Tara Dhillon - IR Dan Warmenhoven - CEO Tom Georgens - President and COO Steve Gomo - CFO

David Bailey - Goldman Sachs Paul Mansky - Citigroup Aaron Rakers - Wachovia Ben Reitzes – UBS Shebly Seyrafi - Caris Research Katie Huberty - Morgan Stanley Keith Bachman - Bank of Montreal Bill Shope - JPMorgan Kaushik Roy - Pacific Growth Equities Bill Fearnley - FTN Midwest Research Brent Bracelin - Pacific Crest Securities Chris Whitmore - Deutsche Bank Jason Noland - Robert W. Baird Clay Sumner - FBR Research Scott Craig - Bank of America Tom Curlin - RBC

Good day, ladies and gentlemen, and welcome to the NetApp third quarter 2008 Earnings Call. My name is Mike and I will be your operator today. At this time, all participants are in a listen-only mode. And we will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Tara Dhillon, Investor Relations. Ma'am, please proceed.

Good afternoon, everyone and thank you for joining us today. Our call is being webcast live and will be available for replay on our website at www.netapp.com. Along with the earning's release, the financial tables, and the reconciliation between GAAP and non-GAAP numbers. In the course of today's conference call, we will make forward-looking statements and projections that involve risks and uncertainties including statements of our expectations for future performance, our anticipated fiscal fourth quarter financial results, our plans for repaying debt, the anticipated benefits from our acquisition of Onaro and our expectations about going our business. Actual results may differ materially from our statements or projections. Factors that could cause actual results to differ from our projections include but are not limited to customer demand from product and services, increased competition, any decline in general economic conditions. Other equally important factors are detailed in our company's press release as well as our 10-K and 10-Q reports on file with the SEC and also available through our website; all of these factors are incorporated by reference into today's discussion. With me on today’s call are Dan Warmenhoven, CEO; our President and Chief Operating Officer, Tom Georgens; and our CFO, Steve Gomo. Steve will review this quarter's financials and targets for the fourth quarter. Tom will discuss our operations and Dan will share his thoughts and then we will wrap up with Q&A. At this point, I will turn the call over to Steve.

Thanks, Tara and good afternoon, everyone. NetApp produce excellent results this quarter as revenues, operating profits and cash flows, all exceed record levels. Revenues finished just above the high end of our targeted range and our 16.6% non-GAAP operating profit margin was above our long term target. As I walk through the financials, note that all numbers are GAAP unless stated otherwise. Please refer to the table on our press release and on our website to see the reconciling items between non-GAAP and GAAP numbers. Total revenue for our fiscal third quarter was $884 million, up almost 12% sequentially and up more than 21% compared to Q3 last year. Foreign currency effects aided sequential growth by 1.3 percentage points and augmented the year-over-year growth by 3.6 percentage points. The combination of product revenue and software entitlements and maintenance revenue was $733.7 million, up 11% sequentially and up 15% year-over-year. Revenue from add-on software and software entitlements and maintenance was 40% of total revenue this quarter. This compares to the 40% last quarter and the same in Q3 of last year. Our add-on software was about 26% of total revenue, and software entitlements and maintenance were about 40% of total revenue. Revenue from services, which includes hardware support, professional services, and educational services, was 17% of total revenue, up 12% sequentially and 61% over Q3 of last year. Service maintenance contracts increased 11% sequentially and 56% year-over-year. And professional services increased 13% sequentially and 72% year-over-year. Non-GAAP gross margins were 62% of revenue this quarter, down two tenths of a percentage point from last quarter. At 66.3% of revenue, the combined product and software non-GAAP gross margin was down about a point from last quarter within our expected range. As anticipated, this reduction was due to moderate increase on the IBM revenue mix as well as modest changes in pricing. We expect product and software gross margins to remain stable in Q4. Non-GAAP services gross margins were a record 40.6% this quarter, up substantially from the 35.5% last quarter due to slower than anticipated services and support hiring. Efficiencies and utilization also improved this quarter. In Q4 we will host a significant services trading event for our partners and employees, which will cost about $3 million. As a result, services gross margin should finish Q4 in the mid to high 30. Turning to non-GAAP expenses, our operating expenses totaled $401 million or 45.4% of revenue. These expenses increased 9% sequentially and 20% year-over-year. Total headcount increased by 271 people on a net basis and in the quarter, there were 7,123 employees. Going forward, our investments and operating expenses will continue to emphasize sales coverage hiring, in order to drive additional market share gains and future growth. GAAP operating expenses include the effect of prior merger related costs such as intangible amortization from acquisitions and the effect of FAS123R. Non-GAAP income from operations totaled $147 million or 16.6% of revenue. Non-GAAP other income which consist primarily of interest income was $12.7 million. Non-GAAP income before taxes was $159.7 million or 18.1% of revenue. Our non-GAAP effective tax rates remains at 17.5%. Non-GAAP net income totaled $131.7 million or $0.37 per share. GAAP net income totaled $101.8 million or $0.29 per share. Now I would like to turn our attention to cash flow performance. We defined free cash flow as cash from operations less capital expenditures. This quarter strong focus, a large increase in deferred revenue and strong current asset management, more than offset an increase in capital purchases to produce record results. Our cash generated from operations was a record $287 million, up 26% sequentially and up 15% from the strong Q3 of last year. Capital expenditures were $53.7 million, so free cash flow totaled a record of $233 million, growing 23% sequentially and 9% over Q3 of last year. Expressed as a percent of revenue, third quarter free cash flow was 26.4% compared to the 23% average of the last two fiscal years. Moving onto the balance sheet, cash and investments increased by about $145 million from last quarter to $1.13 billion. This balance excludes approximately $63 million with cash associated with last year's foreign cash repatriation, $307 million of restricted cash related to our secured revolving credit facility, and about $8 million worth of restricted cash related to security and rent deposits. The current portion of long-term debt on our balance sheet of about $29 million is related to the repatriation and is expected to be repaid in full by the end of the fourth quarter. The debt associated with our credit facility is $250 million and is classified as entirely a long-term liability. We continue to buyback stock this past quarter, repurchasing a total of 5.8 million shares at an average of $24.88, for a total outlay of $144.3 million. Over the course of this fiscal year, that is the first nine month of this fiscal year, net assets spent about $844 million to repurchase almost 30 million shares effectively reducing total shares outstanding by almost 8%. There is approximately $556 million remaining on our current stock repurchase authorization. Current DSOs, accounts receivable day sales outstanding were 48 days compared to 49 days last quarter and 49 days in Q3 last year. Last years Q3 DSO was recalculated to include the reclassification of $43 million worth of sales tax from accounts receivable to other current assets. Inventory returns were 22.5 times this quarter, up significantly over the strong 19.2 turns reported in Q2. Inventory turns should remain at similar levels in Q4. The total deferred revenue balance increased $123 million this quarter to $1.34 billion, a 10% sequential increase and a 42% increase in the balance year-over-year. Now before I turn the call over to Dan, I will discuss our operating model for Q4. Our outlook is based on current business expectations and current market conditions and reflects our non-GAAP presentation. We're making forward-looking statements and projections that involve risk and uncertainty. Actual results may differ materially from our statements or projections for the reasons that Tara cited earlier. We expect Q4 revenue to be between $915 million and $945 million. This represents about a 3.5% to 7% sequential increase from the third quarter and about a 14% to 18% year-over-year growth rate. On a non-GAAP basis we're expecting gross margins to be just north of 61% as service margins received modestly from their record high in Q3. In addition operating expenses will grow slightly above the rate of revenue with an emphasis on sales and marketing related activities. As a result for forecasting our non-GAAP operating margins to be approximately 15%. With this guidance our non-GAAP operating profit margin for the second half of this FY '08 will be 15.8% in line with our long-term target range. Non-GAAP earnings will be approximately $0.35 to $0.37 per share. GAAP earnings are expected to be $0.23 to $0.25 per share. We expect our diluted share count to remain roughly flat to slightly down in the fourth quarter, depending on stock price. And with that I will now turn the call over to Dan.

Thanks, Steve. Before I comment on the quarter I'd like to take a moment to recognize Tom Mendoza and his promotion to Vice Chairman of the company. Tom's dedication in NetApp's success over the past 14 years has been invaluable and his focus on partner development, customer advocacy and corporate culture for [network] clients are things we value the most. The other promotion we announced was that of Tom Georgens, for the newly created position, President and Chief Operating Officer. Tom has 20 years of [past] experience in the storage industry and in his two years at NetApp, he has demonstrated outstanding leadership. I am confident that consolidating product operations and field operations under Tom result in greater execution focus. And I am sure that he will enhance the NetApp tradition of delivering the most value for customers coupled with a strong competitive focus. In his new role as Chief Operating Officer, it is appropriate to have Tom take you through the results of operations for the quarter. Tom?

Thank you, Dan. Today I'd like to update you on both this quarter's accomplishments and our opportunities for the future. As Steve outlined for you, NetApp posted very strong results for this quarter. One of our objectives for the last few quarter was to diversify our revenue stream beyond or top enterprise accounts. As evidence of our progress, our indirect channel grew 13% sequentially and 32% year-over-year to 63% of total revenue. Our (inaudible) 008-1.55 contribution grew more than a 100% since last year and totaled 17% of revenue for the quarter. Our US commercial business outside of our top enterprise accounts also helped reduce our concentration by growing revenue 17% sequentially. While we are still committed to expanding our top enterprise accounts, we are also focused on expanding our presence in the over 80% of the storage 5000 accounts where we have modest or zero penetration. We are also making strides towards becoming more balanced geographically. Asia-Pac has gained momentum, growing 37% over Q3 of '07, to contribute 13% of revenue. Overall Europe has been consistently strong contributing 35% of revenue this quarter, about the same as Q3 of last year. The American’s accounted for 52% of revenue, up 18% year-over-year, reflecting a seasonally lighter contribution from our federal business. Despite the macroeconomic uncertainty, it is important to remember that strong market position and compelling value proposition NetApp brings to its customers. According to Gartner, NetApp is the leader in the NAS unified storage market and IDC ranks us a leader in the iSCSI market. We distinguish ourselves as the top leader in IT storage and we've successfully integrated (inaudible) 009-1.21 capabilities into that same architecture to become one of the fastest growing SAN (inaudible) in the industry. We are now consistently seeing over 40% of our business including fiber channel or iSCSI protocols. On January 29th, the Storage Performance Council published their independently audited results, comparing NetApp's SAN offering to EMC’s CLARiiON. And in fact, both companies’ best practice configurations our FAS3040 system demonstrated 24% better performance despite a fact that our system used (inaudible) data protection which is typical of real world environment instead of the performance optimized mirroring used by our competitor. When snap-shots were enabled on both systems, once again typical of real world environments NetApp's performance advantage jumped to 234% over CLARiiON. HPC also indicated that NetApp achieved these results with 68% better capacity utilization than EMC. This lay to rest any residual doubt that NetApp has arrived as a leading SAN vendor. These results will be a tremendous asset in our efforts to take additional shares in the large SAN market. Our recent acquisition of Onaro provides yet another way to penetrate competitive SAN environments. Now our enabled customers at large heterogeneous storage infrastructure, to manage capacity, performance, recoverability and change. Onaro has now expanded its offering and includes functionality for NAS and VMware environments. Most recently being awarded Best of VMworld by an independent industry group, as a result of adding this technology to our portfolio, our sales force is excited about the opportunity to engage even more strategically with large accounts. Some project highlights this quarter include the FAS2020 system, our new entry level platform being named storage magazine Product of the Year. With the expansion of the product line and our emphasis on expanding the indirect channel, our lower end systems accounted for almost half of our units shipped. Despite the growth in the entry segment our fastest growing products this quarter were our high-end systems both in terms of units and dollars, now contributing almost 30% of systems revenue, but mid-range systems still contributing a little over 50% of revenue, the portfolio if very balanced. We continue to diversify our product portfolio by investing in emerging products, some of which produce record results this quarter. Revenue from our V-Series virtualization of clients is at an all time high. The V-Series provides customers with a superior NetApp data management functionality in front of arrays for other vendors. Customer gets more efficient storage management and NetApp gets a foot in the in a tranche legacy environments. Our VTL solution showed dramatic growth over Q2 and had a record revenue quarter, while our store security business posted its strongest quarter in almost two years. Data ONTAP GX has doubled its number of customers in the last two quarters and has a strong pipeline of financial services, oil and gas and telecom accounts. We continue to advance our storage manageability software portfolio. And yesterday we announced several new software products and services to improve storage efficiency in virtualized environments. Server virtualization and VMware in particular are top of mind among CIOs today. NetApp's value proposition around reducing risk and complexity while driving improved power and asset efficiency allows customers to maximize the benefits of virtualizing their server infrastructure. In addition our powerful replication technology allows us to uniquely solve disaster recovery and backup issues, which are particularly complex in virtualized environment. Thereby, helping our customers to more quickly move beyond the test phase to full production deployment. Out total terabytes shipped this quarter grew 26% sequentially to 173 terabytes to storage. Our large contributor to our growth and terabytes shipped is the huge proliferation of storage for backup, disaster recovery and archival purposes. The various copies of the data can put number the original by as much as 30 to 1. To address this problem NetApp offers the widest range of storage efficiency features including thin provisioning, flexible cloning and de-duplication. In fact we are the only vendor to offer de-duplication functionality across all copies of the data including the original. Uptake of our (inaudible) 11-1.57 has been tremendous. We have over 1000 licenses installed in Q3 alone. Last year, we focused, I would like to discuss briefly, is our partner ecosystem. We spent a lot of time with the teams at Microsoft, Oracle, SAP and VMware and these relationships are stimulating more business for us everyday. These four environments constitute a majority of business critical data and are essential to the operation of most enterprises. We have developed a set of software and storage solutions that uniquely enable superior performance and reliability for each of these mission critical applications. In addition our IBM relationship also continues [to beat it] 12-0.35 as IBM was up in our mix this quarter to nearly 5% of total revenue. To summarize, NetAPP has become one of the top storage vendors in the industry with a value proposition that affords us a long runway of share gain opportunity. We're focusing on investing and expanding our product portfolio, expanding the markets we cover and diversifying our revenue streams that fuel our growth over the coming quarters and years. We get more leverage everyday from our indirect channel, our international business and our partners. I'm excited about our prospects and I look forward to meeting many of you over the coming months to talk further about opportunities. At this point I will turn the call back over to Dan for his opening remarks.

Thanks. Tom did an excellent job outlining why we're confident and the opportunities we have to grow our business significantly faster than the market as a whole. We think that our value proposition in SAN, and NAS, and iSCSI, secondary stores; virtual tape and data security are quite compelling. We just finished a great quarter and all the economic environment remains uncertain, we believe we had a value proposition that allows us to continue grow faster than the aggregate growth rate of the markets we serve and increase our share in those markets. Now I'll speak on the downturn in 2001 and 2002. The difficult economic environment, provided an opportunity to gain entry in many new accounts. Prospects were forced to consider alternatives to their high class environments and try NetApp's alternative solutions, because we helped them to reduce costs and manage their data more efficiently. We were also at that time an established billion dollar business that got offers in global professional services and support and so we are a viable low-risk alternative. We believe similar opportunities exist for new account acquisition and expansion today. So we are not going to slowdown, our increase in sales capacity. We are going to keep investing and expanding our coverage on new account focus to drive top line growth and capture share. Please join us at our Analyst's Day in New York on Tuesday, March 11th, to get a more in depth look at our plans, our opportunities, and our perspectives on the markets and our business. You can contact our investor relations team for details. I am very proud of NetApp team for accomplishments this past quarter, and it reinforces my confidence and our ability to grow at more than double the industry growth rates. At this point I would like to open the floor to questions. Please limit yourself to one question at a time, and then if you have a second question please return to the queue. So we may address everyone in the allotted time. Operator

Thank you sir. (Operator Instructions) And our first question comes from the line of David Bailey with Goldman Sachs. Please proceed. David Bailey - Goldman Sachs: Great. Thank you very much. Last quarter you commented about your top 22 commercial accounts and said that the revenue was down 4% year-over-year. Can you comment on how that group did this quarter and have you seen the weakness spread to a broader set of customers or geographies?

David this is Dan, we have not tallied up this quarter, last quarter we made that kind of an analysis to understand why we were a little short, but we did not bother to do that math this quarter. If you look at the performance for the various verticals has not changed appreciably quarter-over-quarter. Financial services are lower than its traditional representation or mix. Financial services right now in this past quarter was about 13% typically it's close to the 17%, 18%. So we haven't seen any material change, financial services which I was at large trying to capturing that sector I should point out. A third are in that sector, so I think it's pretty consistent although I cannot answer your question without a quantitative answer. David Bailey - Goldman Sachs: Okay, thank you

And our question comes from the line of Paul Mansky with Citigroup. Please proceed. Paul Mansky - Citigroup: Yeah great, I was hoping you could update us a little bit on a pricing dynamic. It looks like you took some action during the quarter to bundle some more software specifically with the you SAN products, NAS looks like its continuing to price at a premium, notice that EMC just reported the lowest platform software attach rate we've seen in quite a while. You do believe that you are still kind of leading the pricing dynamic down into that kind of SME segment particularly on the SAN side or have you seen some increased competition there, just any color you can provide will be helpful?

Well, Paul on the last call we indicated that we're going to try and move aggressively towards with the introduction of our new low end products, than we'll aggressively expand those channels, I think we did some of that. More broadly I think our tax rates have all looked good actually unit growth has actually looked pretty good. And I actually don't really see anything different in pricing; I don't want to send a message that pricing is benign or any of those words. I think it's been competitive for a long time, but I don’t think I saw anything last quarter that was dramatically different than the quarters prior.

Yeah. The pricing initiatives that we talked about last quarter we implemented. And we just reported on a lot of those were in the channel and some of those I think I mentioned last time would never seen their way to the street some of those took the form of -- performance milestone that earned a partner funded headcounts, do business development on behalf of Network Appliances and things like that. Those programs were very, very successful according to our channel people. Paul Mansky - Citigroup: Thank you very much.

And the next question comes from the line of Aaron Rakers with Wachovia. Please proceed. Aaron Rakers - Wachovia: Yeah, thank you and thanks for taking the question. I guess I want to dive a little bit deeper in the headcount growth here, the comments that you are really not going to drop any additional leverage down to the bottom line going forward. Looks like you missed your target of 300 to 350 net new adds this last quarter. Why might that be and what should we expect in terms of net headcount additions here as we roll into the next quarter?

So, we didn't execute against our plan you were a little sluggish if you will, probably hearing on the side of cautiousness that said you know it's a lost opportunity in some sense because those people won't be generating the people that didn't hire won't be generating revenues for us in the future. So looking forward we are going to try and make up for a little bit of that this quarter. So we catch up and early focus our investments here on sales and marketing activities that basically allow us to and reach out further into the market and grow faster.

Aaron this is Dan. I want to add and one comment on top of Steve's we have some fairly unusual events this quarter as well with respect to conversion of contractors and a few other things for instance when the operations' Andy was a bill to by. The numbers we will give you on headcount are regular full time employees and there contractors and other forms of temporary employment is not included. Next quarter we will see at least a 100 or so increase in the headcount that does not have any associated increase in expense, because of unusual conversions. Aaron Rakers - Wachovia: Thank you.

And our next question comes from the line of Ben Reitzes with UBS. Please proceed. Mr. Reitzes your line is open, please proceed. Ben Reitzes – UBS: Hi, I am here. Just wanted to talk a little bit more about the guidance, I mean, we'd take the midpoint of 5% to 6% or so sequentially, that's the lowest sequential growth rate for the April quarter, since '03. I just wanted you dive a little a deeper and to why you feel that that's prudent at this time, may be if the linearity of the quarter had something to do with it, or bookings or any more color on, I mean, we are all on pins and needles here so.

I bet it's a pain. Ben Reitzes – UBS: Hey Dan.

My guess is this is probably the lowest GDP growth rate we've seen in the same five year period. It's really just not easy, no it's not a function of anything we can put our finger on. It's still early in the year for most of our customers, some of them having quite finalized their spending plans this year. I am sure all of you guys know. But just looking at the macroeconomic conditions, I will have to argue that this quarter doesn’t feel as robust as the last one. Nothing specific to point to you, but I don't think it's going to be at the high end of our growth range relative to private years that is. I think 2003 was a pretty good comparison point. Ben Reitzes – UBS: Okay just anything in particular by geography, you thought was across the board, it doesn't feel as robust?

Yeah, just really across the board. Asia is still doing really well, Australia is doing well, Spain is doing well. The countries in Europe are doing well, some are little slower. As we mentioned last quarter the UK continues to be a little sluggish on a growth line. North America has actually rebound a little bit, especially I was really very pleased to see the East area which is down by financials, that's where the headquarters of the financial services are. The East did really well. So, again, it is not something that's global, it's not something that's across all verticals either, so it's really hard to pick. And then a question for all of you, and I think most of you look at the macroeconomic picture pretty closely. You expect the GDP growth rate to be up or down this coming quarter and I haven't heard anybody say it is going to be up. Ben Reitzes – UBS: Okay. Thanks a lot. And the next question comes from the line of Tom Curlin with RBC Capital Markets. Please proceed. Tom Curlin - RBC Capital Markets: Hi, I think, sticking with the bookings, it seems you are entering an easier compare with respect to year-over-year bookings growth. The April quarter of last year being the first tougher quarter for you on year-over-year bookings, so you think that might offset to some degree what you are seeing in the macro environment. Is that the case and related to that how would you describe your targets on backlog coverage if you were for the end of the April quarter this year versus a year ago. Are you taking extra measures to try to have coverage just given concerns about visibility, relative to macro?

Well, first relative to the bookings, in Q4 of last year we actually had a very strong revenue quarter, so the revenue growth is actually quite robust. Tom Curlin - RBC Capital Markets: The bookings were about 26% year-over-year if I recall the response from the July quarter?

Yeah. But, effectively what we are doing is to compare year-over-year is on the revenue number, not the bookings number. So as far as the backlog, I think at this point I don’t think we are going to give any more color into the backlog and the situation. The bottom-line, as we look forward, is I think there is a lot more uncertainty than where we were a year ago and I think that we are just trying to be cautious and trying to be prudent here about what we focus on. That said one point I would like to not decide of is that we have been working very, very hard on diversifying our revenue stream. We talked about that in prior calls, and I made the comment that a substantial amount of the large storage buyers in this world are not yet our customers today and after keen part of our focus. So I do believe that the opportunity for us to gain share and to grow our business despite the macro environment, but nonetheless to forecast independent the macro over hang I think would be a bit reckless at this point. Tom Curlin - RBC Capital Markets: And just on the backlog coverage scenario do you feel like you are taking extra measures on coverage skill in the macro environment versus a year ago?

Tom its Dan, coming end of this quarter our backlog profile it looks like its at the end entry to Q4 of last year so roughly the same composite backlog to work with. We would expect to have a normal backlog going into Q1, as we [lost] both the bookings estimates we have and the revenue forecast we decide with you. So we're down our normal profile if ever they came together as well. Tom Curlin - RBC Capital Markets: Alright thank you.

And the next question comes from the line of Shebly Seyrafi with Caris Research. Please proceed. Shebly Seyrafi - Caris Research: Yes, thank you very much. So I am curious whether your guidance which is below your typical near double digit sequential growth guidance is mostly because of concerns about the macro noise in the US and Europe or more specifically related to your backlog and your pipeline and thing like that. For example do you have upside to double digit growth in your opinion and related to that do you think that the July quarter I know it's two quarter out could be up like it has in the past or the industry has it down sequentially? Thank you.

Mr. Shebly, I just mentioned the backlog is obviously the same going into Q4, we expect to see it near normal levels as we enter Q1. Is there an upside? Yeah I am optimist right. Yeah, I mean you got to get off to this business there is always potential from double digit growth but our guidance is what it is right as exactly what we think is going to happen. There is lots of puts and takes to this right, there is lots of softness in the economy and also I'll see our fiscal fourth quarter where we've got the maximum incentives going for the sales team. All boiled up that's how we came to the number we shared with you and that's why I would encourage you to land on your forecast relatively to the Q1. I think you should assume Q1 is going down. If you recall at the Analyst meeting last year Steve showed what the normal seasonality is we've seen an increased [saw tooth] that is a drop from Q4 to Q1 over the last few years and you should expect to see that in Q1 of next year.

Yeah, this is Steve. I just want to make sure that we are very, very good on this point the issue. The issue guidance and the guidance we gave you we have our backlog is in a normal position our pipeline looks normal the question is in this environment are you going to close all that pipeline. The question is in this environment how much aggregates the managers are going to be out there. And frankly the demand is down from some of your expectations because we're worried about the outlook.

Yeah, so all of us understand it. We are dealing primarily in the customer community with people who are at the director senior director kind of level. Big thing they have funded programs or particular undertakings and they are facing a budget cut they don't know it for yet to the final sign off. For all of a sudden something are decided to be cut from the plan others are stretched out of time. We don’t know how to forecast and that, here is -- so one my directors told in 2001, your sales guys are always the last to know because the customers they are talking to thinks he is got a budget. And that's issue we are dealing with. And we are out to forecast that for a while, so I would encourage you all to just take very conservative posture on your expectations for Q4. Shebly Seyrafi - Caris Research: Thanks.

And the next question comes from the line of Katie Huberty with Morgan Stanley. Please proceed. Katie Huberty - Morgan Stanley: Hi. Good evening just switching topics back to the business with the new server virtualization group in place, do you have any metrics you can share around the percentage of new installations that are driven by or incorporated into a virtualized server environment?

Probably no metrics that were prepared this year at this point, but if you look at field activity, you look to field engagement and you look at new the opportunities flowing into our pipeline, that even our internal analysis about which is a primary opportunity that we use to renew accounts is very heavily skewed towards [M world]. So I have no doubt just by the empirical data that our penetration in VMware as a percentage of the total market we're probably doing better in the VMware environments than we are doing overall. So I am still very excited, I still think that our focus and the team we put together, I think is building the right capabilities. So all in all I am pretty pleased with that. There is probably nothing that I am specifically wanting to share at this point but I think that we are doing better in our competition and I think we are, our market share in that segment is greater than it is in the market overall, so I feel good about that.

And the next question come from the line of Keith Bachman with Bank of Montreal. Please proceed. Keith Bachman - Bank of Montreal: Hi guys. Thanks very much. I wanted to see if you could add some color either qualitatively or quantitatively on how we should be thinking about the different growth levers particularly between products, which came in at roughly 10% and the other categories and software and services. How should we be thinking about that going forward particularly since sequentially at least the bookings on the balance sheet grew slower than the revenue rate. So just wondering if you could help us think about how we should be thinking about the different revenue levers going forward. Thanks.

Keith I know what Tom answered the corporate side of the question, but the bookings on the balance sheet, when you are referring to… Keith Bachman - Bank of Montreal: Sorry, excuse me Dan, deferred revs, excuse me.

Yeah, deferred revenues grew faster than revenues. Keith Bachman - Bank of Montreal: Not sequentially, on a year-over-year basis they did not sequentially.

I'm sorry, okay.

So maybe I will answer out, so I think Keith you are referring to is the fact that our products and software grew, the non-subscription software. Keith Bachman - Bank of Montreal: Correct.

Grew roughly at 10% last quarter, now, just a couple of points, first, you got to remember you are comparing back to periods when you had our CDBU. Remember our cashing business was included, but you have to add a -- point out more of growth. Keith Bachman - Bank of Montreal: Yeah.

If you backed out CDBU's performance year ago quarter. Keith Bachman - Bank of Montreal: Yeah.

More importantly, I think what we look at very closely is how fast our units grow, and if you look at unit growth, again, sans CDBU, we're looking at 20% growth, that's a lot of sockets out there for network appliance to build on, and to attach secondary storage to, and then provide secondary storage solutions around. So that's the number that we are really looking at. This whole shift that you are seeing compared to a year ago to the lower end of the product line that's out the acceptance of the FAS2000 series and the rapid ramp there is providing a lot of those sockets for us, and that's what we think is really exciting.

Yeah, just a little bit more color on the unit growth. This is Tom. Units have actually grown roughly 15% sequentially each in the last two quarters, and as Steve indicated, those are things that we attach service to, those are the things that we attach professional services, future software to. So in terms of the metrics that we are driving clearly, when I keep driving the unit growth, because that opens up opportunities to follow on sales including the gross margins they go with it which remain robust. Keith Bachman - Bank of Montreal: And so Tom, does that suggest when you anniversary that mix issue that your revenue from products would increase?

There is a lot of complexities that goes into that in terms of discounting and deferred revenue and all those other types of things but I think the otherwise fundamentals is that we drive units we're basically opening up sockets and we preserve gross margins tell this our competitor is strong and I think we're doing well in both of those dimensions.

The typical system shift does not reach its full configuration in terms of things being added to it released two years. So average system units you shipped has essentially got a two year annuity coming forward.

The other thing that's baked into those numbers is hardware upgrades too so you are seeing equipment sales which is different than units sales also I see with upgrades. So upgrade activity will move that number around up and down, but as long as we are selling units that approximately fixed customer acquisition approximately for new footprints. It's also a door opener for future business so the revenue number isn't the entire story. Keith Bachman - Bank of Montreal: Okay, thank you.

And a next question comes from the line of Bill Shope with JPMorgan. Please proceed. Bill Shope - JPMorgan: Okay great thanks. Last quarter on your margin guidance you commented that part of the decline would be from the increase the contributions might be on a seasonal basis, I think you said it was going to be about one third of the margin decline. Was that actually how it played out in the quarter? And then looking at the April quarter obviously IBM's seasonally weaker is that going to be somewhat of a tailwind for the April quarter margins and what does that say about how you expect pricing to trend?

Yes, so you have pretty much played out like we had anticipated IBM ended up roughly 5% of our business it was up from prior quarter and it was indeed about 4/10 of a point I think it might be up to half a point, 4/10 or 4.5 point. 4.5/10 of a point. Going forward IBM should moderate a little bit in terms mix this quarter if history holds here and if that's the case we should pick up roughly tenth of a point or so maybe 2/10 of a point in profit margin. Bill Shope - JPMorgan: Okay. Thank you.

And the next question comes from the line of Kaushik Roy with Pacific Growth Equities. Please proceed. Kaushik Roy - Pacific Growth Equities: Thank you. Can you comment on the impact of the Onaro acquisition on the bottom line and then are you seeing Dell being more aggressive on storage with the EqualLogic acquisition?

I think it's a little early to comment on Dell EqualLogic that deal hasn't been closed for that long and I think we've really seen any fundamental change in dynamics. I think that they are probably actively substituting the product for one of our competitors and then I think they start to see some impact of that. But in terms of market dynamics I don't think I've really seen anything dramatically different shift yet, it's still early.

In terms of the impact of Onaro in our bottom line Kaushik it is absolutely immaterial. It’s a rounding error next quarter and even next year it fairly rounds to a penny in a worse case scenario. Kaushik Roy - Pacific Growth Equities: Okay. Thank you.

And the next question comes from the line of Bill Fearnley with FTN Midwest Research. Please proceed. Bill Fearnley - FTN Midwest Research: Yes, thanks. When you take a look at the competitive dynamics is there any additional color you folks can give regarding decision cycles whether you saw your hardest competition from your larger competitors and your smaller competitors this quarter you've talked about that in the past? The competitors.

Yes. From my viewpoint the competition is primarily with the market leader. It's got us only -- we encounter most frequently and that's normal to really focus most of the energy around. And the smaller guys we think we've done an excellent job in response to the ones that we have represented it a challenge. There are several in that category and we feel though we've done very, very well. Our win rates in all categories are the ones we have identified as ones we should respond to have increased significantly. Bill Fearnley - FTN Midwest Research: Decision cycle Dan.

No it’s the [Syrian] cycle is really good; they are really hard to judge right now. Q3 is the worst I will tell you why because you got some customers who think that a user looser situation at the end of the calendar year and that effects decisions cycles and then and when you get into January which is always actually the toughest month for us of any month in the calendar, because a lot of customer does not have a permanent budget in place. And the first two or three weeks of January we can just close the booking desk because there's nothing coming in and I see you waiting all the guys to kind of nail down the budget to mid January and hopefully things flow. So I can't read anything as a January cadence it sounds likes a normal December, January, you know a big rush at the end of the year, drive period for the first three weeks of January and I just don't know. Bill Fearnley - FTN Midwest Research: Thanks.

And the next question comes from the line of Brent Bracelin with Pacific Crest Securities. Please proceed. Brent Bracelin - Pacific Crest Securities: Thank you. I actually had a follow-up question on your top enterprise customers. I know you don't have specific numbers to give us, but as you think about those set of customers and as you think about the opportunity there. Are you fully penetrating with those customers? Is there still share gain opportunities or you think the trends with those top customers are solely attributed to kind of the sensitivity around kind of economic changes here.

Yeah, I know it in the, I think in the US of the 22 or so commercial top accounts. There is significant growth opportunities for a number of those but the real growth opportunity is reaching beyond us. So I am going to give a few stats real quick. We have done this piece we call storage 5000 trying to identify the 5000 organizations that spend the most on storage in the world. Right now the storage 5000 accounts are roughly three quarters of our total business, and only about, right now, about a third of those are in fact, current customers. And at least a thousand, but we are less than 15% of they are spending on storage. This is a thousand of the largest buyers and storage in the world, who have a relationship with NetApp and we are very low in terms of the total mix their percent if you will or share. That's where the opportunity is from our view point 1,000 accounts that know us and hopefully that we can expand in. And many of those because they are so large I think we can drive them into the top client account program over the next couple of years.

Yeah, I would share that. If you look at the top enterprise accounts, there are no doubts there is some way we have got the overwhelming majority of their wallet and we are going to grow at their rate. But that's not the topmost common case. There is something that we are doing quite well, and as Dan indicated, a substantial amount of them, and that doesn’t even get to the two-thirds of that list where have no presence at all. So if you look at it, if you look at investment levels and the investment decisions that Dan and Steve spoke about, that's why expanding our sales capacity and explaining our awareness is so important to us. We believe there is a substantial amount of customers out there that look just like customers that we have. They are buying products we already have, if we can just reach them, and get in front of them, we can grow our business. Brent Bracelin - Pacific Crest Securities: That's helpful. Thank you.

And the next question comes from the line of Chris Whitmore with Deutsche Bank. Please proceed. Chris Whitmore - Deutsche Bank: Thanks, good afternoon. Steve. I was hoping you can update us on cash available for buyback, how much is in the US, how much is outside and any thoughts or updates around buying back more stock given the depressed stock price? Thanks.

We have, right now we've crossed over the line in the sense where the bulk of our cash is now overseas and remember that a good portion of our US cash, in fact over to $300 million is now in the from of restricted cash which is not available for buyback either. So as a result this quarter, while we plan to be in the market and re-purchasing shares, it will probably be a more modest amount you have seen over the past several quarters obviously.

And the next question comes from the line of Jason Noland with Robert W Baird. Please proceed. Jason Noland - Robert W. Baird: Thanks a lot. I am sure there is going to be a fair month speculation regarding your March 11 analyst day, any preview or additional color there --

It's going to be great. Be there.

We look forward to seeing you there. Jason Noland - Robert W. Baird: Nothing you can say regarding road map or long term operating model or anything along those lines?

You are certainly invited. You should come in here. You can join around the web, if you can’t make it personally. Jason Noland - Robert W. Baird: I'll be there.

And the next question comes from the line Clay Sumner with FBR Research. Please proceed. Clay Sumner - FBR Research: Sure thank you. In the fall, you guys were talking about building up backlog higher than normal level after your July of '07 quarter, higher than you typically carried in the past. With the economy deteriorating since the fall, I would assume you would have tried to continue that trend. Can you just talk about book to bill, was it -- or to assume booked-to-bill would be better than one this quarter? It sounds like you are actually saying the opposite.

Well, Clay, as we talked before; we are not a fenny conductor of the company. Booked-to-bill is not metric that is very meaningful for us, orders measure value and revenue is subject to accounting regulations and accounting recognition rule. So, suffices to say that our backlog is healthy and everything know has been factored into the guidance. The most concern we have about the future has to do with the uncertainty that is out there in marketplace. As Dan said, if the GDP were growing at what it was a year ago, type of thing, I guarantee you we would be projecting faster growth rate.

The commentary here on the bookings and backlog is it that the backlog going in to Q4 looks exactly as the profile ahead going the last Q4. It is not a function of what does the booking profile looks like. So we're sitting in a normal position relative to our backlog and entering in Q4, in terms percentages of all of the numbers that we gave you. Clay Sumner - FBR Research: And Dan do you mind just reminding us what -- I remember you used to say, I think high 20s percent as your product revenues, what's normal in a Q4.

That is a very long memory, because haven’t done anything like that a long time. Like the backlogs says, too many complex components including professional services, DSOE kind of the deferrals come up the balance sheet, other forms of reserves etcetera. It’s a very complex problem. And so that's why I say it gets the right profile. In the order days, back in the late 90s and early 2000 era, backlog predominantly dominated by product backlog which we could build a ship, that's now kind of a days gone by.

And the next question comes from the line of Scott Craig with Bank of America. Please proceed. Scott Craig - Bank of America: Thanks good afternoon. With regard to increasing investments in the channel last quarter, when do those investments start to kind of peak out sort to speak? Secondly when looking at one of the gap measures, the stock compensation expense, it looks like it declines significantly as a percentage of sales. Was there any strategy behind that or just happened to be a lower share price, with the same number of shares and is that changing going forward, thanks.

Isn’t that amazing that accounting really provides you insight for us to drop the share price. That is in fact one of the buy products and how the numbers have calculated. It was not our strategy to drive the share price down.

As far as the channel goes, I don't know if I would use the word peak, that has been an area of continued investment, we wanted leveraged account, we get it from some of those StorEdge 5000 customers as well. So, whether these would be the mid sized enterprise or StorEdge 5000, we intend to continue push the channel. So, I would (inaudible) message that with some how a one time investment, is already half?

Yeah I am just going to follow up on Dan’s point to show you how, just to grow up on Dan’s point; we actually issued more shares for compensation last quarter, both in the form of options and restricting shares than we did the prior quarter, but because of the stock price and – in fact because of the size of the stock price predominantly, you saw a reduction in the amount of stock compensation charge. So, that's the nature of the game, by the way we are on plan for our commitment that we gave on just at the beginning of the year, and we are right on the plan to achieve exactly what we committed to in our (inaudible). Scott Craig - Bank of America: Okay thanks.

And our next question comes from the line of Aaron Rakers with Wachovia. Please proceed. Aaron Rakers - Wachovia: Yeah, thanks for taking the follow-up question. I guess my question is around the IBM relationship, understanding that it grew on a sequential basis. But when we look at the year-over-year growth, it's really implying only about 3% growth. Can you help us understand what's going on there and when we should, may be expect that to really start to materialize in terms of year-over-year growth rate?

Last year's Q3 numbers were, I wouldn’t say inflated but driven to a very large competitor by a major sale to one major US retailer. It was a great big lumpy deal as shown up in that one quarter, and I mean millions and millions of dollars have one quarter and one account. So, it does make a very tough competitor. Aaron Rakers - Wachovia: And then if I could ask a quick follow-up as well. Free cash flow, I know was above the historical average as a percent of revenue. Do you see that reverting back to that level this next quarter or should we think about these current trends continuing?

I think what you will probably see, again if historical trend continues, if you go back to last three or four fourth quarters, you will probably see an extension or an expansion of our DSO, and (inaudible) I would think that they will probably return to more of the historical compare. Aaron Rakers - Wachovia: Thanks for the follow-up.

You bet.

And the next question comes from the line of Tom Curlin with RBC. Please proceed. Tom Curlin - RBC: You have been giving quarterly guidance for several quarters now. Do you plan to come back to an annual guidance policy or do you plan to stick with quarterly guidance?

At our analyst day on March 11th, we will give you our full year FY ’09 guidance. Every quarter we will just update you with the next quarter. Once a year we give the annual guidance and this has been our practice for years, and then every quarter we update the next quarter. Tom Curlin - RBC Capital Markets: Okay. Thank you.

You bet.

And this concludes the question and answer session. I would like to turn it back to Mr. Warmenhoven for closing remarks. Dan Warmenhoven I would like to again thank you all for joining us today and remind you that our much anticipated analyst day is schedule for March 11th in New York. For details please contact our investor relations staff. We look forward to seeing you all there. Again thank you for your time today.

Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very, very much.