NetApp Inc (NTAP) 2013 Q4 法說會逐字稿

Welcome to the NetApp fourth quarter and fiscal year 2013 earnings call.

My name is Ellen and I will be your operator for today's call.

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

Later, we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Kris Newton, Senior Director Investor Relations.

Miss Newton, you may begin.

Hello, and thank you for joining us.

With me on today's call are our CEO, Tom Georgens, and our CFO, Nick Noviello.

This call is being Webcast live and will be available for replay on our website at netapp.com along with the earnings release, the supplemental commentary, our financial tables, and the non-GAAP to GAAP reconciliation.

As a reminder, during today's call we will make forward-looking statements with respect to our financial outlook and future prospects, all of which involve risk and uncertainty.

Actual results may differ materially from our statements and projections for a variety of reasons.

We describe some of these reasons in our accompanying press release which we have furnished to the SEC on an 8-K.

A detailed discussion of the reasons is included in our risk factors included in our most recent 10-K and subsequent 10-Q report also on file with the SEC and available on our website.

All of which are incorporated by reference in today's discussion.

All numbers discussed today are GAAP unless stated otherwise.

To see the reconciling items between the non-GAAP and GAAP you may refer to the table in our press release, our supplemental commentary, or on our website.

In a moment, Nick will walk you through some additional color on our financial results and then Tom will walk you through his perspective on the business for the quarter.

I will now turn the call over to Nick.

Thank you, Kris.

Thanks, everyone, for joining us.

Q4 represented another quarter of solid financial performance by NetApp.

Net revenue of $1.72 billion was inside our prior guidance range, driven by branded revenue growth.

We achieved a strong non-GAAP gross margin of 61.3% and non-GAAP operating margin of 17%, underscoring our continued execution focus.

Non-GAAP EPS of $0.69 was just under the high-end of our Q4 guidance range.

And, we generated $392 million of free cash flow in the quarter, approximately 23% of revenue.

Starting with revenue, Q4 revenue increased 5% sequentially and 1% over Q4 last year.

Q4 deferred revenue increased by $134 million from Q3.

Branded revenue was up 9% from Q3 and 3% from Q4 last year, while OEM revenue declined 19% sequentially and 18% from Q4 a year ago.

For fiscal year 2013, revenue of $6.33 billion increased 2% from fiscal year 2012 with branded revenue up almost 4% and OEM revenue down 12% from the prior fiscal year.

For fiscal year 2013, revenue for all geographies was flat to up 1% from fiscal year 2012 with the exception of APAC which was up 11%.

Non-GAAP gross margin of 61.3% in Q4 exceeded our previous guidance driven by strong product gross margin.

Product gross margin of 55.8% was up both sequentially and year-over-year fueled by branded revenue growth and sales of more highly configured systems.

Service gross margin of 56.2% decreased both sequentially and year-over-year due to increased investments in our service and support infrastructure, which we expect to continue as our installed base grows.

For the full year, gross margin of 60.7% was about at the midpoint of our targeted financial model.

Non-GAAP operating margin of 17% in Q4 was in line with our prior guidance and down slightly from Q3.

Non-GAAP operating margin for fiscal 2013 was down 2.5 points from fiscal 2012, impacted heavily by lower revenue and operating profit in the first half of the fiscal year.

Non-GAAP other income net was down substantially from Q3 driven by higher interest expense related to our senior notes which were issued in December.

Our non-GAAP effective tax rate was 13.4% for Q4 and 15.1% for the fiscal year, slightly lower than prior guidance reflecting year-end true ups related to the full year mix of revenue and profits from our overseas and domestic business.

Q4 non-GAAP EPS of $0.69 was just under the high-end of our previous guidance range.

For the full-year, EPS of $2.28 was down 5% from fiscal year 2012, despite the 4% reduction in average diluted share count due to lower revenue and operating profit in the first half of the year.

Our balance sheet remains healthy, ending the year with approximately $7 billion in cash and investments.

Accounts receivable days sales outstanding increased to 42 days, consistent with our seasonal expectations and improved from Q4 last year.

Inventory improved to 19 turns.

Cash generation continues to be a highlight with cash from operations of $456 million in Q4 and free cash flow of $392 million, roughly 23% of revenue.

Overall cash reflects the repurchase of approximately $180 million of stock in the quarter, about 3 times the amount in Q3 and is consistent with the expectations we laid out on our last earnings call.

Diluted share count increased in Q4 by 3.5 million shares, 3 million of which were related to the accounting for shares associated with our convertible notes.

The notes are now fully convertible and will mature on June 1 with final settlement on June 3. We expect to settle the notes with $1.265 billion of US cash paid to note holders and to the extent the average share price is over the strike price of $31.85, shares of common stock associated with the conversion feature of the notes.

This dilution will be partially offset by existing note hedges, and, as you may recall, 80% of the convertible notes are hedged.

Separately, our related warrants will come due in Q2 fiscal 2014.

The warrants may also create dilution if our share price is over $41.28 at maturity.

We expect to repurchase shares to offset any remaining dilution associated with the maturity of our convertible notes as well as our warrants.

Capital allocation is a topic that we continually evaluate and was an area of particular focus over the course of fiscal year 2013, both internally and with our shareholders.

At our financial analyst day last June, I highlighted the strong cash generation of NetApp over a five-year period, as well as the balance we have maintained in both investing in the business and returning capital to shareholders.

In fiscal year 2013, we continued to demonstrate that same balance.

We invested $410 million in the business in the form of capital expenditures and technology tuck in M&A and repurchased $590 million of our stock out of the almost $1.4 billion of cash we generated from operations.

We also spent the year planning, listening to our shareholders, and enhancing our capital structure through important activities such as achieving an investment grade credit rating, completing a $1 billion debut investment-grade bond offering at historically low rates, executing a new five-year $250 million revolving credit facility, paying off all of our remaining real estate synthetic leases, and announcing our intent to retire our convertible notes at maturity in June.

We are now entering the next phase of our capital allocation process.

NetApp is increasing its current stock repurchase program, of which $1.4 billion remains outstanding, by an additional $1.6 billion.

We intend to commence a $3 billion share repurchase program to complete over the next three years.

We intend $2 billion dollars of repurchases to be completed within the next 12 months, of which $1 billion is planned to be completed during the next four months.

I'm also pleased to announce the initiation of a quarterly cash dividend of $0.15 per share of the companies common stock, which we expect to increase over time.

These capital initiatives reflect our confidence in the underlying long-term strength of NetApp's business as well as our commitment to enhancing shareholder value.

We have carefully structured the program to ensure full flexibility to support innovation in growth initiatives both organic and inorganic.

The timing and amount of repurchase transactions under the program and future dividends and dividend increases will depend on market conditions, corporate business and financial considerations, and regulatory requirements.

And, as you would expect, we will provide updates on our progress each quarter.

Separately, we recently commenced a realignment exercise across the company which we expect, upon completion, to result in the elimination of just over 900 jobs and result in a GAAP restructuring charge of approximately $50 million to $60 million.

We took this action to better align our resources and investments to our most strategic initiatives.

While difficult, we believe these decisions position us well for the future, enabling us to achieve our business objectives, profitability, and profit growth expectations.

Turning to guidance, we expect our Q1 target revenue to range between $1.475 billion to $1.575 billion which, at the midpoint, implies an 11% sequential decline and 6% year-over-year increase in revenue.

The sequential decline reflects a combination of our typical Q4 to Q1 seasonal revenue dynamics, continued reduction in OEM revenue, and a bit of conservatism relative to the low growth IT spending environment.

We expect consolidated non-GAAP gross margins of approximately 61%, almost 1 point of improvement from a year ago.

And, non-GAAP operating margins of approximately 13.5% to 14%, 1 to 1.5 points better than a year ago reflecting partial benefits to be realized from our realignment activities.

We expect our blended consolidated non-GAAP effective tax rate to increase to approximately 18% for Q1 in fiscal year 2014.

And, our diluted share count for Q1 to decrease slightly to approximately 367 million shares based on our average stock price of $35.11 for the first ten days of the quarter as well as the expected remaining impacts from the convertible notes.

We expect non-GAAP earnings per share for Q1 to range from approximately $0.45 to $0.50 per share, up 7% to 19% from operations alone versus Q1 last year.

As we look at Q1 and beyond into the rest of fiscal year 2014, I have a couple of closing thoughts to which I am sure Tom will speak as well.

We believe we are in a strong position to gain market share based on the power of our innovation.

That said, we must be cognizant of the macro and IT spending environment and have taken carefully planned steps to ensure we have directed our investments and resources to our biggest opportunities within our targeted business model.

We are reiterating the guidance given in our 2012 analyst day presentation.

Including target ranges for non-GAAP gross margin of 60% to 62% on average and non-GAAP operating margin of 17% to 19% on average for the period fiscal year 2013 to 2015.

However, both measures are ultimately dependent on revenue mix and growth.

For fiscal 2014 specifically, we expect gross margin at the midpoint of this range, operating margin at the low end of this range, EPS growth from operations before our capital allocation actions in the mid-teens.

And finally, continued strong cash flow generation.

At this point, I will turn the call over to Tom for his thoughts.

Tom?

Thanks, Nick, and welcome everyone.

Despite a challenging IT spending environment NetApp performed well in Q4.

Our revenue was within our guidance range, EPS was towards the high end of our range, and we increased gross margin.

In the quarter, we achieved record bookings with branded bookings growing double digits year-over-year.

Our highest branded growth in five quarters.

As others in tech experienced the quarter was heavily backend loaded, and it impacted our bookings to revenue conversion.

Nonetheless, we saw strong customer demand in all geographies as well as an increase in the number of deals over $1 million and a record number of deals over $5 million.

As Nick pointed out, this was another branded lead quarter with 9% sequential growth in branded revenue.

With a complex product transition behind us, we are now accelerating our pace of innovation introduced to the market.

We are seeing rapid uptake of Clustered ONTAP as well as our new platforms.

We recently announced a family of all flash arrays and started shipping Flash Accel, our solution for flash on the host.

We also saw a record quarter for branded E-series products, an expansion of our FlexPod solution set.

NetApp has more innovative technology at the early stages of its product lifecycle than at any time in our history.

And, we believe NetApp is better positioned than ever to take advantage of the substantial opportunities presented by the emerging customer technology trends that are transforming the industry such as cloud, flash, and converged systems.

Private cloud environments will see the greatest growth in IT spending in the near-term.

For private cloud deployments, IT organizations need flexible storage resources that can be deployed on a wide range of hardware and provisioned and consumed based on policy directly by the application and development teams.

This concept has been coined software defined storage.

NetApp pioneered this value proposition with our Data ONTAP operating system and OnCommand portfolio.

For the last decade, we have been able to run ONTAP on our hardware and other peoples hardware through E-series.

Today, we have extended this capability into the cloud with NetApp private storage for Amazon web services as well as enabled ONTAP to run on commodity servers with ONTAP Edge.

And have the ability to bring data on server-side flash into the ONTAP framework with Flash Accel.

Through storage virtual machines ONTAP abstracts the data access and services to provide data mobility, granular quality of service, and integrated data protection for direct consumption and use with an application across a diverse set of physical storage options.

Only NetApp can deliver on the promise of software defined storage today.

NetApp provides compelling value to both the enterprise private cloud and public cloud service providers with the scale, performance, and non-disruptive operations of clustered Data ONTAP.

The momentum of cluster Data ONTAP has grown over the course of fiscal year 2013 with a 4 times increase in clustered nodes from fiscal year 2012.

Sales of clustered nodes in Q4 increased 95% from Q3 on top of sequential increases of almost 70% Q2 to Q3 and 120% Q1 to Q2.

The installed base includes almost a 1,000 unique customers, of which one-third are repeat clustered ONTAP customers.

In Q4, 18% of midrange and high-end systems shipped are running clustered ONTAP.

In addition, over 50% of our installed base has migrated to Data ONTAP 8, the industries most innovative storage operating system and we will continue to enhance it.

You can expect to hear more about the next version of Data ONTAP in the near future.

We strengthened our leadership position in flash with the introduction of the EF540 all flash array.

And a preview on the flash array product family which will deliver rich scale out and storage efficiency features to maximize the benefits of all flash arrays.

Since the introduction of our flash program, NetApp has shipped 44 petabytes of flash and accelerated over four exabytes of hard disk.

Q4 saw a record unit sales of Flash Cache and Flash Pool.

Flash Cache is attached to 54% of midrange and high-end systems.

Approximately 11% of systems with Flash Pools are deployed in cluster environments and Q4 Flash Pool deployments grew 32% from Q3.

NetApp now has the broadest portfolio of flash in the market offering flash as a cash in the server, controller, and array, as well as all flash arrays to meet extreme performance needs.

The EF540, an all flash array built on E-series, that we have discussed with you on prior calls, was introduced in Q4 and we are seeing good customer demand.

Overall, our branded E-series products, including the EF540, are performing well with an increase of 17% in units shipped from Q3.

Also in Q4, we refreshed the FAS6000 family.

FAS6000 units were up slightly from last quarter with new generation systems representing almost one-third of total FAS6000 units shipped.

FAS6000 systems running in clustered deployments also increased from last quarter with 28% of FAS6000 shipped in Q4 running Clustered ONTAP.

FAS3000 units were up 13% sequentially.

New generation systems represented almost 70% of the total FAS3000 shipments in the quarter.

And, FAS3000 units shipped running in clustered environments more than doubled from Q3.

FAS2000 units were down slightly on a sequential basis.

Units shipped from the V-series family comprised of both V3000 and V6000 also increased, up 15% from last quarter.

As we have discussed over the course of fiscal year 2013, partnering continues to be key to our strategy.

We gain leverage in terms of sales and solution reach by working closely with our partners.

Our indirect and OEM business represented 81% of Q4 revenue, up 6% sequentially.

Together, Arrow and Avnet grew 19% from Q3, contributing a record 37% of total revenue.

OEM was 10% of total revenue, down both sequentially and year-over-year.

Our OEM revenue is settling to the level we expected when we made the Engenio acquisition.

We have some partners that are looking to rely more on their own IP while others are looking more to rely more on NetApp and we're selectively adding new partners.

FlexPod is another excellent example of the advantage we can achieve through the depth of our partnerships.

Our FlexPod business continues to grow as measured on every metric, partners, customers, and sales.

We expanded the partner ecosystem with the introduction of the new FlexPod solutions for Oracle and Microsoft.

We have grown the FlexPod customer base almost 150% from fiscal year 2012.

And, in Q4 we have more than doubled booked business from Q4 a year ago.

Most notably, clustered deployments represented 39% of our Q4 FlexPod business.

Fiscal year 2013 was highlighted by progress on our key initiatives.

Adoption of Clustered ONTAP, leadership in the flash space, and leverage through our channel and alliance partners.

As Nick called out, we continue to make progress towards our target financial model and maintain our strong cash generation capability.

We saw strong branded revenue growth in the second half of the year, and gross margins were within our guidance range each quarter of fiscal year 2013.

The capital allocation and realignment announcements we made today are designed to simultaneously focus resources on our growth opportunities while growing earnings and shareholder value.

Whether through share gains from her innovation and partnerships, leverage from our OpEx stack, or capital return to shareholders, NetApp has multiple avenues to achieve sustained double-digit annual EPS growth.

Finally, I would like to thank the NetApp team for their passion and commitment to achieving a strategic goal.

I want to acknowledge that last week was a difficult one for employees.

But, I remain confident in our future.

We're faced with the challenge of continuing to execute against our growth strategy while achieving our business and financial objectives in the context of a low growth IT spending environment.

This requires difficult decisions that will ultimately make the company stronger.

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

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

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

Thank you.

Operator?

Kulbinder Garcha, Credit Suisse.

My question is just a clarification around OpEx for Nick and Tom.

Nick, did you say that this year you expect a mid-teens earnings growth rate for the full fiscal year?

And, my question just around that is what does that tell us about how you're managing OpEx in the balance of the year to gather earnings growth?

Is it a case of OpEx to sales coming down even in a low growth environment so there's further cost cutting you guys are considering?

And, linked to that, and this is maybe for Tom, more philosophical, previously I always got the message, Tom, that you guys would -- you were looking to cut OpEx because you had such a significant share opportunity.

You have a 10% storage share, the number one vendor has 30%.

And, there is so much land out there for you to gain.

Has something changed in your thinking around that?

Many thanks.

Yes, Kulbinder, this is Nick.

I will start and I'm sure Tom will weigh in as well.

In terms of the go forward for the year, what we're looking at is aiming at that 17% Op margin.

And, based upon a 61% gross margin for the year, those are the targets we are aiming at.

Obviously the first quarter is going to be a little light of that certainly on the operating margin side, because of the sequential down from Q4 to Q1 in terms of revenue.

But, for the year, driving for that 17%.

We are obviously conscious of the macro, we are obviously conscious of our investments, one of the reason why we made this realignment decision.

But, our investments are going to the areas we think have the best opportunity, they're focused on clustered Data ONTAP, they're focused on flash, etc.

17% is the operating margin we are aiming at for the year.

That yields, on an operational level, that yields mid-teens EPS growth before any of the capital activities -- or the capital allocation activities we talked about.

Yes, I think philosophically, in terms of the opportunity in front of us, I don't think that has change.

We went through this, an activity similar to this, several years back.

And, in the aftermath of that we had a 30% year-over-year organic growth year.

I don't think that taking this action now is basically signaling anything about the confidence about the future.

I think it's a pragmatic point of view and that is we are in a period where IT spending is constrained.

That certainly has impact on our growth rate.

We have a number of very, very key initiatives that we need to make sure that we get staffed and funded.

And, we need to do all that in the context of generating shareholder return.

I think balancing all of that forces us into a situation of reprioritizing and realizing to get our resources connected to the most important things that we have going on as a company and things that are going to sow the seeds for the future growth.

One thing I would say as we go forward, we are not frozen, in fact we have more open req's today than we did a month ago.

So, we're looking to continue to reinvest around the priorities that we set as a company.

And, should we see revenue not come out the way with think or the market deteriorates further, clearly we will modulate that.

But, right now our expectation is that we are continuing to invest around the key initiatives, we basically did the restructuring to basically free up those resources for reassignment.

Thank you.

Shebly Seyrafi, FBN Securities.

Yes, thank you, very much.

Your branded revenue growth was 3% but you said your branded bookings were up double digits.

I'm wondering, do expect the branded revenue growth to accelerate because of that strong bookings number to the high single digits percentage or double digits over the next few quarters?

Thanks.

Yes, I think one of the things about the quarter is on the branded side I think we're pretty pleased with how it played out.

I think we saw growth in all the geo's.

And, it was very, very broad-based across all the segments.

So, I think we finished exceptionally strong.

I think we are very, very happy with all of that.

Margin stayed strong along the way so we were able to protect our value proposition.

It would impact growth and it was back end loaded.

One of the things that we do see is, you saw that $130 million plus went to deferred revenue build.

So, some of that growth when into deferred revenue.

And, some of it came too late in the quarter for us to convert.

Why I don't want to talk about growth in terms of beyond next quarter, it's certainly we're well aware of the earnings cycle and what we have heard from other players in this industry and other bellwethers about their expectations.

I think we're going to be tempered by that.

We have our own dynamics in Q4, where our own incentives and our own sales force, perhaps, overpower some of the seasonality.

We need to be cognizant of what we see in -- from the other companies of their.

But, that said, I think we finished strong, I think we brought home the big deals in the end.

We didn't see a lot of deals pushed out of the year and out of the quarter.

I think the team enters 2014 with some confidence.

But, I think all that is tempered by a backdrop that we are all pretty concerned about.

Brian Marshall, ISI Group.

Great, thanks guys.

Obviously, the investment community is going to applaud the initiation of the dividend here at 170 basis points and growing.

But, can you walk us through your methodology or framework for determining your capital allocation?

Because when you look at it across M&A, share repurchases, dividend, etcetera, it looks like for the next 120 days, on average, you're going to be in the market buying 3% of the shares that trade everyday.

Just wanted to get your sense of the methodology behind the initial allocation.

Thanks.

Sure, Brian, this is Nick.

First of all, in terms of the how we do it, we will employ a variety of means to be in the market with this first tranche that we talked about over the next four months.

But, the overall of the program is last year, if you dial back a year and look at what I showed at the analyst day last year, we talked about strong cash generation and balanced deployment of cash over a period of time.

And, we have spent a full-year looking at and working on capital allocation is a company.

We have taken on the debt.

We have announced that we are going to retire the convertible notes and that's at the very beginning of June.

We have put a revolver in place, we cleaned up all of the off balance sheet stuff.

So, there's been a lot of activity that has gone on over the course of the year that has really gotten us to this point.

When we look at the end of the year and that $7 billion of cash and investments, about 50% of that is domestic.

We're looking at a combination of that.

We're looking at that less the convert, we are also looking at our expected cash generation over time.

I look at the last year and say in a year with 2% revenue growth, we generated $1 billion plus of free cash flow, third year in a row.

We had looked at all of those factors in coming up with this dividend and the announcement of the dividend and the repurchase program that we have put out there.

And obviously, we're not only doing the buyback to offset dilution, but obviously more than that.

And, that is all coming out of US cash and what we have looked at in the past as excess US cash

Thank you.

Aaron Rakers, Stifel.

My question is on the gross margin line.

Obviously, you were able to obtain the north of 55% targeted gross margin on product.

Obviously, that was about offset by the services gross margin, down quite a bit.

Can you talk a little bit about the trajectory of the gross margin, what your assumptions are underlying that 61% for the full year as it relates to those two line items?

Sure, Aaron.

First of all, on the gross margin line, I think what you are seeing in Q4 is the power of that branded revenue growth that Tom talked about flowing through on the product gross margin line.

It was obviously a strong quarter with lower OEM mix, frankly, contributing as well to that.

As we look forward into '14, I gave that overall 61% on the gross margin side and that being the view for Q1.

That would imply pretty close to the types of ranges we saw in Q4 moving forward.

So, that type of 54%, 55% type of range on product gross margin and a little lower than what we've seen in the past.

So, a 56% -- 55%, 56% type of range on service.

And, the service side is really about investments.

And, we've talked about this in the past were when we look at our installed base and we look at the size of our installed base and the growth in our installed base, we have to put the service investments in place to support that.

So, obviously we make those investments ahead of the revenue coming through.

So, we build all of those things together in terms of where we're looking at that guidance and building the guidance.

Okay, thank you.

Katy Huberty, Morgan Stanley.

Hi, thanks.

Federal decline double digits this quarter after good growth last quarter.

Do you think there were spending delays around the sequester?

And, if so, would you expect some recovery in that segment over the next couple of quarters?

Yes, I do, in fact that's probably the area where the bookings performance and the revenue performance were the most divergent.

In fact, from a revenue -- from a bookings perspective the federal was actually very, very strong.

I think we were quite pleased with that.

Certainly we see the sequester, certainly we see perhaps adjusting for that again in our future.

But, nonetheless, I think we're clearly the number one market share player in the federal space and I think we continue to win business.

So, we took some nice size deals out of the Department of Defense, sequester notwithstanding.

We also opened up other opportunities.

So, I read the same headlines you do on the federal side, but I think that team is executing really well.

And, I think our federal business will be okay.

In fact better than okay as the year progresses.

I'm not expecting to see a significant reversal in that business.

I think that will continue to gain share.

And, barring some significant disruption I still think that will be a meaningful part of our business, both from a profit perspective and a growth perspective.

Great, thank you.

Amit Daryanani, RBC Capital Markets.

Yes, good afternoon, guys.

I just want to understand maybe a little bit on the guide for July and the fiscal '14 comments.

I think for July guide, your guidance assumes share count will be flattish at about 367 million shares.

But, I think you are doing $1 billion worth of buybacks in the next four months.

That would imply that share count could be down by 5%, I think.

So, could you maybe just talk about that Delta?

And then, same thing for fiscal '14.

If you were able to execute a $2 billion buyback, that could lower your share count by about 13%, 14% gross of dilution.

So, that mid-teens EPS comment, do we think about an additional ticker of 10% to 14% with the buybacks coming in?

Sure, Amit.

You are right, for Q1 that does not assume any incremental repurchase.

So, when we gave the guidance for Q1 we talked about operationally.

And, when we talked about mid-teens for the year, that's also operationally.

That's a mid-teens EPS growth for the year.

And, strong EPS growth for the first quarter, all driven through operations.

Anything we do on the capital side of the fence will be incremental to that.

But, we wanted to give you the perspective on just what the operations of the business will do before the capital side of the fence.

And, obviously, depending upon the timing, it will impact it and benefit it.

Yes, I think overall, I think we wanted to separate those two so that becomes more clear.

But, as I look at the business and I look at what we're trying to do, and to go back to Nick's presentation at financial analyst day about EPS growth, I think between the capital plan now extended over three years plus the dividend, plus the opportunity for growth, and plus our managing of the OpEx stack, I think there's multiple avenues and multiple paths to get to double digit operating income growth on a multi-year basis.

That's what we're really driving for.

I think we have a lot more optionality than we had a year ago.

And, I feel pretty confident that we have got various different ways to deliver on that for our shareholders.

Perfect, thanks a lot guys.

Maynard Um, Wells Fargo.

Hi, thank you, I just had a follow-up on the US cash.

If I just run through the math, I'm just curious if you are planning -- if you have this sufficient US cash to fund the dividends and to building the remaining share purchaser or do you expect to repatriate cash or raise more debt?

When you run through that math, it looks like you are utilizing all of the US cash.

And then, should we assume that given that M&A more broadly is off the board, at least on the US side?

Thank you.

Sure, Maynard, let me make a few comments on that and Tom may want to weigh in as well.

If I look at that US cash and that 49%, right, that's about $3.4 billion and change.

And, take the convert out of that, which is US settled, which gets me down to $2 billion and change.

Take out cash we need to run the business, we are still at $1.5 billion right there, and that's before what we generate, right?

Which is, let's call it, 50/50.

So, we have excess cash.

We are employing excess cash.

On the debt side of the fence, that is something we may or may not do.

But, that's not something that is absolutely imminent and something we must do.

On the repatriation side, there is no need at this point in time to repatriate funds that are overseas, that are permanently reinvested overseas.

So, these will be things that we continue to look at but I wanted to at least walk you through the math on how we get there.

And, certainly, again, I will go back to in a year, FY '13, with very low topline growth, we were able to generate -- in below business model margins, we were able to generate over $1 billion of free cash flow.

Certainly, this is a business that continues to generate a lot of cash.

And, that is obviously something we have looked at in terms of coming up with this dividend and looking at this overall repurchase plan.

On the M&A question, I think that one of the things that we did over the course of the year is clearly establish a debt rating for ourselves and establish much easier access to the debt markets than we had prior.

As we think about M&A activity, I don't think that our thoughts have really changed materially at all.

I think that we've got optionality now not to fund M&A purely by cash on the balance sheet.

We've got other ways to fund M&A, given that we've got more access to the capital markets.

I think how we play that out will depend on how we think interest rates are going to play, whether we take the cash now, or how that plays out over the rest of the year.

But, fundamentally I think without tapping the debt market we could fund both the capital repurchase plan that we just talked about and our M&A activity that we have contemplated.

Or at least, certainly, our previous run rate, and in fact better than our previous run rate if necessary.

All in all, I think we are liquid enough to basically accomplish what we need to accomplish both strategically and in terms of return to our shareholders.

Great, thank you.

Lou Miscioscia, CLSA.

Thank you.

Hi, Tom, if you look back over the last 12 months, there's a lot of things going on in the storage space.

Some of the areas you're actually participating in, like in flash.

But then, there's also cloud, there's [pirum] systems which obviously reflects clouds but there's also storage deficiencies to OpEx storage.

And, your CapEx only grew 4%.

So, maybe you could put all this into perspective.

How much do think some of these is impacted you from a product growth stand point in the last 12 months?

And, where do you see going forward with these same trends?

I think first and foremost, on the capacity growth, interestingly enough that's not a metric we follow that closely.

That's really not what we're focused on as a company.

I think we've been very consistent on our messaging that we're really about selling Data ONTAP.

We went through a whole six months of conversation about flash on the host and how selling those bits in the host in flash is not the business that we are in.

We want to be the software that manages all of that.

Historically, we have sold V-series, which is basically a product without disc drive that sells Data ONTAP in our premium software, flash in the host.

In fact, the entire FCS story is based on that.

For us, we're looking for Data ONTAP footprints.

Some of that footprint will be managing storage that we sell and some of it will be managing storage that we don't sell.

I think first and foremost, capacity is not necessarily a relevant question and that's not a metric that we individually track on a weekly basis.

Certainly, there are other factors at play.

I think the efficiency story, particularly in difficult economic times, is encouraging customers to perhaps sweat the asset more or deploy some of the efficiency technologies that perhaps they hadn't done in the past or perhaps had not felt the pressure to do so.

And then, likewise I think, certainly, there's certainly low utilization workloads, or temporary work loads that are in the cloud, and I think that's a factor as well.

But, I think overall, as far as NetApp is concerned, I think footprints of Data ONTAP is key to our strategy.

And, that's the thing we are going to push and that's the thing we are most interested in.

Clustered ONTAP adoption, for some of those work loads that you talked about, clustered ONTAP adoption for virtualization, for big data, we've also done some very interesting things with Amazon as an alliance partner, we're on data primary storage for AWS and that has generated a lot of customer interest this quarter, the first transactions in that area.

I think, from our view, the big picture as we see it is I think customers are looking for a broad enterprisewide data management solution which is ONTAP, or clustered ONTAP.

And, they may have multiple different storage incarnations, whether it be flash, whether it be Amazon, whether it be commodity disk, or whether it be net apparatus.

And, our view is that we want to manage all that.

And, the value proposition that we're going to drive to the enterprise is basically a single set of tools, a single set of processes that are very, very efficient, very automated, to basically simplify enterprisewide data management for all of the application classes.

Okay, thank you.

Keith Bachman, Bank of Montréal.

Hi, thank you, very much.

Tom or Nick, I wanted to go back over the restructuring and the operating margin target for FY '14.

If you're taking out 900 people, and just making some base assumption on some fully loaded cost, it seems like that could be anywhere around $130 million of savings.

And, I benchmark that against operating margins that you reported for this fiscal year, it seems like you could do over 17% operating margins for FY '14.

And so, I just want to try to understand a little bit, are you -- is there additional expense going to be layered and on top of those headcount reductions?

That is to say, it is not a net savings?

Or is there some element of conservatism in there?

If you could just talk about perhaps the timing of the restructuring and perhaps the net investments that go in over the top of that?

Thank you.

Thanks, Keith.

Yes, I think first and foremost, this was not effectively a cut and freeze strategy here.

I think this is a fundamentally a realignment.

There's a set of things we need to do to be successful whether it be driving adoption of clustered ONTAP, whether it be the success of our flash offerings and the introduction of flash array, and whether it be other things that are on the road map that are not public.

Likewise, the go to market activity needs to be aligned around the alliance partners as that heats up.

Not just Cisco and we just won a Microsoft partner of the year award yesterday.

That continues to heat up for us.

There are clearly investment areas that we want to go after.

And, we need to go after that in such a way that its cognizant of the fact that it's going to be a low growth environment and we're not going to see a lot of expansion of the operating expense envelope.

Yes, we cut back, and that freed up resource to redeploy.

Some of those resources are part of the company we can redeployed him and some of them are not and we need to add over time.

And, that's why we still expect to be hiring this quarter, we still expect to be hiring each of the quarters the rest away.

Obviously, if the top line doesn't materialize and this business -- the industry slows down even more than we are concerned about now, we will modulate that.

But, right now we do have an investment plan to basically align around the key initiatives that's built into our plan for the year.

And, that is what is driving the estimate that Nick put out for the full-year numbers.

Okay, fair enough.

And, Tom, is the OEM business a part of those anticipated cuts?

Let's be clear, they're not anticipated.

For the most part, where allowed by law, they are in fact complete.

Okay, I'm sorry.

So, it's just one of those things that we don't like to have that hanging over our employee base.

We like to do that -- when we do this, we like to do this quickly.

On the OEM side, recognize that the E-Series branded business is actually moving along quite nicely.

Not just the flash side, but in general.

Technology is the same.

Nonetheless, I think that there is OEM specific activities, both on the development side and the go to market side, that are part of the restructuring and that would fall into the category of a realignment.

And, that is there are some things we're not going to invest in to free up resources to invest in in other places.

And, clearly the OEM side, both on the technical side, the go to market side, and the support side, clearly fall into that category.

Okay, thank you.

Alex Kurtz, Sterne, Agee.

Yes, thanks for taking the question.

Just on the outlook for the OEM business into fiscal '14 here from a modeling perspective, should we be building from this Q4 level as the base?

And, maybe some -- a couple points of growth or is there going to be still some issues with partners coming in and out of the program?

First of all, in terms of the modeling of it, when we first saw and talked about the OEM business in Q3, the business was down significantly in Q3.

We said that Q4 was going to be a branded lead quarter.

And, what we thought was happening was that the OEM business was starting to come down to the net normal, right?

We had expected, actually, when we did the Engenio transaction two years ago now, that pretty quickly that would occur, and we probably are on a year delay.

But, starting in Q3 we saw the decline.

I would expect to see a continued decline, certainly on a year-over-year basis, as we go into Q1 and Q2 and now normalize that business going forward.

And, in terms of the partners we work with, we're always looking to selectively expand partners.

And then, also partners make decisions in terms of whether they want to do more business with us or not, that is part of that business, the overall OEM business that we are in.

Yes, I think the OEM business really falls, really, into three categories that drive the number.

One of them is how is their business doing overall?

And, that is something that you guys know full well.

Obviously, their is share shift within the existing OEMs, which ones want to do more with us, which ones want to push their own intellectual property.

And, the other one is selectively adding new OEMs.

And, pretty much all of those things are factors going forward.

Over the past year we have seen share shift in terms of focusing on their own IP, clearly at IBM.

And, that's been a factor.

It's probably the biggest factor as a number as we go forward.

We have some new wins to potentially offset that.

But, probably two things to recognize, is that in the OEM business it's just not the E-series at Engenio, it also includes the prior FAS business, the N-series, as part of the OEM calculation.

And, the other side is that we're seeing the branded side of E-series pick up.

With some stabilization, the OEM business, over time, and the branded business continuing on its trajectory, actually see, in the aggregate, E-Series being a growth business for us next fiscal year.

Brian White, Topeka.

Yes, Tom, I was wondering if you could talk a little bit about Europe?

It was the only geography to fall quarter-on-quarter and year-over-year.

Obviously, it's been challenged, but maybe just some color on Europe, please.

Thank you.

Well, in currency, so currency took about a 0.5 point off the total number for the entire year-over-year and actually took several points off the Europe number.

All things considered, I think Europe held up reasonably well.

As I indicated, the booking performance was a little bit stronger than the revenue performance in every geography.

And so, Europe was mid single digits, so not tremendous, not the double digit growth we saw in the Americas and public sector.

But, nonetheless, I think in light of the headlines, I think we have a little bit less exposure to some of those areas that were hit harder than others.

But, we actually finished with some strength in Germany.

We had a strong year all year in France.

So, I think it's a tough environment.

Certainly, the -- I believe that aggregate GDP in the EU was negative, at least from a growth perspective.

But, I think the team is executing well.

So, it's hard to be optimistic about Europe.

But, I think that that's an area where we are doing better than the competition in aggregate.

And, overall, I think the team is basically dealing with a tough environment and actually doing reasonably well.

But, the strength, particularly in Germany, the finish, and the strength of France all year has been notable.

And, I think we've got a little bit less exposure for some of the places that have been week.

Great, thanks.

Brian Alexander, Raymond James.

Thanks, good evening.

If the EPS grows mid-teens before taking into account the buyback, Nick, and assuming a 17% operating margin for the year, I'm backing into roughly 5% revenue growth for fiscal '14.

And, that would imply no acceleration from what you're expecting in Q1 for your guidance.

Can you just confirm that and put that into context of what you're branded growth expectations are?

And, what do you expect that to accelerate off of Q1?

And, just related to that, given your previous comments about growing 2 times the market from your analyst day a year ago, would this suggest you're assuming the storage market grows 2% to 3% or would it suggest a lower growth premium for NetApp?

Thanks.

Yes, let me start on that one.

Certainly, we are not giving full-year revenue guidance.

What we are giving you is from a gross margin and operating margin and EPS perspective those things that we are aiming at.

Obviously, there is a set of revenue numbers that we are working through.

But, in terms of giving specific revenue guidance beyond Q1, we are not doing that.

All of those things we will report to you and we will come out and discuss with you on a quarterly basis.

On the Q1, as an example, the $1.475 billion to $1.575 billion, is 2% to 9% growth, 6% at the midpoint.

And, when we look at the sequential decline in the business, that 11% sequential decline at the midpoint, if we look at our historical sequential for a three-year period or a five year period of time, those numbers are in the 9% to 10%.

The Q1 revenue, at the midpoint, is pretty reasonable with respect to a normal sequential historical reduction.

Obviously, there is a little bit more conservatism in there, based upon the realignment action and wanting to get rolling there quickly, and a little bit of conservatism based around the ongoing OEM and what's happening on that piece of the business.

But, that's Q1 and we'll go quarter-to-quarter from there.

Yes, I think overall, one of things about trying to derive back from the operating profit also is the assumption about operating expense.

I think the key component here is that it's our intention to invest in the business.

That we do see opportunity, we're certainly not in hunker down mode.

As I indicated, we have more req's open today than we did a month ago.

So, we are looking to invest, we are looking to go forward.

Perhaps, in terms of your modeling, if you're conservative on operating expense you become necessarily conservative on the topline.

As far as the overall growth of the market, I think that there is -- there are a lot of moving parts.

And, certainly the forecast for 2013 from the industry analysts was lower than it was for 2014 -- for 2012.

And, we're certainly taking that into account.

But, nonetheless, I think I see us as a share gainer.

And, I said -- when I say internal for the company it's the same as what I say external and that is we're focused on share gain, because share gain is share gain whether the market is up or the market is down.

And, if we are gaining share then we are winning and we will continue to invest.

Clearly, the absolute magnitude of that investment is going to be modulated by IT spending and the growth of the storage industry, which nobody is predicting to be particularly robust or at least a significant rebound in the near-term.

Okay, thanks, very much.

Jayson Noland, Robert Baird.

Great, thank you.

Just to clarify, Nick, if you could help with the headcount reduction and how it would be split across R&D and sales and marketing?

And, Tom, more broadly NetApp has historically invested into macroeconomic weakness.

So, are you saying you expect this to continue for quite some time?

Or are there components of the business that were just run inefficiently?

You're saying it's not competitive and not secular, so what caused the change of direction here?

Quickly, in terms of the reduction, or the disinvestment if you will, the disinvestment is -- has parts in sales, parts in engineering, parts in the G&A line.

So, it will show up across the income statement.

And then, as Tom indicated, this is also a realignment and a reinvestment into the areas of growth.

Certainly, in terms of product, in terms of where we are going, and in terms of our go to market side of things.

Yes, like I said, like I said earlier, I don't see this as any change of strategy.

I think that we need to be cognizant of the world around us.

I think as we came out of Q4, and obviously build the AOP -- or the annual plan for this current year, obviously we need to be cognizant of what the analysts are saying, what we see.

But, that said, I think we came out of Q4 strong.

I think the team felt good about where we were.

Certainly, the field believes that they are winning and has a fair amount of confidence.

Is that our own Q4 dynamics overcoming the seasonality that we see?

But, clearly, it's been a tough earnings season the last 45 days and we see what other people are saying out there as well.

For us, I think we probably saw more business pushed out of Q3 than we saw pushed out of Q4.

We brought the business in, I think we have some momentum, but I think we need to be careful.

We see what the IT environment is, obviously we may be in for another debt ceiling fight, we already brought up Europe on this call.

Obviously, we have some restructuring activity.

But, in terms of customer facing quota -- carrying people, there has not been much of a change on that front.

And, in terms of engineering on the key projects that are going to drive our growth going forward, that investment is only increasing.

I think for us, I would consider us that we are investing in the key areas into this environment.

We are by no means into a status quo or a freeze.

In fact, we are trying to aggressively move resources to things that matter most.

And, the feeling was as we entered a new year, we reinstated incentive comp, we plan our capital.

This is the time to basically take the reset and build a plan that we could all believe in and gives us multiple ways to get the double-digit EPS growth.

I don't think we had that optionality a year ago, but we have it now.

And, that's what we are committed to deliver, even if the macro continues to stay constant or, in fact, deteriorates.

Thank you.

Ananda Baruah, Brean Capital.

Hi, thank you, guys, for taking the question.

Nick, I just had a follow-up and a little bit of a clarification on the prior question, the earlier question on share repurchase impact and that as distinct from the operational guidance that you are giving.

I guess the clarification is there is no share repurchase impact in the 367 million share guidance for the July quarter, but it sounds like you will be pretty active in the market.

So, whatever you do would be in addition to that and that is the clarification.

And, I guess, as I do the math, just back of the envelope, we assume you buy back the shares ratably through the year, it comes out to, depending on share count, 12.5 million to 14 million shares out per quarter.

And, if I lag that by a quarter, it would actually seem to suggest above the mid-teens operational growth that you could probably do, maybe 500 basis points more of EPS growth which would get you to the high teens, in that range.

Are we reading that right?

Is EPS actually more high -- EPS guidance of fiscal year '14 really more high teens type of growth?

I know that's a lot.

But, I appreciate it, any insight.

Thanks.

Yes, Ananda, let me work you through that.

First of all, remember I indicated that this first tranche would be over the next four months.

So, it's not necessarily all in the first quarter.

And, it's actually four months from today.

The 367 million shares for the first quarter is in fact with out repurchase.

We will obviously give you updates as we go here.

And, give you very clear view of what we have repurchased in a quarter.

But, you can imagine that they repurchases don't all happen, necessarily, at once.

They're not all necessarily at the front end.

They are generally spread around.

So, we will give you that color.

But, we wanted to make very, very clear, and as Tom indicated before, distinguish operational results from results that we are achieving on the capital side of the fence.

And, part of the whole capital allocation philosophy here is a benefit over time from the redeployment of cash and to repurchase.

Really focusing today on the operational is what we want to do.

Yes, I think as we think about this plan, it's $3 billion over three years and likewise a dividend.

The view that we are trying to convey here is that, A, we've got some optionality from a capital standpoint.

That we can think about the capital in terms of return to shareholders.

But, the other component to this is that its got an element overtime.

That we think that the cash flow of the company is sustainable.

In fact, we see with growth ability to continue to grow or free cash flow as a company.

And, we're looking to make a commitment over three years, both on the dividend side and on the buyback side, to basically return that capital to shareholders as it's earned by NetApp going forward.

Overall, I think from our perspective, is this is not just a four-month phenomenon.

This is a three-year commitment to basically return capital to shareholders as NetApp continues it's very, very strong cash flow generation.

Thanks, a lot, I appreciate it.

And, congrats on the capital allocation.

Thank you.

I think we have come to the end of our time.

I'd like to thank everybody on the call for their interest in NetApp and for attending today.

And, we look forward to seeing you again in about 90 days.

Thank you.

Thank you, ladies and gentlemen, this concludes today's conference.