NetApp, Inc. (NTAP) Earnings Call Transcript & Summary

Welcome, everyone. I'm Kris Newton, Vice President of Investor Relations here at NetApp. Thank you for joining us today. I really wish we could have done this in person, but everyone's health and safety is paramount. We hope that you and your loved ones are all safe and well in this challenging environment. Like everyone else, we're all working from home, making the necessary adjustments and happy to be bringing you our first virtual Financial Analyst Day. Before we get started, let me read the safe harbor. The presentations today contain forward-looking statements and projections about our strategy, products and services, shareholder returns and our future results, performance or achievements, financial and otherwise. These statements and projections reflect management's current expectations, estimates and assumptions based on the information currently available to us and are not guarantees of future performance. Actual results may differ materially from our statements or projections for a variety of reasons, including, without limitation, general global political, macroeconomic and market conditions, including the impact of the COVID-19 pandemic, changes in U.S. government spending, revenue seasonality and matters specific to our business, such as the impact of COVID-19 pandemic on the company's business operations, financial performance and results of operations, our ability to expand our total available market and grow our portfolio of products, customer demand for and acceptance of our products and services, our ability to successfully execute new business models, our ability to successfully execute on our data fabric strategy to generate profitable growth and stockholder return and our ability to manage our gross profit margins. These and other equally important factors that may affect our future results are described in reports and documents we file from time to time with the SEC, including the factors described under the section titled Risk Factors in our most recent filings on Form 10-K and Form 10-Q available at www.sec.gov. The forward-looking statements made in these presentations are being made as of the time and date of the live presentation. If these presentations are reviewed after the time and date of the live presentation, even if subsequently made available by us on our website or otherwise, these presentations may not contain current or accurate information. Except as required by law, we disclaim any obligation to update or revise any forward-looking statements based on new information, future events or otherwise. This presentation includes non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available in the appendix to this presentation. We've got a packed agenda for you today. After today's events, we'll post the presentations to our website and tomorrow the video replay will be available. Today, George Kurian will kick it off. He'll be followed by Anthony Lye and Brad Anderson, who will talk about technologies and strategies for our cloud and enterprise data center businesses. We'll then take a 10-minute break after Brad. Then Cesar Cernuda will share a view into how we're meeting our customers on their hybrid cloud journey. Finally, Mike Berry will walk you through how all this comes together to drive shareholder value. After Mike, we'll have an hour for questions. [Operator Instructions] After the event, you'll be immediately prompted to take a survey. We really value your input, so we hope that you give us feedback so we can continue to improve our IR program. Thank you. And with that, I'll turn it over to George.

Thank you, Kris. Welcome to Financial Analyst Day. We're doing it digitally this year because of the extraordinary circumstances. I want to begin by hoping that you are all well and your families are all safe. Today, I want to tell you about how we've been evolving NetApp over the past 3 years since our last Analyst Day. I want to talk about the new NetApp that we've built by working so hard over the last few years and our path into the future. And I'm excited for you to meet key members of our leadership team who are building, shaping and leading the new NetApp. Most of you know us from our foundation, a leading enterprise storage systems company. That is an extraordinarily strong foundation to build on. But over the last few years, we've been doing hard work to evolve our technology portfolio to capitalize on the biggest market transitions in the industry, data and cloud, and we've accelerated that phase over the past 4 years. We bring enterprise data services to the leading public clouds and bring the simplicity and flexibility of public cloud to enterprise data centers. We help enterprises to not just dabble with a quarter of their workloads on the public cloud, but to actually put their biggest and most demanding workloads and to run their business on the public cloud. Only NetApp does so. NetApp unlocks the best of cloud. We have almost 3 decades of innovation on solving the world's most demanding data problems. More than 80% of our engineering investment is in software and approximately half of our product revenue is from software and the preponderant majority of our profit is also from software. We're cloud-led today. Our industry-leading storage operating system software is key to our success in the cloud and on-premises. ONTAP is the most powerful, most cloud-connected and most efficient storage operating system on the market. We introduce our software today on the cloud first. We immediately get feedback from our public cloud partners and our cloud customers and use that knowledge to build differentiated enterprise capability. NetApp is a cloud-led, data-centric software company. And we're building on a strong foundation. We have a deep moat of technology leadership from years of software innovation on the world's hardest data problems. That innovation brought us trusted relationship with the world's leading organizations, and these 2 assets gave us the capacity to build unique partnerships with the world's leading public clouds. Our data fabric strategy is truly differentiated. And today, we'll give you several examples of how we help customers deploy hybrid cloud infrastructures. We've demonstrated software and an increasingly cloud-centered business model, with gross margins of 65% versus our hardware competitors, who have far lower gross margins and a disciplined management track record. We turned every major market transition to our advantage. We invented Ethernet-connected network storage almost 3 decades ago. We invented unified storage in 2002, something that no other competitor has still been able to match, even though they have all tried and are still trying. And we have taken that unified platform to databases, virtualization and now for the enterprises to move their biggest and most demanding workloads to the public cloud. Now let me tell you about some of the macrodynamics we see and industry trends over the next few years. COVID-19 has clearly reshaped the macro environment. Digital transformation of business is now a top priority, no longer a nice-to-have but an absolute necessity. In retail, according to research conducted by IBM, for example, COVID-19 has accelerated digital commerce by 5 years relative to the environment before. Let me tell you now about what we believe about digital transformation. We believe there are 4 key imperatives that drive success in digital transformation. The first is the idea that speed replaces scale as the basis for competitive advantage. Speed is the new scale. The second is that cloud is the platform to run your digital business, to engage your customers and employees and data is the currency. It is what makes a digital business understand and differentiate its capabilities to its customers, employees and suppliers. Multicloud is already the de facto IT architecture. And if you connect the reality of multicloud with the necessity of world-class data management and stewardship, data fabrics become the heart of the IT architecture for the digital era. As a result, cloud software and data-focused projects are resilient in the new normal economy. So let's talk about customer business priorities in the new normal. Soon after COVID hit, we saw a big rush from all customers to ensure business continuity by making sure that their employees can work remotely and businesses can engage customers remotely. What's happened since is that many of our customers have now started to take on the hard work of business transformation and be focused on digital transformation. All aspects of business from customer engagement to product and service delivery and operational transformation are being taken on digitally. And data is at the heart of all these priorities, whether it's digitized versions of desktops or intelligence about your supply chain or real-time analytics of your customers' buying preferences. Data needs specialists, data needs a data fabric, data needs NetApp. Let me now talk about customers' IT priorities. IT is undergoing transformation to support the new digital business priorities of speed, agility, cloud and data. We are seeing the ongoing trend of customers modernizing their data centers to consolidate, standardize, abstract and automate them so that they look like cloud. We are also seeing a cloud acceleration move, whether it is the use of cloud technologies and principles to containerize applications using microservices and Kubernetes or to migrate applications to SaaS and public cloud services. Data mining, analytics and AI are being used in increase amounts to improve the quality and speed of decision-making or to supplement or augment staff who already stretched. For example, we're seeing really good success with our AI solutions in health care, where data-intensive imaging technology, combined with AI algorithms, are being used to augment the work of radiologists and physicians who are heavily taxed by the COVID crisis. We're also seeing early interest in new IT and procurement models. So I've talked about the landscape, the macroeconomy and customer priorities. I want to tell you more about NetApp's strategy and our execution plan for success. Data is likely to be the most unique or protectable competitive advantage of the future. It's true for our customers and it is certainly true about NetApp. We are focused on helping our customers accelerate their digital transformation efforts. And as CIO magazine says, that effort starts with a focus on data. And as I've said before, data needs specialists, data needs NetApp. That's the foundation on which we've built our strategy. Our strategy is essentially to apply our rich data-centric software innovation to help customers thrive in a hybrid cloud world by enabling our customers to build data fabrics. These data fabrics enable them to accelerate their data-driven digital transformation. According to a recent study by McKinsey & Company, data-driven digital leaders outperformed their counterparts by 50% in total returns to shareholders and the strategic use of data alone contributed to their earnings before interest and taxes being higher by 20% than their nondata-driven digital counterparts. We build data fabrics by bringing the best enterprise data services to the public clouds, and in turn, as we innovate at rapid speed on the leading public clouds, we bring the simplicity and flexibility of cloud to the enterprise data center. The core of our competitive advantage in enabling data fabrics for our customers is that decades-long data-centric software innovation leadership that is embedded in the industry's leading ONTAP operating system. ONTAP is now embedded deeply in the leading public clouds, deployed across all of their regions and in the heart of so many of the world's leading enterprise data centers. Let me give you 3 customer examples of how data fabrics enable our customers to drive competitive advantage. Let's start with the hybrid multicloud use case and SAP. SAP, a world's leading software company, in many ways is the backbone of digital transformation. Today, 72% of all global transactions touch an SAP system. Over the last few years, SAP have evolved their business from being enterprise software to delivering cloud solutions: hybrid, public and multicloud solutions. By NetApp being the platform for SAP's owned HANA Enterprise Cloud, SAP on Azure and Google Cloud and the platform for SAP customers on-premises, we helped SAP deliver applications and drive digital innovation much faster, improving time to new releases and workloads about 30% to 40%. We also enable SAP customers to deploy cloud-like architectures in their data centers or migrate orders of magnitude more quickly to the public cloud with NetApp technology. Now let's go next to the hybrid cloud. Most enterprises have a data center that serves their business needs but are looking to complement those capabilities with public cloud services as their business evolves. Arc'teryx is a global design company based in North Vancouver, Canada, specializing in technical high-performance apparel, outerwear and equipment. Their success in attracting a global audience to their brand and apparel caused them to need to scale their digital infrastructure to meet those global needs. Rather than build segregated data silos, Arc'teryx unified its data management with a single integrated view of all of their data on NetApp so that all their teams can work seamlessly together: product designers, colors, supply chain and customer service teams. And they scaled that environment leveraging NetApp cloud services on Amazon Web Services to meet the demands of providing a single, globally integrated data fabric that can adapt rapidly with their rapidly growing business. Willis Towers Watson is a leading global advisory, broking and solutions company with 45,000 employees, serving more than 140 countries and markets. NetApp has helped Willis Towers Watson build a bridge between their NetApp data center environments to the public clouds so that they can rapidly meet the demands of a changing global world. Modernizing enterprise data centers by bringing the simplicity and flexibility of public cloud to the data center is something that we see a lot of customers undertaking. ICON is a Dublin, Ireland-based global provider of outsourced clinical development and commercialization services. They serve pharmaceutical, biotech, medical device, public health organizations and governments around the world. ICON's data, mountains of data, drives the success of clinical trials, accelerates the proof of drug efficacy and hastens the delivery of life-saving new medicines and therapeutic devices to market. ICON has built a private cloud and data fabric leveraging NetApp technologies. These not only accelerate drug discovery for their customers but have also enabled ICON's sciences and AI engineers to have created a new revenue model for clinical Data as a Service. This is absolutely breakthrough stuff, and I'm so excited at the work we're doing with our customers. All of the businesses that I spoke about are digitizing or already have digitized their businesses with a data fabric enabled by NetApp. You've seen that data is at the heart of these businesses and frankly of all businesses go forward. And data is growing in scale, diversity and importance to the business. Stored data is growing rapidly with the preponderant majority of that stored data being in the enterprise data center and cloud, both of which NetApp is very well positioned to address. Data is a growth business and is the foundation for our overall business plan. High-value data that drives real-time business insight is now being deployed on all-flash arrays. As flash costs compared to disk-based costs get better and better, bigger parts of data is estimated to be on flash. Our analysis estimates the growth of all-flash array market to be 9% over the next 3 to 4 years. And nearly double the number of companies that have already deployed all-flash array architectures are going to migrate to flash in the next few years. We, at NetApp, are the market leader with the best products in flash. We have the highest-performing products, the most efficient architecture in the industry and the ability to autonomously migrate workloads and data from expensive flash to cost-effective disk to managed cloud. Only NetApp can do so. This gives us opportunities to gain share as we see legacy architectures transition to flash, particularly in our competitors' storage installed bases. In addition to flash, unstructured data is growing, and between leadership positions in file-based NAS storage and object storage, we are very well positioned to address this part of the enterprise data center. Companies are rapidly moving workloads to the cloud as well. 93% of enterprises now have a multicloud strategy and we believe it will be the dominant cloud architecture go-forward. Top cloud providers are gaining share, but customers still plan to use multiple of these cloud leaders each for their specific strengths. And 87% of enterprises have a hybrid cloud strategy. Typically, 1/4 of enterprise workloads have already been deployed on public clouds. This means that there is a major wave of migrations still ahead. And we are very well positioned to capitalize. The data fabric strategy is perfect for a hybrid cloud world. So to summarize, data is growing in scale, scope and importance. Flash and hybrid multicloud architectures are growing, and NetApp is perfectly positioned for this next phase of growth. So how does this translate into market size and market opportunity? NetApp is playing in large and growing markets. Let's start with the enterprise data center market, which is where most of you know us from. The enterprise data center market is a large market with several subsegments that are growing quickly. The overall market, inclusive of external storage, converged and hyper-converged storage and object storage, grows from $63 billion in 2019 and to $72 billion in 2023, paced by the fast-growing all-flash array market, the highest growth and the largest segment of the market. NetApp is well positioned in multiple of these fast-growing subsegments, including all-flash arrays, converged storage, object storage and in the enterprise data center portion of the hyper-converged market. Our leadership in these segments will enable us to grow faster than the aggregate market and gain share as we see these high-growth segments grow to be a bigger part of the total enterprise data center market by 2023. Now let's talk about the cloud services market opportunity. Today, we play into a $5 billion cloud storage market with 3 subsegments, shared storage, Desktop as a Service and monitoring and optimization. All of these segments are growing rapidly. We started our foray into the cloud by building the #1 shared storage position by making the world's #1 storage operating system cloud-ready and adding a series of industry-leading data services that enable the autonomous deployment of enterprise, cloud-native and desktop applications on the #1 shared storage platform in the public. To the position of storage optimization, we added compute optimization through the acquisition of Spot and monitoring through cloud insights, a SaaS-based application built from the industry-leading on-command insight technologies, the leading data center resource management software program. We leverage these 3 capabilities into desktop service delivery with the acquisition of Cloud Jumper and Talon that give us a multicloud, multi-tenant offering ready for the migration of desktops to the cloud with Windows 10 and Windows Virtual Desktop. Overall, these public cloud service segments grow from roughly $5 billion to $6 billion in 2019 to almost $19 billion in 2023, at a 32% CAGR. This gives us a chance to build a substantial cloud business in that period of time. So let me summarize our overall market opportunity. Many of you have seen us in the $45 billion low-growth external storage market. What we've done, however, over the past several years is to build strong positions in many growth segments of an aggregate $65 billion market in 2019, growing to $90 billion in 2023, reflecting a 7% CAGR across that time period. NetApp has strong positions in enterprise data centers, particularly in the growth segments of that market, growing strength in rapidly growing public cloud services, all underpinned with differentiated data-centric, margin-rich software. So let me summarize my key takeaways and messages. NetApp is a cloud-led, data-centric software company building on a rich history of software innovation. We have trusted relationships with the world's leading enterprises and public clouds. We are uniquely positioned in large and growing markets to capture and win from market transitions. We have a focused execution plan to grow storage software and systems and to scale cloud data services, both software-centered, margin-rich segments. We have a software and cloud-focused business model that drives recurring revenue, and together with disciplined OpEx management, it allows us to invest for growth while sustaining capital returns. Now let's transition to the rest of the agenda. On technology and innovation leadership, you will hear from Anthony Lye, who leads our public cloud services portfolio; and Brad Anderson, who leads our enterprise data center portfolio. On our alignment with customer imperatives, you will hear from Cesar Cernuda, President of NetApp about how we are aligning across sales, marketing, services and support, to meet our customers where they are in their hybrid cloud journey. And on our strong business model, you will hear from Mike Berry, Chief Financial Officer. Now let's hear from Anthony Lye. Anthony?

Thanks, George. Good morning, everyone. As the leader of our cloud services business unit, NetApp has established itself as a leading platform for thousands of customers who run primary and secondary workloads and their applications on the public cloud of their choice. Our cloud business is growing very quickly in fast-growing markets. Our cloud foundation is storage and ONTAP, the leading storage operating system on-premises made available natively on the public clouds. And we have, through an organic and inorganic strategy, built a platform that addresses the key cloud opportunities for both traditional IT and cloud-native customers. Customers on the cloud, on multicloud and hybrid clouds choose NetApp. We offer our customers the same or better experiences on public clouds as they have on-premises. We're different and unique because the public clouds have chosen NetApp. We are embedded in the consults of Microsoft and Google, sold, supported and billed by both of them. Our technology, performance, availability and our incremental data services distance us from any other competitor. Today, customers see NetApp as a platform that unlocks the best of cloud. We run our services inside and on top of the 3 big public clouds and increasingly a software on private clouds. We see a platform opportunity. Customers on the public clouds need optimized infrastructures for every workload and application. Customers want to maintain their high rates of innovation but combine them with the continuous cost and performance optimizations. We solve this problem. We provide a cloud platform, a set of APIs that combine storage, compute and desktop infrastructure services. And we've done a lot to build out our platform, and we will add more capability to our platform over time. NetApp helps IT teams extend and migrate to the public clouds. We help cloud-native teams develop and deploy new applications on the public clouds. Our platform provides them with differentiated functionality, backed by price and performance benefits, allowing customers more cloud at less cost. NetApp has demonstrated clear leadership with ONTAP on the public clouds. Cloud Volumes is the #1 shared storage platform, sold as a first-party service by Microsoft, resold by Google and available on Amazon's Web Services. Our platform in Azure and Google runs SAP, large relational databases like Oracle, MySQL and Postgres, HPC workloads in industries like oil and gas, pharmaceuticals, genomics and EBA. We platform applications running on VMs, all containers managed by Kubernetes. And industry analysts project the TAM for cloud volumes will reach $9 billion by 2023, with a 38% compound annual growth rate. Cloud volumes are surrounded by a unique set of vertically integrated data services, giving each workload owner the protection, security, orchestration and enterprise resilience they had on-premises all done by NetApp. Unlike any other hybrid cloud vendor, NetApp provides this better experience in the public clouds. Customers know with confidence they can purchase net solutions to manage their transition and incorporation of public clouds. Having the #1 shared storage platform on the public cloud allows us to take share from all of our legacy competitors, as workloads and applications migrate. Our customers consider this our commitment to delivering open and extensible data fabric. To become a platform, storage needs compute. And Spot brings compute. Spot is now integrated and will optimize our storage. Together, we provide customers with a single vendor solution for their entire application stack. Spot drives a continuous optimization and extends the continuous integration and continuous deployment model. Now together, made better with the integration and continuous optimization of NetApp cloud volumes. Spot by NetApp provides customers with unique capabilities for both cloud-native and legacy applications. Spot is an integrated platform of optimization services. Spot understands the application and its use of VMs or containers, and at runtime, optimizes both compute types and compute buying models while maintaining or improving the SLA and SLO. And Spot by NetApp will now optimize storage as well as compute. One customer, Ticketmaster, uses multiple spot products to optimize their compute resources that run the services supporting their customer-facing web applications. Ticketmaster not only reduced their cloud compute cost by over 60% using Spot, they also improved developer productivity and increased the speed of application delivery. To offer our customers more value, we bring both cloud storage and compute capabilities to our virtual desktop service, a SaaS control plane for customers to deploy, manage and optimize virtual desktop infrastructures on the cloud of their choice. VDS supports both RDS and Microsoft's Windows Virtual Desktops on all public and private clouds. Our virtual desktop service provides choice like our storage. It supports both self-managed and fully managed solutions. Customers can deploy optimized virtual desktop infrastructures or subscribe to a fully managed service. Our VDI solutions are again made better by our cloud storage and our Spot optimizations. To complete our current offering, we have Cloud Insights, a SaaS application for real-time analytics and insights of both infrastructure and platforms. Cloud Insights was built on the OCI on-premise platform, the standard for most of the Global 1000 customer base. Cloud Insights monitors hundreds of infrastructure and platform assets, providing customers a solution that finds problems faster, manages resources more effectively and optimizes the placement of workloads across our customers' hybrid multi-cloud infrastructure. Today, we are used extensively in 16 different workloads. Customers run mission-critical and DevTest workloads. They run legacy and cloud-native applications in both subscription and consumption business models. Today, we serve thousands of customers. Leaders in every industry category rely on NetApp for the public cloud. Customers choose NetApp because it unlocks the best of cloud. For example, the global multi-energy company Repsol traditionally supported reservoir simulation workloads on-premises, requiring expensive hardware and software configuration plus licensing to support the environment. By adopting Microsoft's Azure high-performing compute environments with Azure NetApp Files, Repsol has seen amazing performance increases, and can make decisions in what once took a month, that process now only takes a few hours. Another interesting customer is a large software development and collaboration tool company. When one of their large teams received their corporate cloud mandate, they decided to port one of the biggest collaboration software tools available to Amazon's Web Services. The software vendor chose Cloud Volumes for the primary and DR storage on both coasts. This customer is a longtime NetApp customer with multiple clusters on-premise. When they decided to move to Amazon, they knew they would need a low-latency storage solution to be successful. And they decided that Cloud Volumes was the best price and performance platform, and by far, the easiest for them to consume. So together, how big is this market opportunity for the NetApp in the public cloud. When we add the market size and growth expectations, we see a large TAM, fast-growing markets where we lead or we will lead in the near future. Our results speak for themselves. We are experiencing rapid growth. Existing customers are buying more and we are landing many new customers and have been onboarding multiple customers every business day for the last 6 months. NetApp continues to support its customers on the public cloud on-premises and for most customers, a hybrid cloud. Our solutions on the public cloud are as good as our solutions on-premises. This commitment to symmetry provides our customers with flexibility and choice and this is unique to NetApp. Our platform takes the combination of new services with the almost 30 years of intellectual property of ONTAP at NetApp. NetApp has the opportunity to get new customers to get more from our existing customers even if they are existing enterprise companies or companies born in the cloud. In conclusion, NetApp is growing rapidly. We are taking share in fast-growth markets. More regions, more services, more partnerships bring us more annual recurring revenue. Our platform works because it's based on NetApp's near 3 decades of history and our core intellectual property, now native in the public clouds. NetApp really does unlock the best of cloud. Now, let me introduce you to Brad Anderson, my colleague and partner in the development of our products and services. We get huge benefits from each other's work and are increasingly working on common solutions for our customers operating in the hybrid cloud.

Thank you, Anthony. Good morning, and welcome, and thank you for joining. I wish we could have done it in person, but I'm glad we're still able to do this and have everyone safe. So let's go ahead and get started. As Anthony closed in his presentation, customers increasingly want the same from on-premise and cloud. You heard earlier from George that multicloud and hybrid cloud are the de facto architectures. Organizations see the value of both on-premises and public cloud solutions. The vast majority of the customers are in the middle, in a hybrid cloud embargo. It is true today and it will still be the case in 5 years' time. You just heard from Anthony that NetApp has the leading shared storage platform in public cloud, and I'm here to tell you the same is true for on-premises. And the fact that it's the same storage OS ONTAP for both gives NetApp a big advantage in providing the best hyper cloud solutions. So let's start with the market. The on-premise markets are evolving in a direction very favorable to the NetApp and to our strong position in hybrid cloud. Specifically, digital transformation is accelerating. There is already a top enterprise priority only to be made more urgent by COVID. As a result, companies are driving even faster to adopt cloud and hybrid cloud solutions. Markets are in transition. The major applications that enterprise run their business on, SAP, SQL, Oracle, VMware, are all going through major releases that have most companies rethinking their long-term architectures. And invariably, they are choosing hybrid cloud deployments as a measure of future-proof. And lastly, our competitors are going through major product transitions, the most exciting of which is Dell EMC, who is exposing their entire midrange to a forklift upgrade, a market segment, we are particularly strong in and that will be an opportunity for our cloud business, too. Simply put, all these transitions and changes create buying opportunities for NetApp to intercept. And there are on-premise growth opportunities. So let's look at the most attractive 3. Let's start with flash. Flash is growing at 9% compounded annually, compared with the overall enterprise market growing at 2%. NetApp is the leader in the flash market. We are over-indexed in both product and opportunity, as evidenced by our growing all-flash 34% year-over-year in Q1. We're well positioned to win by leveraging our large installed base of FAS customers, those are our hybrid customers, who are now ready to take advantage of the benefits of flash. And with only 25% of our installed base systems being all-flash arrays, we have plenty of room to grow. We also see attractive opportunities in the enterprise application transitions we discussed earlier and in the Dell midrange transition. The second growth opportunity is object storage. Object storage has become an important primary workload technology at the heart of some of the most exciting new business models. The object market is growing at 13% compound annually on premises, and NetApp has grown greater than 50%, 5-0, for the past 3 years. We are extremely well positioned in object. While others have neglected or even exited object, we have been investing. Specifically, we see 2 attractive growth opportunities. The first is flash data tiering. This is an opportunity for NetApp to sell storage grid or object project with every AFF to cost effectively optimize flash utilization. It is a unique and captive opportunity for NetApp and one where we have plenty of room to grow since our current object attach to all-flash is just 5%. The second opportunity is object storage for active archiving. We see great opportunity in a wide variety of industries where we've already had much success. Our product, unlike most, excels at both large objects, which is ideal for media and entertainment, life sciences and finance; as well as for small object, which is important for manufacturing, autonomous vehicles and IoT workloads. And finally, private cloud. For customers wanting to operate their enterprise data centers like public clouds. The private cloud market is among the fastest-growing on-premises opportunities, growing at 8% compound annually. Some build their private cloud on our traditional storage like AFF and others use scale-out storage built on industry-standard servers. The great news is that we have both. In fact, some of the largest clouds beyond the one Anthony discussed are built on NetApp AFF, and many of the largest service providers are built on our SolidFire technology, which was designed for that segment. We see a lot of incremental growth in helping more enterprises build clouds to operate like public clouds and to serve large VDI and virtualization deployments, enterprise applications and databases as well as advanced applications like AI and analytics to drive business transformation efforts. And we start in a great position: a large installed base, [ with ] a very satisfied customers, all the leading companies across all the top verticals. The takeaway here is industry leaders rely on NetApp. They look at NetApp to solve their expanding workload challenges. They look for our leadership across flash, object, private and hybrid clouds to meet their increasing needs. And this is very important because the key to on-premise growth is expansion of wallet, winning new workloads with new buyers across our large installed base. And our innovation leadership aligns to the most attractive growth opportunities. NetApp is the industry leader for unified external storage. We are the farthest up and to the right of any vendor in the Gartner Magic Quadrant. The same is true for IDC. We are a leader in the IDC MarketScape front. I would mention Gartner, but Gartner doesn't do a Magic Quadrant for [indiscernible]. And as mentioned earlier, our products excel at tiering in both large and small object workloads. And lastly, we have focused leadership in converged infrastructure, i.e., FlexPod, which a lot of customers use to build clouds, high-performance compute, E-series and the high-end hybrid cloud infrastructure where customers need the robust storage capabilities of our SolidFire HCI products to build scale-out cloud on commodity hardware. Let me quickly summarize. The markets are coming towards NetApp and our strength in hybrid cloud. We see attractive growth opportunities in flash, in object, private cloud, which aligns to the needs of our large installed base and to our product and technology leadership. Now let's drill down on our technology leadership. The heart of NetApp's innovation and leadership is its software. 89% of the patents that NetApp applied for and received this past year were software related. In my team, I have just under 3,000 members, 80% of them are software engineers. And the most important piece of software and innovation is ONTAP. ONTAP is and remains the industry gold standard for shared storage operating systems. It's the most powerful, most cloud-connected storage operating system, the most efficient storage operating system on the market, more than 25 years of industry-leading innovation, more than 25 years of software hardening and more than 25 years of running the most demanding problems for the largest companies across all industries. It's the foundation for our growth on-premises and in the public clouds. And it's the storage operating system the biggest public cloud providers chose to build their first-party storage services on. And our competition has not caught up yet. Here are 10 examples where NetApp sets the bar in performance, scale, automation, cloud connectedness and simplicity. Let me say a few things about simplicity. Simplicity has always been part of NetApp's DNA. Nobody should know this better than the finance sector, where we used to drop off a filer and come back a month later to a very happy user. We have continued to invest in simplicity as cloud reshapes the customer experience: how you buy, how you operate and how you consume. Last fall, we announced a number of new simplification enhancements across the full customer experience, including Keystone, which enables the widest range of OpEx purchase options for customers, both leasing and subscriptions, NetApp-managed, partner-managed and customer-managed. And that's not to mention that the simplest OpEx option that our competitors want to ignore and don't have an answer for is cloud volumes in the public cloud of your choice. But we do a lot more. Let me share a few examples: A single architecture that can support a Tier 0 enterprise workload and a massive file storage workload, and I mean massive 40-plus petabytes, maybe 400-plus billion files. For everyone else, this is 2 data silos with 2 different architectures and 2 different skill sets to operate. We offer integrated, automated tiering, caching and backup, the right data in the right place at the right time at the right cost using the right compliance and security for both on-premises and in cloud. Our competitors can't do this. For them, it would require the addition of caching and backup and tiering appliances at both source and target, many of which will be third-party and incredibly costly and complex solutions to manage. At NetApp, this is native technology that works automatically. And lastly, nondisruptive adoption of new technologies with transparent application migration. We plan for innovation. And as such, we make it simple for customers to take advantage. ONTAP allows customers to go from hard drives to flash to nonvolatile memory to every network speed and transition to new protocols nondisruptively. A simple click of a button moves your workloads and file services transparently. For others, it's a new product and likely a forklift upgrade. You see, simplicity is also about understanding the complete process of a customer managing their data through the full life cycle. For NetApp, it's a never-ending journey to bring effortless value to our customers. NetApp also offers the richest set of data services of any vendor, which makes it easy for customers to manage their data holistically and cost effectively. We've been doing this for years. You saw a similar slide from Anthony, but with cloud volumes in the middle, which shouldn't be a surprise since they're both ONTAP. Public cloud benefits from the innovation of ONTAP, and on-premise benefits from the value of new cloud services like BDI and Kubernetes that you see up in the upper right quadrant. For on-premise, we do annual ONTAP innovation releases to align with the natural upgrade rhythm on the enterprise; while for cloud, we continuously innovate in the CI/CD manner to accelerate ONTAP innovation into the public cloud. And cloud and SaaS enables us to capture valuable customer feedback from public cloud usage that we can merge and sync back into our on-prem release. This is the best way to accelerate the innovation for both on-premise and cloud. It's also the most efficient, and it gives me tremendous leverage in my R&D spending. And our innovation continues as [ call ] becomes more mature and plays a bigger and more important role in hybrid cloud. Here are a few examples: Software-defined storage, containerizing ONTAP, so it can run on industry-standard hardware, support modular scale-out architectures. Developing the best Kubernetes storage to run alongside our leading virtualization capabilities. Some of you may know this work by codename Astra. This enables customers to develop new applications cloud natively using containers so they can run either on-premises or in public cloud. It also automates application life cycle management, enabling full-stack upgrades without any application downtime. And lastly, it leads many customers from that growing virtualization text that they're trying to get out from underneath. And it solves data persistence for containers, which is key to application mobility for stable applications. Oh, by the way, Astra is already running in one of the largest public clouds, providing a software-defined version of cloud [ bundles ]. Stay tuned. You'll be hearing a lot more at our Insight Conference in October. As you can see, we are not slowing down. Let me summarize NetApp's innovation in hybrid cloud leadership. Having ONTAP both on-premises and in cloud is a powerful advantage. NetApp covers the entire hybrid cloud spectrum with a seamless set of capabilities and data services spanning core to cloud. No matter where customers are on their transformation journey, an investment in NetApp is future-proof. That's the NetApp advantage that only the NetApp data fabric can provide. This is why customers are constantly expanding with NetApp. So let's look at a few examples. A large U.S.-based home improvement retailer with over 1,800 retail locations. They started off in the cloud with Azure NetApp files for their file services. That experience convinced them to bring in AFF on-premises to run their new global SAP HANA deployment and now are in the process of moving their entire suite of Oracle applications to NetApp. The deep integration of NetApp solutions with Azure was key. We can now see our cloud strategies paying off for our on-premise customers as well. Second example, Blue Cross Blue Shield of North Carolina moved from a managed service provider to 2 on-premise data centers using NetApp AFF. They optimizes the storage grid and fabric tools to optimize flash utilization. Once they had storage grid, they had a object repository, then they were able to run native object workloads. So they went from an AFF customer to a storage grid, fabric tool customer to running native object workloads. Now as their data grows, so do we. Lastly, Epic Games. Long-term NetApp customer. They recently bought 3Lateral, another NetApp customer. With the acquisition, they turned to CDO in AWS to mirror their on-premises environments to simplify their overall architecture. In the announcement of the acquisition, the CEO of Epic Games called out the importance of the NetApp data fabric to their IT environment. "We see the data fabric as our gateway to cloud." So why do we win? I think it's simple for these 5 reasons. One, market and competitive transitions are driving growth and creating buying events, growth that plays to NetApp's strength. Two, customers choose NetApp because we have the best technology for on-premises and the cloud. Three, NetApp is future ready, driving the software innovation customers need for their digital transformation journeys. Four, NetApp will grow by expanding flash adoption, delivering a simple and powerful cloud-like experience and empowering customers to thrive in a hybrid world. And lastly, our data fabric strategy offers customers seamless investment-protected hybrid cloud. NetApp unlocks the best of cloud. Thank you very much. I think this brings us to the next part of the program, which is a 10-minute break. So enjoy, and I look forward to talking to you in the Q&A session later on this morning. Thank you. [Break]

Hi, everyone. Welcome back from the break. I'm Cesar Cernuda, President at NetApp, heading up sales, marketing, services and customer success. I joined in July and have been learning about the business, the opportunity ahead. And I'm excited to be here today to share my perspectives with all of you. I have a long history of working in technology. For the last 23 years at Microsoft, I had the opportunities to have regional and global roles that enabled me to live in different parts of the world, U.S., Spain, France, Denmark, Singapore, the last several years as a member of the executive staff and Corporate Vice President of Microsoft. But now I would like to share with you why I joined NetApp. I observed NetApp from another perspective and saw value in their approach to solving customer challenges and opportunity to help the company continue to transform. I appreciated the strong technology and road map, the almost 30 years' history, the strong customer installed base, their cloud plans and partnerships. The vision of NetApp is aligned to where the market is headed: the world of cloud and software. I'm very excited about the opportunity to evolve NetApp and build a new perception of NetApp in the market. We have a clear vision, and I believe in our strategy. With data fabric, our industry-leading solutions work across diverse customer environments and the world's biggest public clouds. As a leadership team, we are all focused on continuing to evolve NetApp into a cloud-led data-centric software company, helping our customers unlock the best of cloud. But now let me tell you how we're putting the strategy to work. Let me introduce you to our go-to-market organization. Of our 10,500 employees, we have 5,600 of them focused on serving our customers and partners. We have over 30,000 customers and 5,000 partners in 160 countries. In the last year, Microsoft and Google have become 2 of our largest partners as they are now selling our solutions embedded in their Azure and Google Cloud offerings. This means NetApp cloud technology is installed by their sales teams and partners as part of their cloud offerings. I also want to highlight that our services are available on AWS as well. The focus of the organization is to shift from a hardware company to a cloud-led data-centric software company with tightly aligned customer-facing activities throughout the entire customer life cycle. We are an organization that is focused on the customer. We put our portfolio of systems, software and services and our ecosystem of partnerships together to enable their journey to the cloud. So now let's talk about the customer journey. Think about it from a customer perspective. As George talked about it, in simply operating their business, customers are challenged with business continuity, cost optimization, cash management. And in the medium to long term, they are challenged with business transformation, business resilience, customer experience, [ product ] and services transformation, value chain transformation and workforce enablement are a few of the challenges they face. Be it the transformation, cloud acceleration and AI projects are all moving on the forefront. And of course, modernizing applications and infrastructure to include the standardization, abstraction automation and refractory replacement are concerning. Let me tell you what I'm hearing from customers. As customers move mission-critical workloads to the cloud, they increasingly want the same from their clouds as they come to spectrum enterprise data center. Data center, cloud, invariably, customers need and want both. And my response is, "We will lead you where you are." Hybrid cloud is a consequence of the world we live in. No matter where customers are in their journey, their investments with NetApp are future-proof. And unlike most of our competitors who have limited solutions that span the data center, hybrid and public clouds, NetApp has a rich set of software services spanning a hybrid cloud environment. NetApp has a complete portfolio of solutions ready to tackle the biggest business workloads, no matter what it is or what it might need to be in the future? Here's my big takeaway in my first 3 months. What I thought before I came to NetApp, it's true. NetApp is uniquely positioned to solve a big challenge for enterprises and public clouds, and that leads to a big market opportunity. And as you heard from Anthony and Brad, we have the best technology, experience and portfolio in the industry. We're building our strong foundation of over 30,000 customers. Across the board, enterprises are moving workloads to the cloud. They would love to move more workloads, mission-critical applications and enterprise apps but are concerned with the performance, latency, reliability and security. We have held them with their data for over the past 30 years, giving them precise performance, reliability and security. We have become a trust partner. That's why NetApp has a great opportunity to enable the move to the cloud. We have the trust, the technology and the partnerships to make it happen. To illustrate what I mean, let me share a couple of customer examples. Let's start with enterprise applications, an enormous opportunity with SAP. Many enterprise applications, such as those that run on SAP have stickiness to on-prem due to monolithic natural performance issues and the data being critical for the customer. But things are changing and especially for SAP with the migration of S/4HANA. Approximately 83% of SAP customers have not yet made the journey to S/4HANA. Interestingly, 85% of those who haven't migrated are evaluating the business case. And we know that approximately 85% of cloud customers use hybrid cloud deployments. NetApp is uniquely positioned to win in this SAP transition. Even SAP runs SAP on NetApp. And not only do we offer the best systems and software to run SAP in the data center, we're the only vendor who can offer those same technologies in the public clouds. And those cloud services are also certified by SAP to give the customer confidence in their ability to make great applications to the cloud,that they previously thought unmigratable. Only NetApp can do this. We will win by partnering with Google and Microsoft to help move the 57,500 SAP customers that are still on-premise seamlessly into the cloud. It's clear that NetApp provides the most comprehensive support available for SAP workloads in the enterprise data center in the cloud. Now let me share with you a real example with Accenture and a big-box retailer. We're deepening our relationship with system integrators. With Accenture, one of our global transformation partners, we had a joint customer, which is one of the largest big-box retailers in the world based in the U.S. that was tasked to [ formulate a cloud strat ] for their SAP HANA environment. This included migrating over 100 instances of SAP HANA to Microsoft Azure. Accenture proposed and implemented solutions for this customer include a combination of Microsoft Azure and HANA [ Northeast assets ], build a NetApp ONTAP as well as Azure data files. By deploying our technology in their data centers in hybrid environments and what the customer calls their near cloud, in the Azure public cloud, the customer achieved high levels of performance reliability and recoverability across all environments, and they could only do that with NetApp and the data fabric. Let me share another quick example of how we're executing on this said HANA opportunity. Let's talk now and look at CONA Services. CONA is a Software-as-a-Service platform based on SAP for the North American Coca-Cola bottling businesses. It provides participating bottlers a common set of processes, data standards, manufacturing and customer solutions. This platform supports end-to-end business operations, including demand planning, procurement, supply chain, sales distribution, finance and reporting. In other words, CONA Services delivers solutions for the bottlers to optimally run their daily business and refresh their [ world ]. CONA have been looking at alternatives to their legacy, dedicated, physical SAP environment. Azure NetApp Files was a catalyst for this project. Our history of enterprise solutions and our partnership with Azure made them feel comfortable migrating. CONA understood that having Azure NetApp Files as underlying technology will provide them with the performance, reliability, data management and the scale required to migrate their legacy SAP environment to Azure, reducing their total cost of ownership and increasing services levels to their customers. Azure NetApp Files is a catalyst for helping CONA modernize their platform with the best of the public cloud has to offer. Another good example on how our data fabric strategy has helped a large customer to shift to the cloud. Now let me move to a different scenario, our workload, artificial intelligence. AI tends to be borne in the cloud, and customers utilize cloud services to perform artificial intelligence functions to the last compute. However, many customers want to utilize AI on data that might be sensitive or need to be secured. At the same time, performance and latency are key in business scenarios. NetApp provides a unique capability to provide flexibility and mobility for data that needs to be on-prem for security and governance, but allowing customers to [ brush ] into their cloud for functions like AI or utilizing enterprise performance and scale to perform AI on-premise. So now let me share a real customer example. We recently worked with King's London, a public research university in London, U.K. and a worldwide leader in medical research. It is the first clinical provider in Europe to adopt AI to rethink the practice of radiology. Their business challenge required them to transform clinical care for 8 million patients. They needed to realign a medical platform to allow specialists in the U.K. national health service to automate radiology interpretation. They choose NetApp for our extreme performance and nondisruptive scale-out on our proven data services in demanding environments. At the end of the day, customers want to manage these environments in a simple way. They want tools that bring together the best of cloud and the best on-prem to allow the resource to quickly and easily manage these applications and to secure and protect the critical data for these applications. These are some of the many examples I could share with you. And given our limited time, I only shared enterprise applications and AI workloads. However, we have countless other database cloud migrations, VDI, cloud optimization, HPC, et cetera. But now let's shift gears and talk about how we are building a go-to-market organization that supports and serves this customer needs. As [ a cloud-led of our ] company, our go-to-market organization is constantly evolving to meet our customers on their hybrid cloud journey. First, we need to understand the opportunity for NetApp. We believe we have a $90 billion total market opportunity, and it is spread across these customer segments. And we are aligning our resources toward it. Here's how we are addressing the customer segments. We serve our customers in a variety of ways: NetApp's direct sales force, our partners and the leading public clouds. First, our NetApp direct sales force. We have organized our selling teams by segments, our largest accounts, enterprise accounts and commercial accounts. We also have a new dedicated renewals, customer success, digital sales and cloud sales teams. We have more than 3,500 technical field resources to serve our customers and partners. This structure allowed us to reach and serve a listing set of customers and focus resources where they will generate the highest return. We have aligned account managers and technical teams to high potential and large enterprise accounts. We have expanded the footprint with existing enterprise customers to acquire new customers via more focused go-to-market approach. We're leveraging our digital sales, digital market and channel to increase business in the commercial market and continue to leverage our partners as an effective sales engine to extend our reach in the market. Partnerships are more important than ever in helping customers navigate their ever-changing IT landscape. And we have a great ecosystem of partners ranging from our strategic alliances to our distributor channel. As I mentioned previously, we have 5,400 partners, and they're engaged in approximately 80% of the NetApp business. Today, I want to highlight our new cloud service partners. We continue to make investments as well in GSIs and ISVs. We're investing in this partnership to address the market opportunity and capture more cloud business, which aligns with our strategy. Evolution of the partner model is critical to my plans. And there are a few other areas of focus that I want to highlight today. Let me talk about the public cloud vendors relationship. We have continuously invested in our sales teams and partners expanding coverage and bringing in new skills to better serve our customers in their cloud journeys. But it's not just about adding direct sellers or more partners. We have effectively captured the selling power of Google and Microsoft. We have built teams closely aligned with our public cloud partners. Each one of those cloud partners have a unique solid motion and customer focus. And it's important that we align to that to capture the full growth potential. By doing this, we effectively extend our sales force. Think about it, we now have Microsoft and Google selling our solutions that are embedded in their Azure and Google Cloud offerings. That's tens of thousands of new sellers who are being [ goaled ] and paid to sell NetApp solutions throughout Azure and Google. And we have expanded our offer into new markets. As you heard from Anthony, we have also invested in cloud acquisitions that expand our ability to capture this market, offering capabilities in workplace management, cloud jumper, real-time global file sharing and compute application optimization spot, making our infrastructure even more relevant to the needs of enterprises today and tomorrow. Spot, for example, has less than 5% customer overlap with NetApp, which is why we are working strongly together to introduce our customers and partners to these new element of our portfolio and also leverage the Spot installed base to offer some other NetApp products and services. Evolution of the partner model is critical to my clients. And there are a few other areas of focus that I want to highlight today. Let's start with renewals. Within our service and support organization, we now have a dedicated renewal sales team with clear end-to-end ownership and accountability of renewal opportunity. This team has a leave-no-asset-behind mindset and is accountable for managing every asset in the installed base to ensure either every asset is renewed or dispositioned. We are driving customer retention and recurring revenue by enhancing the customer experience. We are delivering efficient renewals enablement support to drive quoting, forecasting, data cleanup, management and scoping. Now I'd like to discuss our marketing organization. [ Mostly ] changing our marketing approach and marketing teams. We're leading with cloud, promising our prospects and customers that will help them put data at the heart of their digital transformations and unlock the best of that. We are showing the world that we are true specialists in everything we do because we believe that a specialist will win over generalist every time. And you might notice that we look different with a fresh and modern look and feel. But it's not just about messaging. We have fundamentally restructured the marketing team to be a part of the selling process, deploying new tools and technology that support the new demand generation programs. All this helps us reach new audiences, get them to understand who we are and widening our solutions and services and connect them to the right sellers in real-time. This is our own digital transformation. Modern tools and technology with highly aligned and collaborative marketing and selling approaches, and a lot of AI starting to drive efficiency and scale. Our chatbots are now doing a lot of the selling for us. At NetApp, marketing is at the heart of our revenue engine. NetApp learning services is our training organization. We are investing in our customers, partners and employees role-based learning paths to drive adoption, certification and the ability to sell the total NetApp solution. We are modernizing and retooling for the remote era and using some of the industry best tools and platforms to do so. I have high expectations from this group. And being a lifelong learner, I'm excited about what they will be delivering. We start this section discussing how our go-to-market organization has changed to support the new NetApp. I want to make sure I reiterate where we are making investments to ensure we deliver growth. We have increased sales capacity to improve sales coverage and address the growing market with our cloud, specialists and our customer success teams. We have higher software and cloud industry experts. We have established a cloud sales team to capture the growing market. We have incorporated a digital marketing selling motion, a one-stop shop for our customers and partners to unlock the rest of cloud. I've told you how we are meeting customers wherever they are on their hybrid cloud journey and how we're organizing to support NetApp as a cloud-led data-centric software company. Now I'd like to share with you how we will win. We have involved our organization to support that objective and have added new capabilities to sales to reach more customers and evolve our partner community to support those capabilities as well. We will increase our focus on digital sales to extend our reach in the marketplace. We have a clear plan to secure on the big opportunity with over 30,000 customers. And I'm very confident that we can increase our share of wallet. We have an opportunity to grow new businesses, and we'll continue to optimize and reallocate to support growth. We are the new NetApp. And we will continue to evolve. We are set up for success and watch us unlock the power of cloud. And we will deliver growth both to NetApp and our customers. In closing, I'm fully confident that we have the right team, the best portfolio and the biggest opportunity. I know we will win. Thank you for your time today. And now I'll pass it to Mike.

Thank you, Cesar, and welcome to NetApp. Thrilled to have you on the team. Good morning, everyone, and thank you for joining us today. I am super excited to have the opportunity to take the messages you heard from George, Anthony, Brad and Cesar and summarize how they will impact the NetApp financial model. Please note that I will be referring to non-GAAP numbers unless otherwise noted. Before jumping into the numbers, let's summarize what you have heard today from the NetApp team. Our data-centric software and cloud solutions create significant value for our customers. Our data fabric strategy built on a strong foundation of software innovation supports our customers wherever they are in their hybrid cloud journey. I will also connect the customer journey to our financial model to illustrate how software and cloud will also drive substantial long-term value for our shareholders. During today's presentation, I will walk you through how software and cloud support our growth and profit expectations. I will touch on the importance and resiliency of our support business and our disciplined approach to expenses, our free cash flow generation and provide our future framework for capital returns. To wrap it up, I'll go through the key drivers of our forward financial model. We have a lot of data for you to digest, and we'll expose you to some new metrics. So let's get started. I will start with our software franchise. The underlying value of NetApp is grounded in our software innovation engine. As you heard from Brad, at its heart, NetApp has always been a software company. Our core operating system, ONTAP, runs across our storage portfolio, the technology underpinning for our cloud services and drives the dollar content in our recurring support business. During the first quarter earnings call, we began showing you the software portion of product revenue to highlight this value. Together, software, recurring support and cloud revenue represents 70% of NetApp's total revenue. When you aggregate these 3 key revenue streams, they collectively carry gross margins of approximately 85% and drive nearly 90% of our gross profit dollars. These important financial metrics are a result of our continued investment and innovation through software. As Brad mentioned, over 80% of our engineers are software engineers reflective of the large investment in our software franchise. At the end of each of my agenda items, I will summarize for you the key takeaway from that section. As I mentioned, our software franchise is foundational to our value. Software, recurring support and cloud will drive the future value creation for NetApp as we return to growth in our storage business through share gains in all-flash and scale our cloud business. Okay. Speaking of cloud, let's shift to our exciting cloud business. As Anthony showed during his presentation, our cloud business delivered an impressive $178 million in ARR in Q1, which resulted in a CAGR of 191% over the last 2 years. We have supplemented our organic cloud services, which are powered by ONTAP, with the strategic acquisitions of Spot, Cloud Jumper and Talon. Even excluding these acquisitions, our organic cloud business has delivered 152% CAGR over the last 2 years. We have been asked many times in the past quarter for our revised cloud ARR growth targets. So let's spend a few minutes reviewing our updated projections. As we look forward, we expect to end fiscal '21 with $250 million to $300 million in cloud ARR, up 148% year-over-year at the midpoint. We expect to achieve between $400 million and $500 million in cloud ARR exiting fiscal '22, up 64% year-over-year at the midpoint. Based on our expected progress and continued execution of the cloud strategy, our current goal is to achieve $1 billion in cloud ARR in fiscal '25. The majority of this growth is expected to be driven by cloud volumes, our ONTAP-based solution running in Azure, Google Cloud and AWS. Importantly, you should expect us to supplement our organic services with a disciplined M&A strategy centered around smaller bolt-on acquisitions. As you look at these projections, you may ask yourself how do these compare with other high-growth cloud companies. We have analyzed a growth profile of 20 SaaS companies and how they scaled their business over time. As you can see, our projections are in the sweet spot of the growth profile when compared to this peer set. We feel good about the progress we have made in our cloud platform and believe our $1 billion ARR goal in fiscal '25 is supported by the underlying fundamentals of the business. Additionally, we have several advantages this SaaS peer group did not have in scaling their businesses. We have a very substantial installed base with over 38,000 customers who know and trust NetApp for their most critical data needs. We have deep technical integrations with the leading public cloud providers, and we have a proven go-to-market engine that is further supported by our partnerships with Azure, Google Cloud and AWS. Let's take this comparison down one more level. As we look to scale our cloud business to $1 billion in cloud ARR, this SaaS peer group provides a great framework to assess our progress. Over time, we will increasingly use more cloud-specific metrics to gauge our success, including ARR growth rates, customer retention metrics and the margin profile of this peer set. Benchmarking against this peer set will also provide a disciplined and measurable approach to uncovering areas for improvement. This is where the peer group is today. Obviously, they will continue to grow as well. But it provides great context to where we are headed over the next several years. Exiting fiscal '21, we expect our ARR to be comparable to were Fastly and Bill.com are today. As we look ahead, we believe fiscal '22 will be a critical growth year for NetApp's cloud services. Based what we have seen in the business to date, we believe $400 million to $500 million in cloud ARR is where you really start to see scale benefits and mind share as a leading cloud platform. To the extent that we are successful in this journey to build a $1 billion-plus cloud franchise, it will undoubtedly unlock significant value for NetApp shareholders. We firmly believe we have the installed base, technology, go-to-market engine and partner ecosystem necessary to deliver on our commitment of $1 billion in cloud ARR in fiscal '25. I mentioned earlier, we will start to focus on cloud-specific metrics, and here is one of them: the dollar-based net retention rate. During the last 2 years, we have seen tremendous growth in our customer cohorts. As Anthony would say, the land-and-expand model is working. These customers have not only added capacity, but also new workloads and new products. When you look across the SaaS industry, we see net retention rates typically range between 100% and 140%. So while our net retention rates are currently benefiting from our small scale, we are off to a very strong start. Let's close out our review of the cloud business by discussing our cloud gross margins. Our cloud gross margins are currently below the corporate average. As we scale the business, we expect cloud gross margins to be similar to SaaS industry margins. By fiscal '24, we expect cloud gross margins to be accretive to overall company gross margins. Our expectations are driven by several factors, including: additional revenue scale, increased software-only mix, increased utilization of our existing footprint across the public clouds, the benefits of ONTAP software improvements that drive additional efficiency, and the addition of new products and services on the existing platform. Regarding this last point, it is worth noting that the recent acquisitions, which are software-only solutions, are expected to be accretive to our cloud gross margins by the end of fiscal '21. We are excited by the rapid growth of our cloud business and expect continued strong growth to reach $1 billion in cloud ARR by fiscal '25 with SaaS-like gross margins. Let's move on to another important revenue stream for NetApp, our support revenue. This chart compares our historical product and support revenue as well as our total deferred revenue balance. Going all the way back to fiscal '14, you can see that our high-margin recurring support revenue has been amazingly consistent at approximately $2.1 billion per year despite the choppiness in product revenue. During this time frame, we have also seen a $700 million increase in deferred revenue. We compare these 3 financial measures because while product revenue certainly contributes to support revenue, deferred revenue is the leading indicator for future support revenue growth. You may be asking, how does deferred revenue grow with choppy product revenue? This is mainly due to the product mix, so let's go down one more level here. As we have discussed before, all-flash systems carry higher software content relative to the rest of our portfolio, which drives higher software support dollars. This increased software support from the all-flash uptake has driven substantial growth in deferred revenue, which ultimately will come off the balance sheet and drive our high-margin support revenue. Share gains and growth in our all-flash revenue will further support our stable and high-margin recurring support revenue stream. Now that we have reviewed cloud and support revenue, let's briefly discuss our expense structure. Over the last 4 years, we have demonstrated disciplined operating expense management. During this time, operating expenses have remained roughly flat. Importantly, underneath these numbers, our expense base has been substantially rebalanced towards strategic growth initiatives, including building out an entirely new cloud business unit that is poised to drive considerable value. Over the last year, we added 200 quota-bearing sales reps, substantially increasing our overall sales capacity. We have funded and created a new stand-alone cloud sales team. We have also added a renewals team that has added more rigor and focus through the support contract cycle. We benefit from tremendous R&D leverage from our software engineering team and as ONTAP is the technical foundation for both our flagship on-premises and cloud platforms. And most recently, we acquired 3 cloud companies that have added meaningfully to our cloud TAM. To summarize, as we look forward, we will continue to remain disciplined as we balance the trade-off between driving growth and operating profit. Before reviewing our financial framework, let's discuss our free cash flow and capital return philosophy. Starting with free cash flow. Over the last 4 years, we have generated in excess of $4.8 billion in operating cash flow and over $4.2 billion in free cash flow. As we have discussed on prior earnings calls, over the past few years, the best corollary to operating cash flow is non-GAAP operating profit. As we drive operating leverage through our business, you should expect to see similar dollar increases in operating cash flow. Obviously, free cash flow will fluctuate, as you saw in fiscal '18 when we did a lot of great work on our cash conversion cycle. Over time, we expect to improve free cash flow from lower CapEx as we increase the software-only mix in our cloud business. This stable cash generation provides support for sustained capital returns to shareholders. As we just touched on, we generate roughly $1 billion in cash per year. Coupled with our strong liquidity position, it gives us the confidence to remain firmly committed to our dividend long term, which now carries more than a 4% yield. As we have discussed on our recent earnings calls, in the current environment, we believe it is prudent to pause our share repurchase program. We are likely to remain in this holding pattern until we have a better sense for the timing and magnitude of the broader economic recovery. Longer term, share repurchases will play a key role in our capital allocation strategy with the commitment to have buybacks at least offset dilution from our equity plans. With the remaining 30% of free cash flow, we plan to invest in growth through M&A as well as executing on additional buybacks. Consistent with NetApp's long history of disciplined M&A, our acquisition strategy will remain focused on bolstering our strategic road map, particularly within our cloud business. The trade-off between M&A and additional buybacks will depend on our M&A pipeline and the stock price, and will vary each year. Of course, we will continue to assess the trade-offs of raising our dividend and buying back shares against reinvesting in the business for growth. I do want to highlight that our credit rating is critically important to NetApp and our ability to access capital. As a result, our capital returns are unlikely to go materially above 100% of free cash flow. We will continue to balance shareholder returns and reinvesting in the business for growth. Now let's pull together what you heard today from the whole NetApp team and review our forward financial framework. As we entered fiscal '21, we talked about 2 key strategic initiatives: returning to growth in our storage systems and software business, driven by share gains in all-flash; and scaling our cloud business. We got off to a strong start in Q1 on both initiatives. We grew our all-flash revenue by 34% year-over-year, taking share against our top competitors. And we grew our cloud ARR by an impressive 192% year-over-year. Looking forward, we expect revenue to grow over time, driven mainly by all-flash and cloud. However, the shape of the economic recovery will largely determine the overall growth rate for the storage industry in the near term. We will update you on our medium-term growth goals as the macro environment normalizes and visibility improves. Moving on, we expect to expand total company gross margins going forward. Margin accretion will be driven by scale, a higher software mix and driving efficiencies in our cloud business. We expect continued growth in our all-flash business which is a tailwind for our support business. Post-COVID, we also expect product margins to normalize back into the mid-50s. As you have come to expect from NetApp, we will continue to rebalance our operating expense to fund our strategic growth initiatives. Our goal over the near term is to maintain total operating expenses around the current levels. The growth in revenue, coupled with gross margin expansion and disciplined operating expense management, will result in operating margin improvement. As we drive operating margin efficiency, we expect to grow EPS faster than revenue, which will further be supported by targeted share buybacks. As I mentioned earlier, we expect operating cash flow to continue to be correlated with operating margin results, so increased operating leverage will drive operating cash flow growth. And free cash flow will benefit from lower CapEx in future years as we improve the software-only mix in our cloud business. Our goal is to have our total capital returns average between 70% and 75% of free cash flow. You should expect this to move around each year depending on our investments for growth. Let me take this opportunity to summarize our financial framework. Our key strategic initiatives are poised to drive top line growth, margin expansion and free cash flow, which will support sustained capital returns and drive meaningful shareholder value. In particular, our cloud franchise has the potential to structurally accelerate recurring revenue contribution and how we are viewed by customers and investors. As I mentioned at the beginning, we reviewed a lot of data today and hopefully gave you more visibility into how we view our business. I'd like to summarize the important takeaways we are leaving you with today. First, NetApp is, at heart, a software company. And as a software company, we will drive value creation through recurring support and cloud revenue in the coming years. Our cloud ARR is expected to grow to $1 billion in fiscal '25 with accretive gross margins. Our global support program provides a healthy $2.1 billion in high-margin recurring revenue. We have consistently delivered disciplined expense management, while at the same time, investing to grow our business. Finally, our strong cash generation supports sustained capital returns. In closing, as you have heard from the NetApp team today, our software franchise and cloud solutions create significant value for our customers. We also see a clear opportunity for software cloud to drive substantial long-term value creation for our shareholders. With our strong financial foundation, well-managed financial growth strategy, software franchise, cloud-led data center portfolio and powerful go-to-market organization, all led by the dedicated and passionate NetApp leadership team joining me today, I am confident and very excited about NetApp's future. Before we wrap up and move to Q&A, I will share our supplementary tables and non-GAAP to GAAP reconciliations. [Presentation]

With that, I'll now hand the call back to Kris to begin our Q&A session. Kris?

Kris, you're on mute.

Okay. Thank you. We now have an hour for Q&A. You can submit questions through the chat. We have a number of questions already. So I'll kick it off with one for Anthony. He's been very popular in the question line. It comes from Karl Ackerman from Cowen. Anthony, your company is clearly a leader in hybrid cloud. Data is at the heart of your customers' priorities and buying preferences. You've invested heavily in cloud volumes and ONTAP software and you offer Kubernetes-persistent storage. At the same time, one of your competitors acquired a leading Kubernetes provider aimed at driving its data services platform. I'd love to hear how your existing cloud offering differentiates from peers.

Thanks, Kris. I think very simply put, we have been, at NetApp, very excited by the opportunity to define storage in the context of microservice architectures and particularly those driven by Kubernetes. What's been very unique about our approach, and something that I think creates distance between us and any other solution, are our sort of software-defined Kubernetes story is based on ONTAP, so it takes advantage of the nearly 3 decades of ONTAP functionality. It isn't yet another operating system. Everything we do at NetApp revolves around ONTAP, as you've heard. Our Kubernetes-native software storage is already running today, as Brad mentioned, in Google Cloud. Our Kubernetes-based storage offering supports not just a self-managed environment, but a fully managed environment. So what we call Astra today sits behind cloud volume service and will very soon sit behind Azure files. It will run on-premise. It is hardware-agnostic. It is, again, supported by the rich set of our data services capabilities, cloud compliance, the cloud backup service as well as baseline features like cross-region replication and high availability. Our capabilities are extended then by our acquisitions. Kubernetes itself really is a combination of storage and compute. And so our technology around software-defined storage for containers is only enhanced by our Spot capabilities, and in particular, their Ocean products. So uniquely, NetApp has, I think, a leadership position in storage, whether that's traditional storage or software-defined storage, is complemented by a rich set of data services, and then optimized by our technology acquisition with Spot. So there's a lot, I think, to be said about what we do. We think it's a very big market opportunity, and we believe we have a very strong position and a unique position in that market.

Okay. Thanks, Anthony. A question for Brad now from Wamsi Mohan at Bank of America. Brad, why would NetApp take share in all-flash from other vendors? It's hard to displace the Dell EMC installed base just like it's hard to displace within a NetApp installed base.

Well, the -- so we did take share in Q -- calendar Q2. I think IDC just announced results. NetApp grew 1.5 points, and I believe Dell EMC declined at 0.6, so we are taking share. I think there's a lot -- a couple of things. One is that a lot of the transitions that we talked about earlier is Dell's forcing forklift upgrades. Taking share from competitors or incumbents, particularly in this environment, are difficult. But I think they're made easier for a couple of things. One, when a vendor forces a forklift upgrade, vendors are now looking at architecture decisions that will not only run those workloads that will future-proof them longer term. And NetApp's a leading position in hybrid cloud, I think, is a natural. Secondly, a lot of that share we're taking is block. And I think in some ways, taking share in block-based opportunities is a little bit easier than in file base at this point in time.

Great. Thanks, Brad. So a question for George now, and this comes from Steve Fox at Fox Advisors. George, NetApp continues to highlight digital transformation momentum, but it's still hard to recognize against the overall macro backdrop. What's the argument for these trends that these trends are actually becoming more noticeable near term as a top line driver over the next 12 months?

I think if you look at every customer that I speak with, and I speak with many, many customers every week, there literally is no way for them to engage physically like they used to pre COVID. And so every element of their business model is going through change, whether it is being able to serve customers through digital mechanisms. You see the acceleration of electronic commerce trends. We are the foundation of some of the largest retailers' electronic presences in the market. The second, internal communications. There are tools like what we're using today to drive communication and collaboration. Again, we're the platform for some of those remote desktop services, remote learning services. You will hear about so many customer examples at our Insight conference, where the fact that we have cloud-based services complementing data center technology has allowed us to enable our customers to move their entire workforces to a remote working model in a matter of a few days. We moved one of the largest school districts to a remote learning model in less than 48 hours. So those are some examples. I think the overall spend will be muted while there's uncertainty. But as we look at customers, the mix of spending is moving towards these transformational projects, and that is what underwrote a strong first quarter for us. So we're excited of what the future holds. I'm sure every CEO is thinking about how they set their businesses up, taking on the hard challenge of transformation today so that when the COVID situation abates, they are the first part of the out of the gates.

Great. Thanks, George. So one for Mike now. Mike, how do you calculate the breakdown of hardware and software within your product business? Some of your products are software only, in which case, the breakdown is obvious. But when it comes to shipping appliances, which would you rather account for the majority of product sales? How do you separate hardware or software given that a deal might have a range of discounts applied? And that comes from Katy Huberty at Morgan Stanley.

Sure. Katy, thanks for the question. So as we talked a little bit about on the Q1 call, and it is in our footnotes. Keep in mind, Katy, this is a non-GAAP disclosure. We do sell an integrated appliance. And under 606, the software is fundamental to the operation of the hardware. We use, like everybody else, the estimated fair value to allocate those 2 components. It's based on what we would typically charge a customer. That obviously then feeds into the support maintenance, be it hardware or software. So we use an estimated fair value. It depends on the SKU. It depends on the product. We track all of those differently. So hopefully, that helps. There is more in our Qs and Ks as well that lay out how we do our fair value allocations.

Great. Okay. One for Cesar, so we can get everybody's voice here. This comes from Shannon Cross at Cross Research. Cesar, how are your salespeople compensated? How much of that formula is software-focused? And are you rewarding competitive wins given that it's a big opportunity right now? In general, how are you thinking about go-to-market given prior missteps in addition to new resources over the past couple of years? How do you look to modify given your new priorities?

Thank you for the question. For sure, the way we're looking to our [ local ] compensation is based on growth, and it's based on the strategy that we have shared today with all of you. So it's true, we do have today, 200 people only paid on cloud. They wake up every morning just thinking of cloud and growing that line of business. But I will say, the entire 5,400 people that I shared with you on the go-to-market, they are paid on the core of our strategy which is data fabric. And everything starts on the data center side. So one of our main goals there is to incentive and ensure that we grow on the data center. And we're leading with flash. And as a matter of that, as you know, flash has more software intense. But certainly, one of our main drivers and goal is to ensure that we incentive growth. And going back to your point on competitive wins, yes, we have accelerators, and we have special incentives to go for those wins. So in terms of expectations, what you should expect is that this growth that we have shared with you all today, we're going to make sure that our comp plans help us drive that growth.

Thanks, Cesar. I'm going to send one to George now, but you might want to ask some of the other presenters to chime in on this as well. This comes from Jason Ader at William Blair. George, what are your growth expectations for the hardware piece of the business? And how much cannibalization do you expect to see as cloud grows?

We continue to believe that the hardware portion of our business can grow above the overall storage market growth rates because of the fact that we are exposed and have really good technology leadership positions in the faster-growing subsegments of the market. Certainly, all-flash arrays, converged storage, the high profit margin components of the hyper-converged market and object storage, and we are seeing the acceleration in those parts of our business. Those technologies also are software-rich. So as we drive into those parts of the market, particularly the all-flash array market, we have a long runway. I'll let Brad comment about that. In terms of the question on substitution, as I've said before, the cloud business is complementary and accretive to overall NetApp's portfolio. The cloud workloads that we support are -- allow us to not only move some of our customers to the cloud. But as we have shown and demonstrated in the Q1 results, a large part of the customers that are coming to us on cloud are new to NetApp, and give us the opportunity not just to displace our competition in their data center footprint, but to bring the cloud in as a competitive displacement weapon. And I'll let Anthony comment on that. So Brad, maybe you can go first and then Anthony can comment next.

Yes. I mean, let me just add a couple of things to what George said. I mean the question said hardware, but just to reemphasize what George said, it's really software. And we have a number of projects also looking at -- to taking core ONTAP and making it software-defined. It's hardware because customers are choosing a appliance model for -- as the most easy way to consume that software. And so while you call it a hardware business, I still think of it as a software business long term. And there always will probably be a subset of customers that will choose a appliance or a hardware model to rapidly deploy it. We see that in a lot of our businesses. Our object business is completely software-defined, but we see the majority of the customers using a hardware form factor to deploy objects. So don't think about that as a hardware business long term. I think the other question may be embedded in that, George, is flash and the runway we have on flash. I think today, it's a -- I think this last quarter, it's 25% of our current installed base systems are all-flash array. When we look at the other 75% of those hybrid systems, there are both performance workloads and capacity workloads. And invariably, we see all the capacity, all the performance workloads eventually going to flash. And that's -- and so a lot of that's the 10K drives, and that's coming to the end of their kind of life. And so we're going to see those workloads transition across. As flash prices come down, you're going to see more transition across. Now the capacity workloads, I still think a large number of them, hybrid model's going to be the right model. And so hard drives are not completely going away. I think it's going to be a smaller subsegment of that market. And it's going to be an important subsegment of that market for us on our installed base. But I'll just point out, when Dell is taking their entire customer through power store to all-flash, it's also going to expose those hybrid customers in the Dell installed base to NetApp as well. So where might that end up? I mean, I'm not going to be a prognosticator. But I think longer term, it could be about 70% of our workloads will be on flash. Now in terms of dollars, that's probably higher than the 70%. But in terms of drive capacities, because the capacity workloads will still be on hard drives, a higher percent of the capacity will probably be on hard drives. So that's just kind of balance it a little bit there. Anthony?

Yes. And Brad, thanks. George, I would just add. I think we continue to see a big opportunity to bring new logos and new workloads to NetApp. We think the public cloud presents a very sizable increase in the overall market opportunity for us. I think what we have done uniquely that's helping, I think, our customers, our competitors' customers, and companies born in the cloud is the very simple fact that we are native and our competition isn't. Our competition continue to sort of attempt cloud but sort of best operate within their walled gardens. And that's not in the best interest of customers. Our customers want to embrace all dimensions of the public cloud, and they can do so with NetApp. We're winning cloud-native workloads, container and microservice-based architectures on proprietary or increasingly Kubernetes orchestrations. We are winning in the data lake business. We're winning in the traditional web apps built on the public clouds. All of these are incremental opportunities to us. So George, I think you're exactly right, we have proven, I think, that this business is very much an incremental business. We've proven that we can take share in markets that -- originally, with just on-premise, we couldn't. So I think we're able to demonstrate very clearly that our investments and our efforts to bring ONTAP to the public cloud, not only the fact that we've been chosen by Microsoft and Google, but very much chosen by a wide variety of customers, from the biggest companies in the world to companies at small or start-up phases, we're selling into industries like oil and gas and pharmaceuticals. We're doing incredibly well, I think, proving to our existing customers and our new customers that they have this wonderful opportunity to embrace everything that we do in the public cloud that's as good as the work that we've proven to our customers on-premise.

Great. Thanks all. So I got a couple of questions for Mike coming from Wamsi Mohan at Bank of America. This one is actually coming from a number of people. How much of $1 billion target for cloud data services is organic versus inorganic? What about the long term and the near term?

Yes. So I would say in the near term, it's almost all going to be organic. We've disclosed outside of the 3 that we've already done, and we've talked about the size of ARR, call it, about $50 million for those 3. Over the long term, I would expect the majority of that ARR to continue to be organic. We're really excited about the organic growth, and that's really focused, Wamsi, in team, is that we are focused on the smaller acquisitions. Hard to estimate when they'll come in and what the size of those will be. We did want to make sure and say, "Hey, in that target, we are expected, and we will continue to be active. But we are focused on smaller bolt-on acquisitions as we continue our disciplined M&A."

All right. And a follow-up question from Wamsi at Bank of America. What will the free cash flow margin profile of the cloud business be at various revenue levels?

Yes. So we likely -- while we won't break it out now and, Wamsi, we likely won't break it out going down the path, here is what I would encourage you to look at: That our free cash flow, assuming a similar collections profile, which we have today, is going to be pretty similar to the operating margins of each of those businesses. We likely will never break out free cash flow by -- it's not even by segment today, it's by business. But I would encourage you to take a look at the operating margins. And you can certainly do your own counts based on your gross margin estimate. But it should be darn close to what that pretax operating income is for that business.

All right. Thanks, Mike. Going back to George, from Simon Leopold at -- public cloud ARR has been impressive in the past few quarters. Could you provide us with an update around your Keystone as a service offering and progress you're seeing there moving towards subscription-based revenue?

Thank you for the question. We see customers wanting to look at a broad range of IT procurement models, and we have a broad range of ways to serve them. If a customer wants to consume IT differently than a traditional capital purchase, we have, of course, our cloud services portfolio where you can buy NetApp technology as a service across all of the regions in the world's leading public clouds. It's completely managed. You can choose to configure it or you can get it prepackaged and configured, and that's our lead offer to customers. We also have, of course, a broad range of ways in terms of financial mechanisms to support both customers and partners who are looking at different flexible financial offerings. We call that Keystone Flex Pay, and it has a broad range of capabilities. And then we have in beta currently, just about to be generally available, a subscription service called Keystone Flex Subscription, which you will hear more of at our Insight customer conference. What is unique about Keystone Flex Subscription is 2 things. The first is that it has the same technology that runs on the public cloud, and so you can manage it as part of your overall data fabric. The second is that uniquely in the market, you can change your profile of workloads in an ongoing basis, unlike what many of the other as-a-service offerings have. So I'll summarize by saying we have a large number of ways to serve customers. Cloud data services is the broadest and most capable of those. But in addition, we have both Flex pay and Flex subscription options, and you'll hear more -- a lot more about that at our Insight conference coming up.

All right. So one for Brad coming from Mehdi Hosseini at Susquehanna. This is probably actually both Brad and Anthony will want to chime in. Can you please provide some details and examples of the changes to storage requirements as containerization starts in earnest in 2021?

Yes. I mean, I think Astra is a great example of this because people want to be able to develop applications cloud natively so they can run it both on-prem and in clouds. They're using Kubernetes. With Kubernetes, now you need a persistent storage. This is particularly true for staple applications. And so we did a lot of investment in a capability called Trident that we brought to market here a couple of years ago. Trident allows you to orchestrate, to provision and deprovision, persistent storage in a Kubernetes cluster. And so storage becomes a little bit more challenging, and that's why NetApp being the storage specialist is, I think, so key in this. I think the other thing, too, is that for years, and this is also a key attribute of our Astra work, is increasingly, people want to manage their applications at the application level rather than at the infrastructure level. They want to do it holistically. And so when they move the app, they want the app and the data and all the things to go with it rather than them to be completely disconnected. And so that's another thing that we're absolutely -- that's a -- I mean, that -- this feels like the natural requirement going forward, and that's the way we're driving Astra going forward so that people now manage at the application level rather than at the infrastructure level. And I think that's going to be a major change and it's going to be a huge change for improved business productivity.

Yes. I think just simply to add, I think George often refers to this. It's a business attribute of speed being the new scale. In microservice, the architectures essentially break the application down into a discrete set of services that each one can iterate in speed and scale. Our sort of inclusion in sort of software-defined Kubernetes-native storage has had a significant benefit of being jointly engineered with Google. We decided that we would build a software-defined version of our popular cloud volumes service, and we've done that with Google. In fact, I think just today, Google posted a very strong endorsement of that technology. We found that technology has given us a huge opportunity to capitalize on these microservice architectures in a very unique and compelling way so much so that, that technology is now being deployed into all of the public clouds and very soon will be deployable on to private clouds and on-premise. We've chosen to make it sort of software-defined so that not only does it benefit -- and on ONTAP, I should say. Not only does it benefit from all of the ONTAP work and all of the sophistication we bring in our infrastructure, our hardware and software, but we get the benefits of ONTAP now through software-defined structures on any piece of technology, on any line. So today, we're running on Google infrastructure. Their particular desks were running on Microsoft infrastructure. We're obviously going to support NetApp infrastructure. But the capabilities that we've decided to release to our customers offer them the choice to run that technology on any piece of infrastructure able to support microservice architecture. So it's been a very significant piece of work. It's been done very much from a sort of a cloud-native construct, and we're very, very excited about the benefits that it will bring to add incremental opportunities to us on cloud and on-premise.

Super. Thanks. So Mike, I think we're going to have a whole bunch for you.

Okay.

The hot seat. All right, so the first one comes from Jeriel Ong at Deutsche Bank. Does the disclosure that software and recurring revenues drive about 90% of gross profits mean that hardware gross margins are about 20% per your latest split?

Yes. So it's -- and I want to go back to Wamsi's question in a second, too, Kris. I'm going to add in a little bit. So on that, if you take a look at total products, you take a look at total product margins, and you use an industry-standard software margin, it jumps around a little bit certainly by company, but everybody's darn close. You're going to get somewhere between 15% to 20% on just the hardware portion. Again, there are some costs that we have there that we needed support. So you're right about in the ballpark. And hey, Wamsi, on your question, too, I just want to go into that a little bit deeper on free cash flow because you know I love cash. So your question was across different revenue levels. And what I want to make sure is my answer that it should reflect operating margins is in the longer term. As you know, we are continuing, at least for the near term, to support that business using our hardware. That drives up CapEx a little bit. I talked in my presentation about that coming down a little bit as we move to more software. So that will even out and you'll get depreciation and coming together and evening out over time. So my answer was, in the longer term, it should be close to that. Early on, it will be a little bit more negative as we invest in that business. So I just want to give you a little bit more detail on that answer, sorry. Kris?

All right. So a question from Jim Suva at Citigroup for you again, Mike. In the past, NetApp's mentioned goals of operating income from 20% to 24%. You weren't CFO back then in 2018, but is this number valid or actually too low given the focus on software and services? All the metrics you've given today have been pretty general and not specific. So maybe you could comment on why that is as well.

Yes. So let me do the first one first, Jim. So given where we are, as you know, we're only guiding one quarter at a time. There's still a lot of uncertainty out there. While there is some, I'd say, optimism in terms of getting through this unfortunate time, getting the economy moving again, we don't know the timing or the acceleration or the slope of that recovery. So we don't feel that at this time, it's appropriate to give a long-term number. What I would say is, based on what we talked about today, the growth in cloud, the action plans we have in place to drive those margins up, the headwinds or the tailwinds that we get from the growth in AFA, certainly, we would expect operating margins to continue to increase. Whether 20 to 24 is the right range, we'll get back to you on that as we go through this. I don't want to give a number now. But I would say that all of the things we talked about today, our investment profile and the underlying fundamentals of the business, do make us comfortable we can continue to drive up margins. To what level? It really depends on how long it takes to get through this economic cycle.

Okay. Another question for Mike, coming from Eric Martinuzzi at Lake Street. Assuming NetApp is able to achieve the cloud ARR of $1 billion in FY '25, do product gross margins move up in a straight line? Or is it skewed more towards the back end FY '24 or '25?

Can you do that for me again, Kris?