Steve Gomo - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance Tara Dhillon - Senior Director of Investor Relations Thomas Georgens - Chief Executive Officer, President and Director

Benjamin Reitzes - Barclays Capital Keith Bachman - BMO Capital Markets U.S. Robert Cihra - Caris & Company David Bailey - Goldman Sachs Group Inc. Amit Daryanani - RBC Capital Markets Corporation Glenn Hanus - Needham & Company, LLC Aaron Rakers - Stifel, Nicolaus & Co., Inc. Mark Kelleher - Brigantine Advisors Chris Whitmore - Deutsche Bank AG Paul Mansky - Canaccord Genuity Jayson Noland - Robert W. Baird & Co. Incorporated Brian Marshall - Broadpoint AmTech, Inc. Mark Moskowitz - JP Morgan Chase & Co John Slack Kathryn Huberty - Morgan Stanley Ittai Kidron - Oppenheimer & Co. Inc. Maynard Um - UBS Investment Bank Wamsi Mohan - BofA Merrill Lynch

Good day, ladies and gentlemen, and welcome to the NetApp Q4 and Fiscal Year 2010 Earnings Conference Call. My name is Shamika, and I will be your coordinator for today. [Operator Instructions] I will now like to turn the presentation over to your host for today's call, Ms. Tara Dhillon, Vice President of Investor Relations. Please proceed.

Good afternoon, everyone. Thank you for joining us. With me on today's call are our CEO, Tom Georgens; and our CFO, Steve Gomo. This call is being webcast live and will be available for replay on our website at netapp.com, along with earnings release, the supplemental commentary, our financial tables and a non-GAAP to GAAP reconciliation. Last quarter, we implemented new format for our quarterly results announcement. Concurrent with the press release, we are now publishing and distributing a supplemental commentary, which contains the metrics and some of the analysis we have previously we provided in our live call. Our goal is to provide the investment community with additional time to review and analyze all of our results, allowing for more thoughtful interactive dialogue during the Q&A. This live call will focus on strategic commentary and outlook from our CEO and CFO and allow for a slightly longer Q&A period. We received very positive feedback on this new approach, so we'll be using it going forward. As a reminder, during today's call, we will make forward-looking statements and projections, including our financial outlook, which involve risk and uncertainty. Actual results may differ materially from our statements and projections. Factors that could cause actual results to differ from our projections are detailed in our accompanying press release, which we have filed on an 8-K with the SEC, as well as our 10-K and 10-Q reports also on file with the SEC and available on our website, all of which are incorporated by reference into today's discussion. These factors include among others that our quarterly operating results may fluctuate for a number of reasons, some of which are beyond our control. All numbers mentioned are GAAP unless stated otherwise. To see the reconciling items between non-GAAP and GAAP, refer to the table in our press release, our supplemental commentary and on our website. I'll now turn the call over to Steve for his thoughts. Steve?

Thanks, Tara. Good afternoon, everyone. NetApp further separated itself from the pack this quarter. We again achieved records across most areas of our business from revenue to cash generation. Record levels of net income, deferred revenue and impressive accounts receivable collection efforts drove both cash from operations and free cash flow to new heights. Free cash flow expressed, as a percentage of revenue, was 37%, well above our targeted range. However, I believe the best indicator of our business strength is our 50% growth in product revenue. That's five zero. 50% organic growth in product revenue demonstrates unquestionable share gains in the network storage market, and we accomplished this while maintaining very strong non-GAAP product gross margins. The main reason I'm so excited about this particular metric is that everything attaches to product. To stay in product growth eventually drives the growth of the deferred revenue element on our P&L. It is no coincidence that the large increase in product revenue was accompanied by a significant increase in the deferred revenue level on our balance sheet. The growth and demand for our product has also put additional strain on our supply chain, which was already experiencing challenges due to unpredictable spot towards it at some parts and the disruptive effect of the volcanic eruption in Europe. To deal with this environment of supply chain variability, we have taken steps to protect the sustainability of our revenue growth by forward provisioning a lot more material around the world. As a result, you should expect all categories of inventory level, raw material, working process and finished goods to run higher than normal for the next few quarters. Our non-GAAP operating expenses were also above plan in Q4, although it was again due primarily to greater-than-expected variable and incentive compensation related to our business volumes and our operating income performance. We will continue to invest in both sales and engineering to further strengthen both our near-term and longer-term growth opportunity. At the same time, we will maintain control over to level of investments we make to ensure that we are spending our resources wisely. We will not spend beyond levels, which we believe we can manage effectively to achieve our growth objective. Looking forward, Q1 revenue is expected to decline from Q4 levels by about 3% to 6%. It is worth noting that the midpoint of our target for Q1 revenue implies a year-over-year growth rate of almost 34%. Granted this is over and easy compare, but at the midpoint of our revenue guidance, we expect product revenue growth to be about 45%. A 45% organic product revenue growth is a remarkable number for a company of our size in any environment, giving you a strong indication of the momentum we have on our business. We expect our Q1 operating expenses to fall from Q4 levels now that the variable and incentive compensation part gets reset at the beginning of our fiscal year. As a result, our forecast non-GAAP operating margin is now expected to be in a range around 17.5% of revenue, plus or minus half a point or so. I'd also like to point out that free cash flow we received from Q4 levels as the accrued compensation for commission and incentive compensation is paid out to employees in Q1. As a result, expect free cash flow to be lower than our targeted range of 17% to 22% in the first quarter. To summarize, we are forecasting continued momentum in our business, once again driven by strong demand for our products. And while we continue to invest assertively in sales and R&D, the combination of strong revenue growth and solid growth margins will drive our operating margin higher than our long-term target. Now I'd like to turn the call over to Tom. Tom?

Thank you, Steve. What a difference a year makes. At the beginning of the last calendar year, economic conditions forced some difficult choices. In response, we created a more focused articulation of our product and go-to-market strategies, we eliminated products and programs that were not aligned with our strategic direction and we moved substantial resources from low-yield activities to be able to fund key initiatives in an investment-constrained environment. While there are still much to do and opportunities for further improvement abound, I'm proud to report the results created by the dedication and hard work of the NetApp team. Despite a slow start in a challenging environment, for the full year, we still managed double-digit revenue growth and achieved our target operating margin level of 16%. In addition, we produced the highest full year growth margin levels in over a decade, while generating a record number of deals over $1 million. Our growth accelerated over the course of the year, and we closed to a tremendous momentum in record revenues, profits and free cash flow. Last year, we spoke at our Analyst Day about the impending tech refresh cycle. The premise was that a protracted downturn had stalled storage spending resulting in an aging infrastructure that would be replacing. However, there was also a transformation underway as customers had begun moving from the application silo model to a shared application infrastructure to underlying architecture for the internal and external cloud. This evolution was enabled by server virtualization, and our competitive advantage in that area would position us well as the cloud infrastructure implementations began. This is clearly playing out as we expected. The tech refresh has been the rising tide that has produced recent growth for most of our major competitors, with NetApp growing significantly faster. The sudden vitality of the storage industry has raised the inevitable question of sustainability. But I would like to point out that the dynamics of NetApp's growth are different than that of the market at large. To get a clearer picture of relative performance, it is instructive to look back at the same quarter two years ago to eliminate the distortion of weak compares. If you look at the storage businesses of the largest vendors on this two-year quarterly compare, you'll find that one is down double digits, two are down high-single digits, and while the fourth is up single-digits, almost all of that is inorganic with this legacy businesses roughly flat. Over the same period, NetApp revenue is up 25%, demonstrating a clear and sustained separation of our relative growth rates. What is different about NetApp is that two years ago, we acquired more new customers than in any year in our history, and we believe our slowdown was cushioned by this new revenue stream. This past year, I've seen repeat purchases from these customers, as well as a new set of first-time buys in another strong customer-acquisition year. While the tech refresh is a tailwind for NetApp as well, our story is also about share gains, opening new accounts and being chosen for significantly larger data center projects, which combine produced growth sooner than any major competitor, create a greater momentum today and leaves us well positioned for continued outperformance even if the current environment moderates. Our traditional business areas, our providing primary and secondary storage offerings in file services, Microsoft, Oracle and SAP environments continue to be robust. In the last few years, virtualization, both server and now desktop, has become a rapidly accelerating part of the business. Roughly 1/3 of our current installed base is supporting virtualized environments. It was not that long ago when people were questioning whether server virtualization was a potential threat to NetApp, when we were in fact the first to recognize the impact of this trend on storage and are now the acknowledged innovation leader in storage for virtualized infrastructures. In the emerging space of desktop virtualization, we have been selected by nine of the 10 largest banks in New York. Further evidence that we have earned our place in the data center is that we had a record number of million-dollar deals and a record number of new customers, whose first purchases were over $500,000. Partnerships have been important to our momentum and our penetration to large accounts. We remain actively engaged in joint innovation and go-to-market activities with our alliance partners Microsoft, Cisco and VMware. We were named Microsoft Storage Partner of the Year last year, and we launched with Cisco and VMware our joint collaboration and support for secure multitenancy, which is an absolutely essential component in providing data privacy and shared infrastructure cloud environments both external and internal. Our distribution partners, Arrow and Avnet, achieved a combined billion dollars in annual revenue for the first time ever, and our relationships with IBM and Fujitsu continue to generate growth. As we mentioned at Analyst Day, systems integrated partners are a big emphasis this year with a large number of practices being developed or in progress. Not surprisingly, many of them are around virtual servers, virtual desktop and cloud computing. The strong performance of our go-to-market team was enabled by a compelling set of product offerings. In our target market, to be the platform of choice for the shared infrastructure, our portfolio of products is second to no one. Despite considerable noise in the industry, NetApp has quietly demonstrated the most efficient and effective way to deploy flash technology and storage systems, and we believe our nearly 20% attach rate is the highest of our major competitor. Our storage efficiency, as evidenced by our 50% guarantee, enables customers to meet their business objectives with dramatically less storage, which has opened up new customers and new projects within existing customers especially in difficult economic conditions. Our solutions around virtualization remain leading edge as we move beyond simple server virtualization to virtual desktop, Hyper-V and the internal and external clouds. A key component here is our secure multi-tenancy capability and end-to-end solution, which allows multiple apps or multiple customers to securely share hardware at every level of the stack. We have yet to see any meaningful competitive response to this offering. In storage, 2009 might have been the year of flash, with NetApp emerging as the leader. But this year will be the year of unified storage. The ability to do both block and file access will become even more important in the future. As people ought to realize the full potential of a shared homogeneous infrastructure running multiple applications, multi-protocol capability will be a requirement. In fact, about 80% of our systems deployed in virtualized environments today run multiple protocols, and products without this capability will eventually be relegated to legacy and niche applications. NetApp has had unified storage since 2002. And with over 150,000 such units installed, we have the unquestioned market leader in the space. Cloud computing will surely be a hot topic for the forseeable future, and a share infrastructure will be a key component of any cloud architecture. This is our focus where we are winning today and where our biggest go forward opportunity lies. A consilience of an aging infrastructure and the re-architecting of the data center represent one of the largest share shift opportunities in the decade. NetApp has innovated beyond the conventional approaches and offers compelling functionality, attractive economics and dramatically reduced complexity, enabling customers to realize the business objective of cloud computing with reduced risk. We have customers in production in that scale in the areas of internal clouds, virtual desktops and external clouds using technology we introduced years ahead of the rest of the industry. While we finish the year with momentum, we have elected not to give annual guidance, which we believe that any 12-month projection will be dominated by a number of external moving parts that we are in no position to predict. However, do not let the lack of guidance reflect any lack of confidence in the sustainability of our competitive position. Good market or bad, we expect to gain share. Evidence of this confidence is our continued aggressive investment in the business. With our current momentum and a compelling amount of market share in play in the intermediate term, executing on this opportunity is still our highest priority. That said, due to better-than-expected revenue growth in gross margins, we exceeded our long-term model of 16% to three quarters in a row and guided above it again next quarter. As long as business remains strong, I see our operating margins staying around our projected Q1 level, give or take, half a point, for the rest of fiscal year 2011. If the economic conditions deteriorates to the extent we can, we will adjust our spending accordingly and work to protect the 16% long-term target. I will close by offering my sincere thanks to the entire NetApp team for a tremendous execution this quarter and for a remarkable year. The difficult decisions made early last year and the transformation projects they generated, many of which are still underway, enabled the rapid turnaround in the business and the record results we announced today. I would also like to take a moment to honor Mr. Don Valentine. After 16 years of tremendous service, Don has decided to retire from the NetApp Board of Directors. I'm sure many of you know that Don is a founding partner of Sequoia Capital, which led the Series C round of venture financing of NetApp back in September of 1994. Don has been on the board ever since serving as Chairman until 2008. On behalf of the company and the board, I would like to thank him for his immeasurable contribution and wish him all the best for the future. At this point, I will open up the floor to questions. Given the number of people in the queue, we ask that you limit yourself to one question so that we have a chance to address everyone doing our allotted time. Thank you. Operator?

[Operator Instructions] Your first question comes from the line of Ittai Kidron of Oppenheimer. Ittai Kidron - Oppenheimer & Co. Inc.: Tom, three times during your prepared remarks, you've mentioned something to the extent of should things turn around, turn back down south from an economic standpoint. Can you give us all the more clarity? I would assume that over the last two weeks, you've made a lot of phone calls to your people on the ground in Europe. What is it that you're seeing over there? And is there any indication that the recovery that we've seen up until now is to stall?

I think that we don't see anything in the horizon that you don't read about in the papers everyday. I think that it clearly concerns about Europe. We have Wall Street Journal this week, talk about the potential of the double dip, and I think all of those are out there. And I'm not going to handicap the likelihood of them, but I think we need to be aware of them. As far as what we're hearing from Europe, I think there's two components of the story. Number one is I don't see anybody backing away from the number even in dollar terms. On the other hand, it's still early in the quarter and we'll see how that plays out. But I think the big thing about Europe is, while we have some strong presence in a number of countries, we also have very, very small presence in a bunch of others that represent significant growth and share opportunities for us. In economies where we have very little market share, the macro doesn't really matter that much, and that's kind of my message to them and if they had a message to me. But right now, I think everybody's reading the headlines, but people are still bullish about the business and ability to gain share. And the customers that we talked to that are going to drive the number are still relatively positive. So I think Europe is really two components. One is the local currency conversion, and where we're going to go from $1.22 to $1.23, I don't think anybody knows, and that's clearly our estimates of that that's factored into our guidance. And the other one is will actually be a reduction of demand. And I think in the latter category, at this point in time, we're not seeing that yet.

Your next question comes from the line of Brian Marshall of Broadpoint AmTech. Brian Marshall - Broadpoint AmTech, Inc.: Question with regards to the operating margin, pro forma operating margin guidance for July at about 17.5%. Typically, the Q1 time frame for your fiscal year is the low point of the margin structure for you guys throughout the fiscal year. So I was wondering how you could talk about that kind of being flattish relative to Steve's prior comments in the call saying that we're going to invest wisely and not jeopardize kind of margins going forward?

Brian, Steve here. So couple things, first, you'll notice that the guidance in revenue, revenues are not rolling off probably as much as had been anticipated they would. Probably more importantly is gross margins are going to remain fairly strong. In fact, they're not going to change a whole lot from the fourth quarter. It'd be down slightly but not much. Operating expenses are going to fall primarily because we had so much acceleration of our incentive compensation program and our commissions in the fourth quarter. So when you add those three things up, revenue's at a relatively stable level, at least compared with past years. Gross margins that are going to stay firm and the reduction in expenses, that's how you're able to protect that operating margin. Brian Marshall - Broadpoint AmTech, Inc.: And so as it rolls through the fiscal year, you would expect pro forma operating expenses to be relatively constant as a percent of sales?

I think that's what Tom said in his prepared remarks.

Yes, I think that's the only way you get there. I don't believe that gross margins are going to be particularly volatile over the course of the year, so I think we're going to do that. And sales remain robust. Certainly, we've had accelerating sales growth as the years has gone on and I think even if they stay around this level. We're not holding back on the spending side. We're investing heavily in engineering. We're investing heavily in sales. As obviously in the other parts of the business, we need to invest in the scale. But there's a limit to how much we can do that. And as long as revenue remains at this kind of growth rate, that's what's enabling us to stay at our operating margin now for three quarters going on four above our historical level. So I think that is not a fundamental change in philosophy here. I just think that the sales and the gross margins have been particularly robust over sustained period of time.

Your next question comes from the line of Mark Moskowitz of JPMorgan. Mark Moskowitz - JP Morgan Chase & Co: The question is around the mid-range market. Clearly, you talked about in your prepared remarks about all the opportunity and the displacement have taken place competitively on behalf of NetApp. I just want to get a sense, is this a function of just a market shift where we're seeing the low end and the high end come to the midrange and so there's plenty of revenue opportunities to go around? Or are you just really have become in a mark with a much better technology that even with your peers trying to come out new refreshes later this year, you're probably still a couple steps ahead?

Yes, Mark, I kind of bristled a little bit at the midrange and the high end. I think that there is a storage market, and there are different kinds of product, different size of products with different needs within that market. And I think that we're winning in storage in general. I just don't think that "midrange" has substantially different dynamics than what you recall the high end. And in fact, if you look at the numbers, we have a remarkably strong quarter at the very, very high end in terms of the unit shift. So I think all in all, the business is robust. Customers buy different types of products for different things. Certainly, we saw a year ago, when customers were not that focused on building an excess capacity or future headroom, they will try to just get by with a minimum they could. And clearly, that was skewing the demands towards the smallest machines they can possibly buy to keep the business running. I think now, I think people have a little bit more view towards the future. But what I think about our 3,000 sales and our 6,000 sales, I really don't think that they're separate dynamics driving both of those. I think that there maybe individual customer dynamics from time to time. But overall, I consider those two markets homogeneous.

Your next question comes from the line of Amit Daryani (sic) [Amit Daryanani] of RBC. Amit Daryanani - RBC Capital Markets Corporation: Steve, you just talked about unified storage to be in a fairly bit focus in 2010. Can you just talk about how do you see EMC's launch of that unified offering down the road playing out to guys? And could you share the feeds that you've gotten from your customers on that product? And if you do see that data source of revenue, had it been down the road?

Well, I think first and foremost, I think unified storage is a big deal. And I would expect to hear a lot more from the competition this year or on forward about that. If you think about what customers are trying to do with their server infrastructure, they're trying to build a broad homogeneous shared infrastructure that's capable of running multiple apps. From the storage side, if I would do the same thing and if they're going to try and build a shared infrastructure that's got different solutions for the low end and the high end, from SAN [storage area network] and for NAS [network-attached storage], for the PC entire purpose and the economic model to shared infrastructure. So I think that multi-protocol is absolutely an essential component of the shared infrastructure going forward. And in fact, if you look at what we sell in virtualization, the amount of unified product we have is very high. It's about 80% of products for multiple protocols. But I think point number one is I think that any product that does not have multiple protocol capability is eventually approaching obsolescence, and it's going to be at best and niche or legacy product and it applies to other products from the vendor you mentioned. As far as the EMC's entry into the space, I mean, we've been doing this since 2002. Certainly, we've learned a few things along the way. I'm sure they have learned a few things from us. And when this product ultimately emerges, I think we'll know more about it, how well unified it really is or is it really just two things in one box. Time will tell, and I don't want to speculate about what they actually offer. By the end of the day, I expect them to have a product, and we'll meet them in the market and we'll see how it shakes out. But the big question, unified storage should be a requirement for every customer buying storage today, and a single-protocol box, I think will be hard to defend in terms of future price protection and future architecture protection.

Your next question comes from the line of Wamsi Mohan of Merrill Lynch. Wamsi Mohan - BofA Merrill Lynch: Tom, NetApp growth was really impressive in the quarter despite the lowest level of IBM revenue contribution in almost three years now. A few years ago, this was supposed to be about 10% of your revenues. It seems to be moving the other way. Is there a mutual de-emphasis especially given IBM is beginning to shift its own scale-out NAS product? And you view the relationship as less strategic or is it mostly seasonal weakness, which we should expect will reverse next quarter?

Wamsi, as far as IBM is concerned, a couple of interesting things at play is the growth numbers of the business measured in net quarterly boundaries are actually something we would've liked to have highlighted. But to some, it's a little bit of timing and we'll see where it goes. The other thing is we're coming off the quarter that wrapped around their Q4, which is the traditional quarter weight of the highest percentage of our revenue. Wamsi Mohan - BofA Merrill Lynch: So they're still generating growth year-over-year?

But clearly not at the rate of the broader NetApp. As far as IBM is concerned, I think that they're still very, very important to us. There is no doubt that they've got a set of products that are internally developed, and I think all else being equal, they would prefer to sell those. I think there's economic reasons and customer account control reasons why they'd want to do that. We certainly see that going on. On the other hand, with our growth is tremendous demand for our products in the market. And when we collaborate them or out sell into big accounts, so we've got common partners. What is customer's specific demand for our product, I think that moved ahead with it. The big picture the way we see IBM is there's going to be a classic customers that are going to value the integration of all the technologies together. And in that particular case, for the customers to add value integration over individual functionality of every level of the stack, notice that the reach outside customer's partners like IBM are going to matter and therefore, they remain strategic for us. On the other hand, I think that when customers gain an integration, they lose investor breed. And in that regard, clearly, that's going to be a key part of our sell emotion as well, so I think IBM for the customers that are looking for integrated solutions are going to be very, very important. Our observation more generally around IBM is that, I think, clearly, they would like to position their own products where they can. However, the customer facing component of IBM, the people they have to deal with customers everyday and after offer up solutions for virtualization, that's probably where the support for NetApp is coming. Clearly, as a percentage of our revenue, is real money, as a real part of that business. And I think they would sell their own product if they could. But there's a lot of customer demand for our product and that continues to exist and that continues to grow. So all in all, I think obviously, there's various complexity. I'm not going to deny it. I think that we will never be satisfied with the positioning of the product. On the other hand, I think we add value in the core strategic areas that are point of emphasis for IBM around cloud computing, and in those areas, we continue to engage very productively.

You have a question from the line of Paul Mansky of Canaccord. Paul Mansky - Canaccord Genuity: On the V-series, specifically, you've been growing that product line both sequentially and year-on-year, they're pretty good for, basically, as long as I can remember. I'm paraphrasing here, but I know in the past, you've characterized that as customer acquisition versus immediate revenue needle-moving business. Can you may be update, give us an update vis-à-vis where we are on that kind of total business maturing into larger system sales, particularly as it relates to some of the commentary around the high end that you put up this past quarter?

Yes, the V-series remains very, very robust. And one kind of little idiosyncrasy about the V-series business, which I think is the essence of your question, is over time, a lot of the V-series business converts into conventional system sales. So in some cases, their business age is off. So in order to maintain this growth rate, they need to continue to get new parts of the new customers. Because of two, three, four years down the pipe, that actually convert to standard customers that are not V-series accounts anymore. And in fact, they had one account. I remember, when I joined the company, that was about 20% of the V-series business. In fact, there was -- at that time, I think our largest SAN installation in the world, that it was V-series. And about a year ago, they actually converted over to buying our standard products. So your point is well taken. When we move into account and retail the NetApp store year around, storage efficiency and integration with apps and unify data protection and all of the things that we can do, that's where the -- could be intrigued by that. But they're not in a position, generally, to rip out everything that they've got and replace it. It's just not economically viable, the private accounting won't handle it. So this is a way to introduce our technology into our customer. They could standardize on our software base, which is where our true value ad lives. And we can bring value to the infrastructure they already have. But make no mistake, our long term goal is ultimately to replace that infrastructure, and that's what's going on. So I think that's playing out exactly as we said. So the growth of that business is despite the fact that a lot of the biggest, most successful accounts are in fact converting to our standard product. So extremely pleased with V-series, it's been a key component of us entering new accounts, particularly in the Storage 5000, and it will remain so. And it's exciting to see the product so robust. So when we look at the V-series, it isn't only about V-series revenue, it's really about new accounts opened with V-series because clearly, it's a very, very compelling and easy entry point for our customers.

Your next question comes from the line of David Bailey of Goldman Sachs. David Bailey - Goldman Sachs Group Inc.: Indirect revenue continues to increase as a percentage of your mix. I think this quarter, it was up to 71%. Do you have a target for your direct, indirect mix? Or is there sort of a natural cap for indirect as a percentage of revenue?

I don't think we have a target per se. I think what's driving that is a recognition that, as we think about the Storage 5000 and we think about the mid-sized enterprise business, it's how much of that opportunity is still uncovered. A couple of years ago, we started doing this Storage 5000, we realized just how concentrated we were. And we've uncovered or we've executed on a bunch of plans, both in terms of refreshing in the product offerings, incentives for the channel, training for the channel, turning over a lot of our professional services to this channel, bundling, things like that to drive velocity has really expanded our Channel business at the low end. I think in the rest of the business, work with the systems integrators and our OEMs has been very, very successful. So I don't think we're staring at a number saying, "Someday, we want to get to 85%." I think of more -- probably though a more accurate characterization would be NetApp is trying to grow this business at a high rate. We need to expand our coverage model. And the most cost effective way of doing that is through the channel, and we're making those investments. And I think it's a big part of our growth.

Your next question comes from the line of Maynard Um of UBS. Maynard Um - UBS Investment Bank: Just a question on the inventories. Was there a significant amount of business that you left on the table this quarter because of the component? And does any of that flow over into the July quarter and embedded into your guidance? And I'm just curious, because if you're doing strategic buys this quarter or next, it seems to imply we're going to see a big ramp coming maybe in the October quarter. So if you could just help me understand the inventory versus the product revenue?

Maynard, Steve here. Yes, we have inventory designated for a shipment leftover every quarter. Revenue recognition rules are very complex. And if we can't recognize the revenue, basically we reverse the shipment transaction and things appear to be back in inventory. We have a large amount at the end of last quarter -- the third quarter. They have a similar amount this quarter relative to the revenue level. And we expect to have some at the end of the first quarter, and about the same level relative to the revenue level. But there's nothing, other than that, going on. With respect to the inventory purchases we're making, we have experienced these spot shortages apart. And they create havoc for us because a single part can hold up an entire shipment sale. So basically what we've done here is forward provision, that they will buy in advance a whole bunch of critical product parts that come in at various levels of inventory, whether it's raw material or WIP [Work in Progress] or FGI [Finished Goods Inventory]. The nick cartridges [ph] would come in with FGI. And basically, we pull those forward. We put them in inventory now, so the inventory level step up. But it basically protect us and gives us more confidence in our revenue levels going forward. And all of that has been factored into the guidance. But [indiscernible] I answer that is I never imagined in a hundred years, I'd be talking about volcanoes on this call, but the volcano eruption was not exactly at a favorable time in our quarter. It wasn't in the last week, but it was close in our supply chain into our European manufacturing, primarily M&As in the Far East. So I think from our perspective, is this situation is probably not going to go away overnight. And I think we want to be a little bit more careful about forward provisioning some materials, so that we could tolerate at this some type of disruption in a supply chain to that regard. So at the very least, I don't want to use volcanoes. The worst thing I could do is -- I should say, the only thing worse than inventory on volcanoes is blaming the revenue mix on volcanoes. But I think the operations team did a great job of overcoming now at the spot shortages, but the disruptions and the transportation. And I think that we ultimately fulfilled what we were going to fulfill this quarter. And I don't believe that there was any arbitrary hold up or revenue as a result of these disruptions.

I have a question from the line of Keith Bachman of Bank of Montreal. Keith Bachman - BMO Capital Markets U.S.: Steve, I wonder to see if I could target this one to you. Your sequential growth on products was fantastic, and how should we be thing about the mix of revenues knowing the July quarter was there after? I assume it would be some catch up, so to speak, on software entitlement and services and then the margin implications on that, if I could please?

You bet, Keith. So the bottom line is, that you're not going to see a great deal of growth in the services and SEM [software entitlements and maintenance] lines sequentially into the first quarter. We're going through a transition there. We're in the process of building deferred revenues. The revenues that are coming off the balance sheet are coming off, and mostly represent a period when the company was growing much slower. So you're going to see a relatively flat sequential growth on those items. Products however, aren't so ever are doing, as we mentioned, are doing very, very well sequentially. And even as we move into the first quarter, they're the ones that are causing the decline, right? But nonetheless, compared to any other first quarter, it's extremely robust. And right now, the story of NetApp is the story of our product sales. Yes, I think that historical seasonality discussion in this environment, I think it might be hard to draw historical comparisons. I think that the market is not on a straight line. So I don't think did this is a normal year. We can argue with the second half is going to go. But I think right now, some of traditional seasonality components, I think, are not going to be what they were historically, both positive and negative. And I think that's the reason why we have to done [ph] the full year guidance. I think we have the visibility into Q1. We gave the best we could. But I think simple seasonality makes an assumption that the overall environment is stable. And I think, certainly, we've seen a run up recently and we'll see how long that sustains.

I would like to add to that, Steve, that you have to be careful of historical seasonality. In history, the deferred level in our revenues was roughly 20%.

We have a question from the line of Chris Whitmore of Deutsche Bank. Chris Whitmore - Deutsche Bank AG: Beyond this year, I wanted to get some color in terms of the longer-term operating margin expectations. Are you resetting the bar on a longer term basis towards that 17.5% level? Can you maintain and make the investments you need to make to continue to grow, or is this a one-year bump up?

I think, long term, I don't think that our fundamental position has changed. I think we're in a situation now where the revenue at gross margin has been sufficiently robust to support a higher number. Probably, more generally though is, we went through a period whereas the product revenue dropped down. The components coming off the balance sheet, which are higher margin were higher and we're holding up the gross margin. I think that the longer-term question is, as products become more stabilized and our bigger percentage of our revenue going forward, that put some downward pressure over time on the gross margin. And so our options were that we choose to invest today to basically stay at 16% today and that at much, much higher rate. And then as the margins come down lower on that's been. And our feeling was at this particular time, we're investing as fast as we can prudently invest. And that's producing with a high gross margin umbrella, that's actually producing high operating margin. But I think in the long-run, we're probably do expect. In the long run, I don't know how long the long run is. I gave guidance for this year. I would think that sometime beyond that, we'll start to see prior movement back towards 16%. But for the forseeable future, as long as the business holds up, I think we're going to stay in the range where we at now.

You have a question from the line of Aaron Rakers of Stifel, Nicolaus. Aaron Rakers - Stifel, Nicolaus & Co., Inc.: My question is on the cash generation that you guys have seen here. And in the context of share repurchases, on use of cash your going forward, can you update us there on your thoughts around share repurchase with continually seeing a little bit of a creep up in the fully diluted share count? And in that discussion also maybe it would be helpful to update us on kind of where your thoughts are in terms of the cash sitting overseas relative to domestic and thoughts on acquisitions?

Well, I'll handle the first part of that. So we'll start here. Right now, we have no -- we're not planning any action with respect to a stock repurchase. That said, we haven't change our policy in terms of trying to make sure that we offset the effects of our own stock option grants. We're actually ahead of our game right now. We're actually ahead of our objective. So we don't see any compelling need to do a stock repurchase. We also prefer, at this point, to let the cash accumulate that gives us just a ton more flexibility with all the other risks in the world, type of thing that makes you feel very, very good to have that kind of cash. And it also gives a lot flexibility from the strategic initiative standpoint. So that's kind of been our strategy, and I think that's going to be our strategy going forward for the forseeable future. With respect to the location geographically of the cash, we have about 56% of the cash that's -- this quarter was domestic, and the rest of it is overseas. We have no plans to bring that back. There's no way we can bring that back without a significant tax, unless we use it as part of a M&A initiative. So I don't see that changing very much. I think these ratios are going to stay in place for a while.

Yes, on the broader question of M&A, we just closed one just a couple of weeks ago. And I think the M&A will fall into really two categories: One of them is technology that we'd like to integrate as part of our portfolio, that's clearly where the acquisition we just did with Bycast. I'm actually quite excited about that in terms of the emerging space of content repositories and, particularly, the vertical that they staked out in healthcare. So I think we'll continue to do that, the long-term objective of that technology is actually to embedded in our core offering. Once again, unifying storage around content repositories with everything else that we do. I think beyond the tuck-ins, I think we also are open to other types of transactions. I think the key criteria that we would look to evaluate them is something that's not too far afield. Something that is going to have leverage of our own sales force, something our own sales force could sell or something that have in our portfolio that by virtue of having it, we'll actually accelerate the sales of our existing products. So from an acquisition perspective, I think that -- last summer, there was a lot of speculation. You could net outgrow without acquiring, I think we've proven that one. But I think as we go forward, I think there's still adjacent markets that we think we can exploit. But the adjacency and the cross leverage is going to be a key component of any choice that we make, and that's how we're looking at it. So tuck-ins, I expect to do more of them. Larger transactions, we may or may not do them. But really, the leverage is going to be the key criteria.

Your next question comes from the line of Ben Reitzes of Barclays Capital. Benjamin Reitzes - Barclays Capital: With regard to Europe, could you just talk about how it went in the quarter? Because you really exceeded my expectations there, by the most of any CEO. And what your guidance implies for Europe in the first quarter? Obviously, you said before that you haven't seen any economic effects there, but just a little more detail. We can talk about what you saw that made it so strong in the quarter and what's baked into your guidance, including currency?

I mean, what we're doing over there is really about gaining share. So the macro environment. We got pipeline. We're executing it for pipeline. We're closing deals. And until such time as they actually see the pipeline disappear or the deals be unable to close, that I don't think we're particularly along to that where we are at Europe. So I think, so far, we haven't seen that. We had really, really strong momentum there last quarter. Our Q1 of the quarter we're going into is traditionally soft quarter for them. They're historically strong in our Q3. Usually, that's their biggest quarter of the year. Although, they actually did quite well in Q4 as well, which is a bit of an anomaly. So I think they have momentum, the headlines are not great and I think they're going to come down somewhere between those two extremes. But so far, I don't see them talking about weakness in the pipeline or inability to close deals. And we'll see how that plays out over time. Benjamin Reitzes - Barclays Capital: And the currency impact you guys are using?

The currency impact, you probably saw the currency impact this quarter. If rates stay roughly were they are, we're going to see about a three percentage point headwind for the company in the first quarter. It would be larger than that in Europe, obviously.

Your next question comes from the line of Jayson Noland of Robert Baird (sic) [Robert W. Baird]. Jayson Noland - Robert W. Baird & Co. Incorporated: Just to follow up to the question on direct versus indirect. Direct has fair, roughly flat over the last couple of years and channel has been very strong. I guess, are you seeing pent-up demand at all on the direct side or have you shift some business from direct to indirect?

I don't know if I'd buy the flat argument. I mean, even in this quarter, it was up 19% or so year-over-year, if you check my number. But there's no doubt that the indirect is growing faster than direct. There's no doubt about that. And the other thing that we are to bear in mind is that a lot of our people are very, very actively engaged with a lot of the indirect accounts. Our Federal business, which is one of the strongest businesses we have as a company is almost all indirect. Yet, we're involved with a lot of those transactions directly with the end user, directly with the integrators, directly to the resellers. I wouldn't make indirect synonymous with no touch. I'm including the work we're doing [indiscernible] with Avnet, less of that business is touched by NetApp. But as you go upstream, it's a larger deals, even with those guys with our major resellers or with our systems integrators. There's still a fair amount of touch associated with it. For a lot of reasons, customers will buy indirect because they may already have purchasing agreements and contracts in place, and things or alike. So I think that frankly, our challenge is to get more of no-touch business into the company. But we're trying to make more and more of our partners self-sufficient. So I think that's a big part of it as well. But the simple fact of the matter is, there are a lot of customers that we're just not going to get to it with our own direct sales force, so we need to have the leverage and the coverage of the indirect players. As far as our big direct accounts are clearly, we saw a bounce back over the last six months there, certainly from where they were a year prior. So I think we just seen a bounce back there as well. And the number, actually, in this past quarter was -- the Direct business was up 19% year-over-year or up 33% overall. So our Indirect business, you can do the math, it was the majority of it was higher. So I had to probably use a 40 plus percent range, actually it was 40%.

Your next question comes from the line of Katy Huberty of Morgan Stanley. Kathryn Huberty - Morgan Stanley: In the conversation with Keith, you talked about the impressive sequential growth in the product revenue business. And product gross margins are very healthy, but they didn't come up with a higher volume. So can just talk through the impact from component costs and mix, and anything you saw on pricing during the quarter?

Well, I think all those are factors. I think pricing is probably the most benign. I'll admit that it's not as easy to negotiate price reductions when your begging people for parts. But for the most part, I don't think that component pricing was the serious factor in the overall margin picture. As far as scale, we also did our record number of big accounts as well. And in those particular scenarios, discounting becomes a bit more competitive. So I think all in all, we have a portfolio of business. We're trying to manage the portfolio to a guide point. But I think overall, the component pricing is probably the least impactful in terms of our margin picture, and more of it is just individual business dynamics. And the other thing is, the luxury of scale and the margin tailwind that gives us allow us to be more aggressive elsewhere to win deals very aggressively where we need to.

Yes, I think to what's worth getting the volume effect are actually were positive during the quarter, and they were offset by other -- most of other minor things, a lot of little things. But the volume effects were fairly substantial. They were about a half of point during the quarter favorable. But as I said, eaten away by a number of other things.

You have a question from the line of Rob Cihra of Caris & Company. Robert Cihra - Caris & Company: Your mix between system's midrange and high end was obviously quite strong sequentially. But your year-over-year trends have been a little funky, just given year-ago comps, where we were. Can you just give any kind of insight into what areas maybe you just feel strongest for you now looking forward by other customer segment or competitive positioning, that sort of thing?

In terms of the youth cases, virtual desktop is clearly hot and probably one of the areas where we probably at the highest win rate. I think the integration of our technology in terms of dramatically reducing the cost receipt is really, really impactful. And it's a difference between customers making the choice to move ahead or not move ahead. I think we're also seeing in our larger accounts, I think we've earned the right to complete more broadly for businesses and other projects or opportunities in other projects. And I think, particularly now, as I think about the internal cloud or the private cloud or the shared infrastructure, whatever you want to call it. I think maybe four or five years ago, we're probably not considered for those. So we're included being considered for those now. So in the big accounts, I think we're competing more broadly beyond our historical, where we have previously been relegated. I think that a lot more of the opportunity in those accounts has opened to us. In terms of new account acquisition, one of the things that was particularly notable this quarter is the amount of first time transactions over $500,000. And that's the sign is -- yes, I always tell people kind of the history of the NetApp sales call is that we give people, we've help people of valued proposition. Customer say, I don't use that from the competition. I'm not so sure you could do it. And we have some, just give us the project to prove it. And that we either prove it or we don't prove it. More often than not we do, and then we grow. I think, in a lot of cases, we've moved to a point where we're being recognized as an innovation leader around some of these new technologies, and people were making bigger bets with us when their first engaged with NetApp.

Your next question comes from the line of Richard Gardner of Citigroup.

This is John Flack, on for Rich. Quick question. Couple of quarters back, you guys were talking about using the service provider, the channel, and both during the service provider kind of indirect sales force. And as we kind of moved to cloud orientation. I'd love to hear an update on how those efforts are going?

Yes, I think I heard the question wrong. I think you said service provider and I heard systems integrators. So that service provider?

I take them both, actually.

So first of all, as part as the systems integrators go. Yes, that is the big part of our approach. The key to the systems integrators is, at this point, in the evolution of those relationships, is more about getting designed into the practices and the product offerings that they are, in turn, delivering. So if their going to build the practice area around SAP deployment, so around virtual desktop or around Oracle. We want to be an integral part of that. So while we're clearly working together on deals and we acutally measure revenue that we did through our systems integrator, then that's working out fine. At this point, what seems more keen interest is their practive development. And so they've got more components or their arsenal where they're bidding NetApp everyday at a very, very high solution level and a much more strategic. So we're quite pleased with the rollout there. And the service providers, in some ways, that's somewhat similar because a lot of them are making important infrastructure choices about how they're going to structure their competitive offerings to their market. So I'd say that the market is somewhat uneven. In Europe, I'd say the progress of the service providers as a significant provider in the market. It's far more mature than in the United States. So as I look at British Telecom, they've built a cloud offering around NetApp. I look at some of the other players over there. But the most -- probably the biggest one that we talk about is T-Systems. The T-Systems has proven to be a very, very successful service provider in Europe. They've built their own platform that they migrate applications too. That application has put those platform as built on NetApp, and they had just a phenomenal year with us, a substantial amount of business in Europe and they're growing they're very, very rapidly. And clearly, I think that's probably the most successful story in Europe of any service provider. In the U.S., I think the model is somewhat different. Either telcos aren't quite as engaged just yet. There's a lot of intermediate-type companies with a lot of promise, but they're not the big name brands. And I think your familiar with a lot of those. One of them terra markets sought out to build a niche. Commercial business put they built the niche at around federal. We had this CIO of the federal government talking about not building any more data centers. They're looking to go to the cloud, terra markets trying to do that. They've built to practice in that area around NetApp. So the service providers and the systems integrators, I think, is progressing well. I think we're still on the design in phase, although, a couple of those are generating substantial revenue for us. But right now, I think we're quite pleased with the progress and we'll see how that's going to play out. Clearly, there's going to be some winners and losers and we'll probably invest in some losers along the way. But I think key systems is clearly a winner, and they had standardized on us. And I think we have some other winners on the way.

Your next question comes from the line of Mark Kelleher of Brigantine Advisors. Mark Kelleher - Brigantine Advisors: The service margin has bounced around quite a bit over the last few quarters. And if I'm not mistaken, that's a record number you just posted. Can you provide some more commentary on the drivers of service margin and do expect that level, let's say, in Q4 to be sustainable over the year?

Hi, Mark. Steve here. I guess the reverse order, yes, I expect that to be fairly sustainable level. All the vectors are playing in the right direction in our service business. The reason why there was a jump in the fourth quarter from the third was because our utilization of professional services, those was particularly high. You'll notice that a year ago, the same thing happened and it's almost exactly the same reason. At the end of the year, we tried to -- our guidance going out really try to shut down the SOWs [statement of work]. Get the work done. Get this thing complete, so that we can move on to the New Year. There's just a lot of pressure for them to do that. And typically, they get a lot of work done on those SOW's and allows us to close them out and then build them. So that's pretty much what happened. That said, I think that kind of the level is something that you can count on going forward.

Your next question comes from the line of Glenn Hanus of Needham & Company. Glenn Hanus - Needham & Company, LLC: Maybe you could talk a little more about the strategic significance of Bycast, and any metrics you can give there and just in terms of employees or operating expenses?

Well I think it's, in the grand scheme of things of your price so minimal to the operating expense structure, they're probably about 60 to 70 employees. So the attractiveness there is that we're certainly seeing the emergence of customers that want to build large repositories of just broadened, not higher electrical [ph] Data, medical images, emails, video, what have you. And they staked out over a number of years to build a pretty compelling product, and they've actually staked out a niche and a number of the healthcare companies. So for us, I think healthcare is clearly a strategic vertical. The content repository makes a lot of sense. And our objective there is ultimately to take that technology and embedded within our core offering. But right now, we'll sell it, bundled together but ultimately, we want to integrate it. And consistent with our unified storage story, it's not only about stand and ask, it's also about unified data protection, it's also did you get another protocol to add to that. So strategically, over the longer term, we see this as a technology tucked in to add more functionality to our core offerings. So we continue to provide our unified set of solutions to our customers over a much broader set of applications. I think in the near term, most of the transactions that they pursue are relatively heavy from a storage perspective in terms of a lot of capacity behind them. And I think that they are clearly going to be open up opportunities in terms of our existing installed base. And I think that they enable us to penetrate some accounts, leveraging their technology with ours. But the long term strategic goal is that any short-term revenue contribution, it's really the long term integration to our product offering.

This concludes the Q&A portion of today's conference. I would like to turn the call back over to Mr. Tom Georgens, Chief Executive Officer. Please proceed.

Okay. Well, thank you very much for joining us today. We look forward to seeing you again, roughly a quarter from now. And I look forward to answering all of your questions yet again. Thank you very much for your interest in NetApp, and thanks again to the employees of NetApp that made all of this quarter's results possible.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.