places, we've built momentum, we've had a lot of continuity in our sales team, that's terrific.

When you keep turning salesforces, there's bad things happening in your productivity models.

We have not had a lot of turnover, and it's paying off.

And the competitive engagements?

The mixes look pretty consistent with prior quarters.

There's some product shifts in there.

We're seeing a little more of the -- not surprising, the DMX, right, when (indiscernible) had their (indiscernible) the CX Stanley (ph) was brand new and the DMX that I introduced, it was rolled towards the CX.

Now it's rolled back to a more standard mix.

Nothing particularly significant.

It is still -- our competitive engagements and frequency are about the same as the marketshares, in terms of rank.

And if anything, Sun's up a little higher in our mix than the share.

But it is very close to that, and it really hasn't shifted around much over the last few quarters.

I think we've talked enough about it, but I'll just say this.

There's a lot of people that have done business with us or just started who seem to be very happy that (indiscernible).

NetApp enjoys a reputation that we treat customers well, that we come through on our word and we support them very, very well.

We'll do almost anything we need -- we will do anything to do to make sure it's successful.

And I think there's a lot companies that have won a lot of storage business over the last few years that (indiscernible) felt about that way.

People felt that if they could an alternative, that they would take it.

We've provided them a very viable alternative that saves them money, and we're going to make sure we just come through on our commitments.

That is the whole reason for the investments in customer sat.

That's the last part of the game.

You win that, game, set, match.

I hear that from very, very many CIOs around the world.

They're so happy that they have a viable alternative.

And that is all NetApps ever wanted to be, was give us the chance to be number two, at every application, let us bid.

That works very, very well when you have our product set.

Great, thanks.

That is all for our questions.

Mr. Warmenhoven, do you have any closing comments?

I would again like to thank you all for joining us this afternoon and we look forward to seeing you at this time next quarter.

Thank you very much.

Ladies and gentlemen, this concludes the Network Appliance first quarter conference call.

If you'd like to hear a replay of today's conference, please dial 1-800-405-2236, and use the passcode 547054.