NTAP - Earnings call transcript Q3 2020

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Operator

Good day, ladies and gentlemen, and welcome to the NetApp Third Quarter of Fiscal Year 2020 Conference Call. My name is Cherie, and I will be your conference call coordinator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

I would now like to turn the call over to Kris Newton, Vice President, Corporate Communications and Investor Relations. Ms. proceed Please

Newton.

Kris Newton

on joining George for is me are for today webcast netapp.com. Thank and us. CFO, CEO, replay available be Kurian; and call website Ron our at live you will With our Pasek. being This

gain make of we our future respect execution and and statements reaccelerate and such regarding full fourth increasing expectations our quarter risk profitability ability as expand future our fiscal During sales to will growth projections financial XXXX, and our today's and forward-looking and our improve call, the revenue, and returns year total outlook shareholder to operating prospects, with which uncertainty. guidance share, capacity without expenses, all involve for

improve results including accounts, We variety execution in ability environment, our for Data disclaim any to accounts allocation capital and new expand to strategy, expand consistency macroeconomic and our obligation acquire IT Actual differ strategy. of our our may available on a update capitalize capital continue reasons, market forward-looking our conditions, projections. our market the of existing materially total Fabric spending and and sales statements

X-K. Form our Please specifically with the sections our financial conditions on to operations risk from our of file and time-to-time the Form also and current year factors available and most and the refer SEC XXXX, fiscal analysis of documents we XX-K reports recent including discussion for website, management's and on results

measures presented our to all be website. financial GAAP on non-GAAP indicated. the During posted of unless are call, will non-GAAP otherwise estimates Reconciliations

to George. I'll now over turn the call

George Kurian

afternoon, Kris. everyone. Good Thanks,

since end the I announced NetApp Ron take in a by retire third the Ron. has contributions Before to decided XXXX. want joining his moment want Today results to I about get for our recognize many year. of I into to fiscal to that, talk we quarter the

leader role in leadership, has nearly navigate dividend helping our our pivotal Ron's services. XXX%. played we period power in by the as He over hybrid product points, margins XX focus a doubled cloud transformational have by and a we increased data becoming Under earnings raised NetApp on

I a been always think and you'll agree honest that broker. he's true

call next includes that is for what's company is he before and for about me. last Knowing proactive bittersweet the continuously We his succession planning. think that this certainly thoughtful earnings retires

To been prospect that I end this and time. about for have the Ron some of talking transition

in the the grateful for During process, to we take finding candidates. the that will Chief end been transition the before with Officer, of someone to expect quality on on the pleased role a right role search focused quarter. on of I'm and and I have the we Financial very Ron seamless I'm of the have will person ensure that. stay

Ron Pasek

Thank you, George.

opportunity four by has been start my team I'm empowering appreciation work have here. proud and of at alongside to proved NetApp. the here years for to team expressing The we talented These during time me my deep past have collaborative, achieved rewarding. incredibly be Let the and what innovative

for it's to look our I for also working next and analyst pleasure the time an thank of the CFO been into helping with you. as a is industry investor I community want to and role. all our transition forward exciting This genuine and NetApp,

George Kurian

Ron. you, Thank

discipline, business quarter. steps and to strength return deliberate of we of challenges, quarter. These our as to the our leverage top reflect our margin, Despite in model revenue turn results continued without flow growth. the better we strong opportunity the on operating overview capitalize to let's take the the ELA and operational gross company from Now, an line by cash anticipated highlighted the benefit

persist. headwinds enterprise However, large in unpredictability macroeconomic and behavior purchasing

environments. us buyers to With access small. companies giving to as in our Data and as the data NetApp these the multi-cloud they of as looking well workloads, Fabric hybrid complexities and to to journey management strategy, to they grapple a are of on are and Customers IT we large cloud with increasing help them NetApp address new both challenges help relevance the customers

We have our deployments. on-premises in for also but increased have public not we value cloud, opportunity only the

Our hybrid multi-cloud can that growth. business customers' environments, to we value real fuels deliver to confidence ability to my return

this While by areas are a exceptional external laid with in fiscal the our our to planning front opportunity getting we replicate To for buyers change factors our no execution out ahead, the start business see of the at full plan our of proven we assuming success in more improve of future. foreseeable we year in environment, portfolio.

by total are operating architects adding majority new new resources the by in primary They the approximately expenses be end our in on geography. increase accounts focused fiscal XXX Americas acquiring track headcount cloud capacity XXXX will of existing QX company. sales be for the sales engaging of sales on buyers year without deployed like We to the will to and accounts. The

new customer acquisition. are success and reach signs We our seeing early on by of focus expanding

all districts to strong sales, units in growth coming across as of in Our progress metrics of growth continued deliver The pipeline metrics to the customers. dedicated quarters. pointing continue growth the these QX, acquired accelerated and did

the still at While our share wallet need acquired districts our to of largest customers. we performed broaden well,

We are making here. progress

the in environment least predictable. However, it which is exposure greatest have to accounts is largest the that the demand our macro the

rate to business SolidFire platforms which a array revenue simplified from all-flash new QX inclusive as well a all-flash products an In hybrid SAN SAN-optimized net billion. $X.X FAS, of array, and and array all-flash and flash services We delivers EF as run of array all-flash annualized experience. increased introduced dedicated and QX, our

the highest primary quarter the recommendation NetApp was Magic In Quadrant NetApp portfolio QX, investments of expanded offerings vision. storage file-based core with product for MarketScape in the cloud solutions customers of consider ranking accolades. named and in our NetApp, Gartner's IDC's need storage a leader Our continue storage. industry to of gain should that because hybrid in leaders' quadrant Last took

and cloud-like data into building public Our for NetApp customers private HCI their SolidFire, experience blocks economics cloud centers. enable to deployments StorageGRID bring and

last inclusive revenue net an annualized XX% of cloud run services of attaining almost quarter, private rate million. business, Our products $XXX from grew and

To Azure in named Object dealing Blob to Storage, sets recommend multi-cloud data. NetApp ability with petabyte-scale demand its unstructured a They when IDC various data citing unique its deployment because object-based customers to leader meet hybrid the increasing tier MarketScape our storage software new StorageGRID, consider StorageGRID Storage. platforms in across the of for announced experience vast and integrations. locations NetApp

our $XX Based on QX, approximately of the year-over-year. last increased month to cloud data up for recurring services annualized million, XXX% revenue

available with Web Cloud and cloud Services. We the Service and Amazon ONTAP Cloud Google for are hyperscale Volumes generally Cloud now Microsoft Azure, leading all Volumes both providers:

ONTAP, and other data cloud comply with privacy as which Additionally, feature we a today's customers compliance Cloud added help regulations. to Volumes

a new of to to data they enable see the continue as as managed expand new customers acquire existing We and reach as cloud NetApp services healthy customers at customers. well buyers to mix sets new in our us

leading technology use Our deep with and range solutions growing the on-premises broad public integration clouds sustainable industry-leading of cases gives for storage us a for a and competitive advantage.

customer in hospital strategy our how us existing research acquired Let data with to expand go on-premises with allows new and U.S.-based the customers, our acquire value. customers and one examples fabric to illustrate you me increase to share A few in our districts of chose strategic our a cloud. footprint NetApp at

ahead multiple cloud requirements. other centers the and Our of all management competition each to with ability providers customer's connect addressing to to the public their us consistent interface a data in well placed

Volumes retailer and will NetApp on-premises footprints and cloud. environment Strategy. spending speed and retain Azure global to currently our current the Files, plan scale halted migrate will using because HANA cloud the the a large managed Cloud only cloud favor ONTAP not in of IT to the data on-premises of their its but has easily we A of gain customer NetApp to They in Cloud migrate by in data customer First NetApp NetApp SAP the to onto competitor's ability move we their help also to centers, flexibility

with I elevated partnering initiative, strategic told company on systems Fortune to from we to petabytes have NetApp a center of XXX to their that XX an And largely existing you data from their now By its our to cloud-first competitor of position Files. a infrastructure customer them with working in a data, finally partner. sight That call, to with move line minority Azure provider our NetApp achieve the centers we migrate data cloud. to has were QX key

relevance enables us It which our and The expand existing new increases which significantly Fabric of Data shareholders. drives advanced quarter. we NetApp through innovation pathways workloads it and agenda reach buyers strategy strategic customers creates to new long-term in our power to our our value our with and customers new the address presence for

multi-cloud a an and are customer has IT. amount customers innovation We succeed of number strategy, in to help experience customers. growing enormous value hybrid portfolio the NetApp delivering to the Only of

and environment margin making Our to the dynamics macro hard to cloud strong over of enables years business our last structure cement services. the in conducted while strategic gross from several the to work us and economy improve cost we necessary data our customer leadership hybrid demand investments navigate the resulting the model

turn Ron? expectations. the I'll that Ron our to it more With and for details quarter over on

Ron Pasek

George. Thanks,

referring a be numbers, I'll As noted. unless reminder to non-GAAP otherwise

highlighted, delivered growth leadership and generated weakness. operating and and uncertainty, we cash reaccelerate QX in forward. strong leverage product remain in George flow in we our strategy free revenue confident demand the As margins Despite the solid going of face to

although had approximately $X.X further In Before detail QX of revenues decreased million, discussing provide year-over-year. on the XX% XX% quarter, approximately $XXX I'll zero our Product we million. year-over-year. had revenue $XX expected revenue We our in performance. ELA net guidance, QX decreased billion of

down P&L. Moving to

million year-over-year Deferred is QX. gross execution our hardware increase results. renewals points of revenue XX.X% maintenance above Product maintenance Software was margin and guidance. of our X.X was increased X% X% which of in year-over-year. nearly with XX.X%, margin to up year-over-year better business in deliver an starting Gross revenue was $XXX

as improvement QX sales in product increased and was force seasonal degradation of we discipline reductions. margins The in margins quarter all-flash The mix of cost year-over-year was NAND increased product driven by and the an for the ELAs. pricing. result mix. customer XXth increase year-over-year in product QX margins seen decrease when benefit We've was no product product almost by a to adjusting straight driven QX continued

million, services The increases. driven by combination maintenance and other by XX.X% year-over-year of annual year-over-year, driven hardware X% continued merit $XXX margin increased improvements. gross of basis approximately increased of XXX points and operating QX nearly expenses productivity software

year-over-year We our but was guidance short-term within X% Operating $X.XX margin investments. QX well and the was guidance. in billion range. cash of with closed with and down $X XX.X% EPS line in

cycle year-over-year. one days DIO DSO was of days, days increase days an Our seven of three an day, was year-over-year. XX of XX And days year-over-year. XX days DPO was up two cash days year-over-year. down increase XX positive conversion a was

Free flow XX% revenue. operations cash from $XXX Cash was flow of was million. representing million $XXX

be free of expectation our fiscal for maintaining range flow to in are XX% cash We revenues XX% to in of XXXX. the

shares million X.X an average price of $XXX million. repurchased $XX.XX we QX, of at During total a for

year-on-year, end million, outstanding As of XX we authorization. buyback of diluted Weighted $X were a decrease. billion $XXX remaining had down QX, million XXX shares the representing original million on shares our XX% average

During $XXX dividends. shareholders the quarter million In in out cash we paid in million total, to we quarter. returned the $XXX

share. be dividend cash will QX $X.XX fiscal Our per

Now on to guidance.

As the we've past be the challenged. noted to quarters, continues demand environment over several

As implies the midpoint billion result, decline QX net a to year-over-year billion, revenues between and revenues $X.XXX range at currency X.X headwind. in we a point $X.XXX of X% including expect which

decline associated of Consistent to consolidated revenue XX% expect overall to range the QX between being and portion larger we with seasonal margin in product sequential mix, gross with from normal revenue gross XX%. margin a QX

XX% between We expect range QX to and XX%. operating margin

ELAs QX for X% and will revenue We our of increase per at range implies which of share total share an fiscal expect X% QX XXXX The earnings midpoint between being guidance down that midpoint implies be year-over-year. per to the $X.XX with approximately $X.XX revenues. total XX% revenue

gross also QX Our of to operating margin implies and fiscal XX%. approximately XX% XX% guidance XXXX margin of

range be quarter. XXXX and approximately last the We expect year-over-year fiscal down X% EPS guided within to we

growth. our George we investments success company signs are from seeing our to to noted, which of in provides early confidence sales long-term coverage, strategic ability As in the return

again customers and thank last the making I NetApp shareholders, for a the our rewarding years experience. want four partners team, to

to back for it to With Q&A. Kris? the call that, hand open Kris I'll

Kris Newton

Thanks, Ron.

as Q&A. now the one Please will possible. be of respectful Operator? so question, call and We can for yourself people to get we peers limit many to open just your as

Operator

Instructions] [Operator question first from Karl you. with Cowen. comes Thank Our Ackerman

Karl Ackerman

guess, to were in me I quarter basis what Ron, should that margins couple guide if we back we the even would step But down ELA take Hey. you revenue seem question. I in will gross letting for if -- points. product by ELA out a Good revenue the of it a hundred for not assume I'm afternoon. Thank sure guess guide. April ask

missing I am guess something? I so And

And other headwinds be Or costs cost we then be you. based thinking about? that secondarily is -- manufacturing would there NAND? Thank should on that component are from

Ron Pasek

Karl. Thanks,

a QX. flash a was margin for guide saw being product in all before know as of year is you mix That X%. to very respect all have -- headwind X% discretely. margin we first from but whole have product. lot small QX so mix is we help about costs opposed X.X% do gross to we But QX of tends we what So had to don't There's to lot right? margins in There's mix, a it by ELAs higher a there's equal. other what the so was amount of to quarter-to-quarter with other it -- is -- component a If of we things -- as

that software higher have We gross margin. helps mix

dynamics with of wouldn't costs. component under I to a lot into So respect there. read it anything there's

George Kurian

guide, regard the products did think that in QX leans seasonality services picture between than is fact by it That's pattern. seasonal to I gross with QX. the the products affected we the see more the the mix margin typical that in and QX to

other the of just being mix So than this quarter. not than a it anything was services different seeing and little we are specific product

Karl Ackerman

to you. meet of Ron Thank great and luck, Best Thank well. and as It's hopeful thanks. you. you

Ron Pasek

Karl. Thanks

Kris Newton

Thank you, Karl.

question. Next

Operator

comes question with Sachs. Rod from next Our Goldman Hall

Rod Hall

why calculation the Good that's mean full just guys. I'm back $XX think assuming much these you these X% you've question. be just about rough this But Congratulations why the exact and so thought I'm could on visibility a on retirement I Thanks million. guidance guys is that. it the three if Ron. ago calculating I we you. $XX Hi, you wanted for of to continue all the And uncertainty in million. got estimate be and revenue them million. working $XXX what on just saying months have And here Yeah. ELAs. I'm you're ELAs it'd -- to year to given go include with wondering

Ron Pasek

see very they the them. year. it's some so of can different expect year QX back-end year to they're but ones That's probably of But some back-end to loaded. slip loaded a We it. the loaded. last still year going Last really out This They're predict year. difficult were always that they're we front-end in of than

than they to year. difficult they're come in the As a quarter. we then told they're the to difficult end going And the come you of predict they're at year if in to predict

of strong. it's the happy just that headwind It's simple. underlying all So be because year-to-year. said a product won't that, still very we Having are really of with gross ELAs the It margin revenue. performance [indiscernible]

George Kurian

I the easily. easier ELAs meant they benefit able more of choppy the predict. and more to are Ron to product make and are think buy Rod to said said structure for to ELAs the buy these customer We've they to it always hard as being from

quarter one with from engagements And deep in have customers thought why to with. range We the out we and down that's had X% we've are taken we has the the that X%. also structuring we that ELAs moved

do the of to and balancing in what's the give you can may that that them some we're available view probability trying the best happen of we're not to So with year. we a

Rod Hall

couple $XXX that's of idea on you guys elaborate ELA mean to deals -- this say one can that you give maybe deals? amounted you $XX have a George. Could us the would million just So few a million? any Or it's I that? Is

George Kurian

customers, transactions is the these large X% It's Listen, very, very of transactions X% large or number a by not -- a and I very number are of few. revenue are our those think total with nature few right?

Rod. lumpy, and just I'll hard leave are them and there sizable to it of each predict So

Rod Hall

you thank Okay. right, All guys.

Kris Newton

Rod. Thanks

Next question.

Operator

Our of question with Wamsi from America. Mohan Bank comes next

Wamsi Mohan

any know Hi, XXXX? have some also please? moving you seems we QX, takes to give on guidepost revenue us thank easy, on puts You if on Talk services at are you. fiscal you can maybe data how guided I the could least and compares give just at about some should but margins, look at gross you doing us sense NAND Can XXXX? better. again, you your cloud of up on and be all quite pricing fiscal

George Kurian

we let guidance we're that in on-track XXXX. next investments accounts tell sales fiscal incremental the give we are customer the the new XXX of all acquisition covering could going against Listen, you of coverage, making QX are of it. you not to kind when additional target that I - our just year me We'll actually we of guide first year. sales guide and headcount driving by end fiscal

next to the we up drive to It roughly get should model made mentioned quarters in we the sales districts year. the which of seeing the show my reps will the of some favorable the what in as majority remarks, showing to we acquisition takes those and are year productive, year. prepared And relative through up productivity this early investments, the had so four acquisition of positively of be year-on-year and I accounts payoff accelerating course

gross we regard services our in and the of across both of strong product discipline differentiation the that have offerings. our With as force of the mentioned, been sales board maintaining value to done offerings, the Ron full work to we've productivity our margins product reflecting business capture the the in and driving terms of on margins

on And the the we that gross ELA we of regardless a have business think margin picture, sound model side.

have disciplined been in operating We our expenses.

have As structure to the the we outlaid expense sales adding headcount said, the operating of without we company.

we're should investments be drive model about disciplined top how plans strong to with a product the our is confidence making company that together every portfolio expenses year. our And business positive strong of really line on next on one. the we have next for territory this you I year operating we'll more year. the continue overall the tell But

Wamsi Mohan

hesitancy shell ELAs the ELAs? tires read If you're is don't So this quick? the hesitancy that On not an I have signing indication seeing really at how around to the the color. is particularly people why this base appreciate out should George, cash Or around because they upfront? what the customer other that could products? necessarily kicking they're that

George Kurian

new first of share our the win with and that about our we all competitive I think we new regard strong proves position, mentioned positions. to ability in to gain accounts competitive that have data districts

years accounts these or of with accounts. see architecture are alternate an them motion. with to we involved ELA dealing they're discussions we got regard are that alternate With those doing buying experience to deeply headed deeply, in we and many don't that We've

I They the customer. think across these many they're the about fact lumpy, always transactions are coordination few departments that transparent complex. of them. and been require there's right? very And We've

that are that So to ELAs in business and meeting we accounts. pursue customers with The extremely beyond other X% in other discussions ways have of my to our business. healthy. parts are view is we of using These these of some X% the the their own majority of is we ELAs needs are

get discussions you we'll forward. into through more the going come some visibility as ELAs of So tell and these more we

Wamsi Mohan

Thank you. Okay.

Kris Newton

Wamsi. Thanks

question. Next

Operator

comes from question Katy Morgan Stanley. Huberty Next with

Katy Huberty

you, Thank afternoon. good

at in accelerated some the the January? in the an easier incremental of decline compare, January just quarter, despite where the revenue talk about looking saw Just trajectory, product you you can weakness

George Kurian

ELA I to was a factor contributing the think decline. Well the

would been had I quite ELA if had different think, in I been come have the Katy. think -- picture

some lines over trying results those buying largest that ones future. said in point seen exposure I by two most are new to in we we uncertain good accounts. regard those to balance continues enterprises, in to And those the conditions. as that. think accounts And to hopefully by near at the have are are revenue our from cross weakness be with which the should acquiring macroeconomic the product affected We've

Katy Huberty

Ron, congratulations you. on your retirement. Thank

Ron Pasek

Thanks Katy.

Kris Newton

Katy. Thanks

Next question.

Operator

Barclays. from with comes question next Tim Long Our

Tim Long

and about as Cloud just partners Yeah. ask It solutions. more Ron, Data of you. like well, the the and Congratulations last But been you've and that George wanted Thank I more Services it products business. higher. you seems quarters, adding kind few GA is Ron. add to moving

million, -- pretty that in where give we're take think, line. the the $XX $X at a of kind in I or about was growth four And much quarters sequential row million

what you more? think, line inflect, that So, could a little to take will talk just bit it you little bit for a about

that Or experience is you. other that it it products? line what will to aggressively higher? more be little start or you make think the partners Thank move with a more will Or do

George Kurian

that the There believe for we Thanks question. that things will lineup. two us are allow move to

training. the and continue I day. we enablement we new acquiring every first are think customers, single do to more is And

They're These they workloads serve we mission-critical or right? are applications in the applications. high-performance public that cloud, important applications, applications,

it technology, the while so expand. And for a and adopt they the customer get with before comfortable our to usage of takes

broaden some is customers early some who of We the of with starting workloads. book concepts did now are started business. proof seeing their us, to to And of move

a ramp take that So will little time. bit of

operationally, rollout. demand. the we second The overwhelming fact global in are multi-region of is, to due the And early a that phases

-- We to provider, have requires agreed the process is hyperscale with that on customer which being white-listing, call manually for a approve cloud they which call them a we've registration we where us the onboarded.

will allow a in fashion. are And remove where more in that We automated white-listing. hard we're demand more scale, -- working to window much us to a

So get things it we need to those through faster. that are able to two the key be scale even to

Tim Long

we're Okay. still track the here? with long-term on assume And targets I

George Kurian

opportunity that's as see intent. clearly that is the demand clearly signs have get. we the And market clearly to patterns. favorable We goal and there of And our

we said, be about behind As of because wanted where we year we to the time. are a

can taken to progress. that get we're readiness, It's production keep so these to push get you continue to updated and we see, us services on we'll target. to going how to And to

Tim Long

you. Okay. Thank

Kris Newton

Thanks, Tim, next question.

Operator

Aaron Our Rakers next from Wells with Fargo. question comes

Aaron Rakers

understand the the you. I been lumpiness business. I the for look think and that with that congratulations just Ron. more is, trying I I'll questions I bit get a will And working great to Thanks math this little given appreciate It's But taking go lumpiness ELA apologize to the Yeah. question my in maybe at back continue. to discussion. also if

understand, of about what gross margin. you're important I kind think it's saying to the

the seems gross back like range. ELA margin implicit on it your is gross XXX%, So, margin mid-XX% close into is guide to I assume if the

missing? to I margin asking what the of I just April And in the appreciate about do quarters? course think is, structure variable, I that of there, aren't next a what guess, So if business through am the how trying we about I'm But think going is mix I'm the couple of gross the ELAs can quarter.

Ron Pasek

gross between margin XX% the we XX%. for it quarter quarter guided and Last to was QX, So, closer for XX%.

You QX. product higher revenue, biggest mix to have in a That's of margins. degradation the

that, without a specific QX than going There's -- actually employed in guide a product is into margin the higher number because of the ELA.

think, see it you you just But I holds all I'm So -- actually can't it all telling this. together.

So...

Aaron Rakers

know -- there's has attributes that Okay. the kicks the some have not variable revenue ELA actually And upfront affects And software yeah, ELA I That's in, this lower that hardware-only that at that a after point? margins. you contributions.

Ron Pasek

That's variable. of That's the kind right.

didn't -- And said now. you now have we difference a margin as mix I historically have do. in got We hybrid You've earlier, a mix between all-flash. and

of versus margin you a Plus, the the card. in difference all-flash mix at a is sell what between, There's hybrid. software big wild

being saw of in we the So that bit a QX. total was degradation. the last QX of quarter in did little software less And we than

lot there. going a under on dynamics, there's of So

Aaron Rakers

Okay. Thank you very much.

Ron Pasek

Sure.

Kris Newton

Aaron. All right, thanks,

question. Next

Operator

Our next SIG. question Mehdi from with is Hosseini

Mehdi Hosseini

my with luck your very you. working nice Thanks And Ron, was it endeavor. for good taking next questions.

array It guide revenues. FY the I'd the assumption April some with look in XXXX when just all-flash you're quarter. exit array. going all-flash George, to I a at like high single-digit for for your make decline, seems And

-- so, the particular array? double-digit I force hiring for have reposition more than flash follow-up. this salespeople? think set assumption are how growth you what just And reload, XXX of area embedded should we you gives sales Are the we if the growth? we for out a you other as confidence And and going So about to

George Kurian

business affected largest the in macro been this dimensions. customers. heavily that array were the all-flash One two most think our I fact were was the by impacted year who has all-flash customers

perspective, product our company. the in from So fact business all-flash that pretty a our less or product than underperformed impacted accounts more substantially much every biggest impacted other it mix the bought

heavily the all-flash-oriented. ELAs is also The that second were

those of have been in both the factors the to So contributing all-flash declines year-on-year category.

more resources the growth the work And additional with about best-in-class on sales in expect plans in ours every focus objectives we'll the that focusing to FY beat that confidence that of we to you growth should returning all-flash business as the on which rates. to our is We meet and market But force, all-flash above as force have deployment category product we're right? as XXXX doing category compensation the tell our next well drive And guide. the at are we our issue be our sales to we market and to be taking we actions able or the sales able year.

Mehdi Hosseini

go Sure. And I are NAND a to ELA, they're follow-up. prices product and excluding much up have quick to understand up But ELAs impact higher going than margin. a on going material are go where they today.

volatile could and margin independent I Because as I way model perceive there's So how product no of are you able ELAs gross ELA? manage to that.

about of want increase the just how able be you're to material to I bill So manage that? and to in going think

Ron Pasek

NAND big our in you gross a So portion margin, prices right? of system on is COGS saw quarter X% belief contrary of one quarter-to-quarter popular up Mehdi, a minimal our about to huge a it's parts. the not and have this number as things: it's two is I software, effect think because actually very other lot NAND, of A went lot

you're lot components. is because we see huge effect a other -- of you go margin gross this to year So right, material I year won't see think a this on but have there's it NAND project what up, should should

Mehdi Hosseini

higher. understand -- there is higher. still it's NAND because that I is NAND a able that Is to replacement margin is small going going the there's you're a cycle another And coming? portion, but on premium? Because

George Kurian

drives NAND on pass system. is component it pass customers, drives commodities to the we our I Listen an in so of cost we all right? customers in think platforms think consumable our a first of our to that not is terms typically to don't I the the the system, in we and on for our try embedded of mask

the is so point, we're market be so be on -- trajectory, at pass of customers, we to that to And some our sure will right? some discrete adjusts And as had making about that history. that the if there upward, that going we've

industry had it And that we disclose a history. the think I we'll do whole as when right? has it,

customers I of of think ELAs sales has substantial to nobody systems how hybrid been the capability year of been know to offerings. to without value actually cloud that A both in sell gross has. force the value efficient allows that and software fact the with enabled take of and regard industry else our that we but industry, makes the this the that they've also portion strong is most our our even in because uniquely margins advantage our product

so software. in we a the differentiated That's gross proven ability in environment. hold tough to And are economic margins in out

Mehdi Hosseini

Clear. Thank you.

Kris Newton

Mehdi. Thanks, Great.

question. Next

Operator

Thank you.

question with comes Matt Cabral from next Credit Suisse. Our

Matt Cabral

more what as George, sort about just it's either confidence versus calling prior being about Thank broadly? footprint just Yeah. a the been if since a secular demand macro opposed few can some about wider the environment seeing pushed a talk that larger all been little in out these customers competitive quarters? actually thinking you're bit you given And and I gives year of losses that then it's you are at guess you. changed deals to as you've their headwind a on-prem or shift

George Kurian

the of of uncertain from more level much about was So We uncertainty we in saw a little of choppy year a into bit macro in January. signs environment that the substantial sort QX. first step-down saw being a ago more a

QX. QX our think fiscal -- I from of

gotten then I same in from say wouldn't three four worse. it's things. the I It territory. stayed key on relatively of or is reflective it has think

buying amount is cycles spend I and transaction are think the the of per is first smaller. longer

transactions and have broader accounts, as through we especially of the sales think we've rate a year. added number capacity across range seen of higher consistently a I

in indications we that size that's so, accounts, transaction but that the more And can win new average net muted. is

comfortable key they're You transaction, long-term. fact for as Those hand people also incentives the capacity see said for buying short-term. versus some sort the larger where for are buying now the a of more Even buy things. people you to of we've buying though are the

relatively have of capacity window I listen first the of get easy put that to regard can we to We've productive. of our us With first year. gives in that what ahead teams compares half next to confidence in return we think sales growth, all,

to to use customer wins, results in the new we terms sales resources really that all deployments cases, the But got XXX the work been have units, do in put We've all encouraging. volume, from enable of place. of

we because regard we architectural deep to these part making of an an have know many. the with those cloud, they're them. are discussions that intimate we large to are go cloud With with choice We customers engaged to when with, relationships

us right? cloud to medium-term, as much remarks, we maybe said a revenue as X larger mentioned had might company, near-term they frankly, them going us hindrance our the revenue XX to And a the but give of to be in in to they've X broader prepared growth, some which than we given cloud a premises. on has We moved Fortune opportunity times opportunity

accounts And are opportunity move in to so, choosing we're excited to those that about cloud. that

Kris Newton

All right. Thanks, Matt.

Next question.

Operator

Thank you.

Ananda next with comes Baruah question Loop Our Capital. from

Ananda Baruah

congratulations, you. well as Ron, Really question. it. the taking you enjoyed me Appreciate guys. from great with afternoon, working been it's Good

Ron Pasek

Appreciate that. Thank you.

Ananda Baruah

Yeah.

You're revenue, environment just easier spending meaningfully like, back seeing from it more quarter, strategic I think compare. was -- speaking slightly -- off that sort said up you're of know you if least that get a in you ELAs welcome. the favorable George, the out you declines the I broadly don't you the more put challenging. you Jan at but Could don't

don't numbers in And spending seem so, The to some the incremental there suggest I that maybe environment. interference like know. is

make and So, comment to I your that understood that you I sure just accurately. run want just by

And you be with If there. this that where update add there like you where you you're at to more you force then, sales feel to ramp-on Do want a could it that I'm the point? from -- you're in us productivity one perspective, just going new too.

Just we're but the I think dynamic of for sense. the all strategic -- just revenue around product kind looking spending product revenue, just the not context

George Kurian

quarters have and I saying right? I it's been environment I data Do say, true is is that have that worse? that enterprise now. has few a better right? centers we're are data shade or is that spending a don't seeing think Listen, choppy We I'm IT it choppy, a pretty for spending, just customer enough seeing and uncertain. for shade data to the on-premises choppy

for we new fiscal said regard and productivity, a that it's force in and think year to quarters XXXX to XXXX. end headcount and always We between said be of we've increments account with starting sales of roughly the four would I four the be fiscal quarters, and of ready. three equipped trained at adding QX manager year XX fully finishing QX

of would have we So chunks that. four

enablement, doing love where the of the that with productivity reasonably should if impact think that's it. you think move And headcount impact and I year. we'd but you on on earlier the of I is so, next and can, do we're to working track the are majority we fiscal math the We And hiring, right? we're listen, productivity everything actually model hard

Ananda Baruah

Okay.

Okay, great. Thank you.

Kris Newton

Ananda. Thanks,

question? Next

Operator

is Sheerin question with Our Stifel. from next Matt

Matt Sheerin

Yes. that Asia, in key Thank you're are potential seeing most to wanted coronavirus in of ask China. I your your chain, about suppliers from in given impact you. the any supply

tend any time loaded quarter, you're that the an there? and be early So, that get be Or quarter to by you the back-end issue? through given constraints still the you shouldn't in more

George Kurian

Listen, our include does the disruption guide any revenue our chain from coronavirus. to QX supply not

So business technology venture you side, the have in far, We, business our their demand China. On Lenovo, on prosecute through China. coronavirus, as of elements the are a our right? don't joint that distributors a large two with who potential business and know, of we impact in

pretty meaningful – to our right? side are yes, contingency our I planning do working is regard Our second-order have the that base minimize would demand of that chain, And a in side, model With business China. we footprint to customers built we others supply the in are disruptions. has hard that a supply with on to supply large regard so to -- derivative, amounts like is us impact China, on

I we far, think to have there's not any, but that. some working hard seen we're So probably likely minimize and

Matt Sheerin

you. Thank Okay.

Operator

you. Thank

question Fox Research. Our Cross with Steven comes from next

Steven Fox

a Good on thinking Ron future I'm NAND might retirement. a Congrats Thanks. have as forward. going you your analyst afternoon.

the job. like not may You

the public their weaker wondering, seemed just little sales little sort through like of any a terms the it curious in there? October on was I Thank may you about rounding that? expectations could was It like year-over-year. was In be a this talk the I if bit questions, of numbers channel but were it channel looks a there your came end you. changes markets question relative the sector And fiscal of off a similar also to – regular the year? to

Ron Pasek

of that mean, with unusual. or – XX/XX is as mean. there – to vacillates nothing I There's respect So mix that underlying channel, permanent it's usually was around vacillates that the

Steven Fox

Okay. Thanks.

George Kurian

public to mostly the business to according regard With plan. performed sector

saw pattern in public a pretty business I think our normal of we sector.

Steven Fox

on has just And a to a just reaccelerate your more your competitors follow-up any as that to focusing know, budgets? general business sort is I as initiatives to of you that that threat? smaller there? area. Do Or see been this of maybe tied one

George Kurian

we think I a ways sector. in broaden of relevance the public have Listen, variety to our

working be We to and partners new are some of in uniform serve with women interesting our their provider initiatives of in to and ways. cloud our men part and

So that we'll market. as to those tell you more bring we about

Steven Fox

very Thank you much. Okay.

Kris Newton

you, Steve. Thank

Next question.

Operator

Thank you.

Citigroup. Our next Jim question with Suva comes from

Jim Suva

is that mentioned to decision-making figure sales expected and months Thank just tempo slower right, being trying it I I you time it and force George, more was the or about Or very line what six than that is longer by Because than approximately much. ago the I'm impacted do cadence all Is lines? transition? again. Thanks with force the wondering, sales if so going in of expected you it by it macro faster guidance. just XXX expected? at softer was out is remember mentioned much. increasing you'd

George Kurian

fiscal regard fiscal of out said and of new saying start in sales sales in allow fiscal this We four QX force, track. would the sort to year – we we we quarters we the year would incremental end are at on and that laid of XXXX, resources With add acquire us customers. that to that finish to of XXX of QX

in I generally As we are track. prepared are on board said on candidates good my we bringing remarks, and

We productive. about also to take said a get four that new typical quarters rep sales it would

So are investment if the majority of you do the next right? benefits year, the really of math, that

X% With a down thought see us of range, maybe would I be what you majority the the is conservative what on QX, to previously going you shade change the and in bit little from the really for X% we And being regard between previously right? what now. think that's change to or below softness saw so that a ELAs X% more

Jim Suva

Ron appreciated. so greatly you the we'll and you. clarifications much greatly Thank for And miss detail that's

Ron Pasek

it, Thank Jim. you. Appreciate

Kris Newton

Thanks, Jim.

Next question.

Operator

James. is Our from next question Simon with Leopold Raymond

Simon Leopold

question the Ron talk about if I overall can the on maybe congratulations return to of we taking for and retirement. capital. regarding wanted philosophy see you your Thank

million good a lot dividend another paying back $XXX You've a million. buying $XXX stock quarter been over of this

you've and $XXX of million. flow almost so And been out exceeding cash free you're authorized your the

to the a mean some assume are I thinking? to is long-term you're update to you'll the you. on that us guess you to set CFO So that Or I'm point. does going philosophy? the how wait But at new CFO what for philosophy. Thank trying I to transition get of And want

Ron Pasek

when year, up the policy. point, to going I capital billion share If the some $X it's that's out. yeah, we from dividend change on going But with happen is done the the we'll fiscal here the And to around what allocation clarity almost the to we're in Well, would coincide not give it's think give Obviously, permanent change. as anything going to go with your to repurchase. proceed we guide.

that end be So will going and And will next probably getting fairly that I'll my the soon you what to company successor George. the let determine see an forward. with could re-clarify tranche

George Kurian

in say a for shared see business is an asset departure and the should think of in the of cash shareholders. you important don't from sources health radical our just that and I Ron had I'll cash. have a a terms one of long-term I both to that and common the investing around providing belief and uses returns philosophy

make forward. that think a us philosophy radical from that going you I see should So, don't departure

Simon Leopold

helpful. That's you. Thank Great.

Kris Newton

right. Thanks Simon. All

Next question?

Operator

comes question with Daiwa Lou from next Our Miscioscia Capital Markets.

Lou Miscioscia

you. it's Okay. Ron, best of good Thank having luck you.

million if further wanted $XX seven revenue So, really is to I ELAs this back focus about on If quarter getting want and I'm for the years. the all a last went growth I just just I look but XX take to right. the average at actually basis, the product quarter-to-quarter on to out years,

basically And to four and $XX let's out of three million last the $XX hitting million with actually other material were just the that seven misses say were quarter-to-quarter.

revenue guess, worried little I'd a out even lower ELAs. taking product this I just So, be on

So, midpoint? hit again, able be to and why would that the all why we environment would given choppy the you uncertainty, --

George Kurian

You're talking QX? about

Lou Miscioscia

-- out QX And model. of over your at I growth product QX, quarter-to-quarter. the yes, average product services, take if get was million thus when million, the hard to revenue to I $XX and I easily to modeling software they're seems don't $XX it very maintenance like revenue, sequential think I'm again, look

George Kurian

for quarter a year-end So, always force. strongest of terms in finish the sales our QX been has

have terms require the And I think anything in we're of our a done isn't coronavirus of else. execution looking amount guide not due disruption at it and doesn't to pipeline. really work good requires we that or saying good

going that we're the transactions, end is counting quarter that But in at the of those in a the to on that's right? reps I that are money think bring QX think are the and are I the summary. we fiscal sales fact short that year

how think at many probability are probability these are like looking at required rates that high looking into low probability work. our is in the pipeline transactions numbers medium get and done choppy close all we've I looking to that we go a quarter at It plans environment.

you. we to the around of -- due be we're tried with the we much so to probabilities, forecast quality cautious can the doing that give bookings as we've And but as diligence we've done regard

Lou Miscioscia

Okay. Thank you.

Kris Newton

All Thanks right. Lou.

Next question?

Operator

Our Capital Eric Martinuzzi with Markets. next question Street comes from Lake

Eric Martinuzzi

some clarity on fiscal year? the And hiring us for did do ending given effort. January where headcount finish XXst? expect you've up Yes, just it our sales good curious where the you was I

Ron Pasek

holding We We're except we fiscal haven't mode been So, it a year. side. on this OpEx that salesforce in hiring -- hasn't changed you essentially flat all It roughly much. was flat. know the

people lot rather surgically. of of that it areas not that comp, obviously Some certain and is adding in variable implies just but we're a

Eric Martinuzzi

Okay.

hiring suspended? been in kind You are that people guys -- pursue Are on probably cycle have normally a has that college that of to QX. would continuing you bring you or

Ron Pasek

ongoing. that's No,

Eric Martinuzzi

you. Thank Okay.

Kris Newton

Thanks Eric.

question? Next

Operator

next with Nik Research. Longbow Our Todorov from question comes

Nik Todorov

displacing more more -- guys. Systems systems. George afternoon. HCI Hi continuing we're and are traditional we're Good that hearing storage and servers

applications the you XXXX of So, do -- that that But that get you HCI in your addresses. inflection to terms moving your enterprise in in provide revenue an scale us your the be that can year? for suggests market that see I with outlook next to product could expect

George Kurian

Listen HCI use data customers' use. addresses particularly the in cases ones that are some of the application center, single

application offering. of use. mixed even I several think that in It's management and And good has a part customers a HCI in have the good we single capabilities workloads differentiated market. in for our that for data who require we're efforts elements focusing

displacing us many center. you'll as applications And sort core fiber got cases. address still high-performance HCI as true. see storage hybrid well to NFS in our has channel solid-state I displace of original don't We aggressively products view proven those the use scale-out flash think of our storage I And flash storage and being might the actually with many, HCI push right? isn't think see those that data

Nik Todorov

follow percent If it. of just CDS? willing with what you proof-of-concept are stage can are I still customers quickly to up at Got share a

George Kurian

that. comment to early too it's No, on

want They production production, of to So, the -- application, in think just in say And could might proof-of-concept on on first majority first right? our early they platform. of in they're I in the you are you I be many. on deployment that that's move platform. that customers they're today would of our tell their CDS application but to

every that, demand, should And removing white-listing, onboarding that more a sort So in much see once to remove be platform. of to we is broadly of automated you speaking, ungated we sort what remove call customers we which able customer proof-of-concept of is until mode.

Nick Todorov

guys. luck Ron. Thanks it. Got Good

Kris Newton

Nick. you, Thank

question. Next

Operator

Our comes next Iwanyc question Oppenheimer. from with George

George Iwanyc

perspective? areas taking And any America? Are you George, the more best see in Are of you you question. a us Thank from gains any bit give purchasing North on my market share seeing to from benefit luck a where could model? Ron. starting workload streamlined maybe trends color for you're there

George Kurian

offerings see to our get partners data good from really the and regard services services offering. in of a customers going are plus we consumption that us consumption-based consumption think cloud with managed to I with use opportunities for

healthy, early are group we type and subscription our made we them seeing a and customers think from that's getting on with board very interest proof-of-concepts working I going available. small on of there. We're model

to. With than healthy, a that's way to customers used much the offer we regard that product platforms, streamlined think I able our to be that why margins part are continue and a think packaging understand I we gross historically of the right? more of streamlined value big pricing in to

force with And so another gross for value product sales element establish margins helping it's support customers. our

market I total sector and shifts the the those mentioned, a With about in going see but providers you we in in that market, more the some of We'll our before. participating regard hyperscaler as we especially market are opportunity cloud in as addressable on it we with way new the opportunities they didn't expand market. tell to real, become public

Kris Newton

All George. right. Thanks,

question. Next

Operator

Thank question will our And come final from Chokshi you. Nehal with Maxim.

Nehal Chokshi

narrative trajectory went on Thank there year-over-year the to Yeah. The from maintenance you. behind hardware declining Is mid that? single-digits flat. a

Ron Pasek

Yeah.

So adjusting actually in if remember flat. we and you QX QX currency, for even were

trend so spot line doing we've up so starting I in really see have in Better rates, shape. year, you'll What the good tried to better actually put to finally remarks we've my it's about until the been some X%. benefits discounting, work, next wait quarter on renewals, to better of is actually pay structures, it's This of prepared started pricing, and that's that to better bright but actually off. renewal a

Nehal Chokshi

you. Thank Okay.

Kris Newton

for final All to back going pass to right. comments. I'm Thanks some Nehal. it George

George Kurian

for creating NetApp the the our these innovation IT. NetApp customers industry-leading help on-premises customer is us and for succeed competitive public in to sustainable customers portfolio a solutions Our integration gives clouds Only storage experience with All strategy and Data Fabric has multi-cloud and investors. the advantage. value our strategy hybrid leading technology

the We'll ahead. discipline, opportunity and on coverage, on experience to strategic operational capitalize us continue which multi-cloud solutions enables customer investments focus in the sales strong to hybrid our make needed

gives again signs our front We to all investments growth. you in of me speaking in are that more look confidence off future quarter. of success you by forward with will getting seeing next early customers, which Thank pay and

Operator

for you today's your call. Thank participation. gentlemen, and conference concludes this Ladies

now You disconnect. may

NetApp (NTAP) 12 Feb 202020 Q3 Earnings call transcript