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

Okay. Hello, everyone. Welcome back to the conference. Thanks for joining us today. We've got the pleasure of hosting NetApp today. We have Mike Berry, the CFO; and Kris Newton, the Head of IR. We're going to kick off here. And by the way, I'm Rod Hall, the Hardware Analyst at Goldman Sachs. I'm going to kick off with Kris reading a safe harbor statement. And then we'll jump into Q&A. And I'd just remind the audience, there is a Q&A system. So if you have questions, feel free to put those into that system. Mike and I are going to go through some questions first, but we're going to leave time at the end to answer audience question. So be sure and use that. Kris, over to you.

All right. Today's discussion may include forward-looking statements regarding our future performance, which are subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons, which are described in our most recent 10-K and 10-Q filed with the SEC and available on our website at netapp.com. We disclaim any obligation to update information in these forward-looking statements for any reason. Back to you, Rod.

All right. Thanks, Kris. So Mike, welcome again. I don't know if you want to make an introductory comment or you want to just jump into questions.

Well, hey, Rod. Good to see you. Thanks for joining, everybody. I would just like to say thank you to yourself and Goldman for hosting us. We're happy to be here and looking forward to a great session.

Great. All right. Good to have you. So I guess the big thing on everyone's mind here at the beginning of the year is the demand situation. In the last earnings call, you talked about stabilization demand. You weren't alone in that, by the way, most people exposed to enterprise IT saw stabilization in the fall. So I guess the question is, now what? What -- do you think we're at a point where we know how 2021 spending is going to be? Can you give us any further color on what you're seeing in the demand environment now?

Sure. So as we talked about on the last call, the demand environment, pretty consistent with what we've seen over the last few quarters. Certainly, we feel a little bit better going into calendar '21. Thankfully, we can leave 2020 behind as all of our hopes. And then going into the quarter, what we've talked about is as we do expect to see some improvement, I think we're all going to go through, obviously, a little bit more pain in the next couple of quarters. And a lot, in our mind, it really depends on hopefully, I'll knock on wood, successful vaccine rollout where we can get back to whatever the new normal is. For us, it was a little interesting because our third -- fiscal third quarter does overlap the calendar quarter. So you had a little bit of that there. And I think a big thing, Rod, going into this year, now that at least the U.S. election situation has been settled, some questions around what does that do to the demand environment. Is there going to be more stimulus? What's going to be the fiscal policy? I think the Fed has said pretty clearly, hey, we're going to leave rates relatively low, thankfully. But then if there's going to be changes to the tax regime as well. So those are probably the bigger uncertainties going into the year, hoping that we can get through the first half and be in a better position relative to the pandemic.

How do you think your counterparts -- and I don't know how many discussions like this you have or if George does more of these. But I'm wondering how many of your counterparts on the customer side, CFOs and CIOs that are over there, thinking about how much they're going to spend this year? What do you think they're doing? Are they resetting budgets lower overall? And then, of course, within that, there'll be priorities. Maybe storage is a priority. Or do you think that they're taking a more optimistic view and resetting budgets at an okay level? Just kind of curious. Or do you think it's too early to tell and we still need another couple of months to find out?

So I think in general, what I'd say, and this -- it's a small population. I do get some feedback from George as well. I think people are being conservative for all the right reasons. And coming out of 2020, obviously, there was a lot of change that none of us expected. I do think, in general, folks are feeling better about 2021. You see it in a lot of surveys. Certainly, I've read yours and the other folks that send those out. You bring up a great point, Rod, around allocation. And it's so interesting to see what the events are that drive that. Being from -- I was in security for a while. It was #1, and then it kind of drifted down to #5 and then the unfortunate events happen, and boom, it popped up to #3. So at least in one of the surveys I read today. So I do think that we saw that in 2020, at the beginning of the year, it was, hey, make sure all of us can work remotely, do it securely, drive digital transformation. And I think in 2021, security will come back up. What we're hearing is digital transformation and cloud still are super important. And I think you have to throw security into that as well.

Okay. That's great. I guess I wanted to dive into AFA, the success you've had there. The AFA number was so good last quarter, we thought there must be ELAs in there, and it turns out there weren't. So congratulations on an absolutely phenomenal number last quarter. I guess the question is, what do you think the dynamics driving that as we look into the year are? Do you think you continue to take share? Maybe just help us understand more color on what drove stabilization? Maybe not just the share gain themes, but also the usage cases that you're seeing out there?

Yes. So great question. So let's bifurcate that. First of all, when we talk about the market, we do think that all-flash will continue to grow. Certainly, if you look at storage in all the industry, folks and pundits saying, what do they think is going to grow, all-flash is the growth story there. We do think that will continue as some more use cases become, I will call it, more financially viable under all-flash. And then folks like us really making a lot of investments, especially around our software to make it more efficient, around data management and the storage process. So that will help. From our perspective, we really focused a lot on focusing our prioritization around 2 main areas: gaining back share in core storage, and we feel very good about what we've done in the first 2 quarters. We do expect to continue to gain share going forward. And then scaling our cloud business, I know we'll talk about that. That prioritization, super important for us. We've also made a good number of investments, Rod, in the past to drive our product road map as well. And you saw some of that when we made the change in August when we reallocated some of our dollars from the HCI product into driving more the core storage business, which was flash. So I don't think you can underestimate the importance of focus at NetApp to drive those gains, and we see customers really deploying that as more of a use case. So all of those things come together make us continue to feel good about all-flash for the rest of the year.

Okay. And just reconstructing the tail end of the year, Mike. One of the things we still aren't completely sure about -- we've seen this with Cisco, too, by the way. They had really weak quarters exiting their October quarter, but then they expect to finish the year really strong. You guys seem to be finishing the year really strong. What's driving that? Is it that people couldn't complete projects during COVID, and they are trying to get them done at the end of the year? Or what do you think is driving this?

No, I think there's 2 pieces. Let's break up again, external and internal. I think externally, the drive towards digital transformation is a big driver. And I think that's only built, Rod, as we've gone through the year. Again, I think most people just coming out of last March, and we're almost at the 1-year anniversary of that. Coming out of there, it was again about making sure that we could all work from home. They started to drive digital transformation. I think you'll see that continue. Whatever the new normal looks like, this will be, at least, I believe, a continued drive of corporations to make sure that they can drive their transformation. Internally, keep in mind, and I'm sure we'll talk about it. Hey, remember, we added all those salespeople, the 200 salespeople. Got most of those folks hired or all of them hired by the end of our last fiscal year. Think you're starting to see that benefit as well as the investments we just talked about. So I think good external tailwind as well as our execution and continued capacity adds have all added that, and that's driving the momentum into the second half.

Yes, it's funny you say a year. I might -- just to show you how bad a forecaster I am, I thought, man, this could go on for a month, the lockdown. Who knows, maybe going on 2, 3, 4 weeks. All right. Let's jump on to AFA and penetration in the installed base. You've recently said that 26% of your installed base is AFA penetrated. We wondered how far that can go. Could you help us understand what do you think max penetration of the installed base is with all-flash arrays, and how does it progress?

Yes. As we looked at it, we think somewhere -- it's hard to call exactly. But in general, somewhere probably around 70%, 75%, we should be able to penetrate. Again, I think that's as the use cases and the economics continue to improve there. It's been really nice because we've seen almost really steady linear growth 1 point, sometimes 2 points a quarter. We get a lot of questions around about, "Hey, do you think you'll see a step function?" It might happen, but since so much is based on that customer's progress, how are they doing on their hybrid cloud journey, when is their current infrastructure up for renewal, all of those things, it really leads it to -- for us to forecast a relatively linear growth. And then -- but I think we -- I mean we have a lot of runway to go to get to that number. It may be more, it might be less. But in general, that's what we think in our head is a reasonable penetration.

Okay. That's really helpful. So linear from 26 to 70 to 75 over time. Let's jump to cloud data services. We don't want to leave that out. So so far, you've been focused on NetApp file storage. Where do you think you can take CDS? Or does -- is file storage really the beginning and end of it? Or do you think that there's a lot of -- a lot more breadth there to go for?

Yes, great question. So I look at it as just the beginning. So today in the public cloud services business, the storage products, CVS and CVO, they're the largest portion of that, but they're certainly not -- they're not the large majority. This is really why we did the investment in Spot. So that focuses on storage. Spot brings us access to those cloud buyers and also gets us into the compute optimization portion. And then, of course, we did the smaller around VDI and some file management. So those were, call it, add-ons. When we look at it, we really look at this as a platform for us to be able to not only add more organic data services to support both those businesses, but also inorganic that would add, call it of -- think of that as adding on to the platform that that's another segment for us to go sell to. We're going to do most of the, call it, land and expand we think we can do not only from growing the existing customer base but adding more data services. And then what can we add in an acquisition to bring another area of growth. So we think that while storage will be still a huge driver, but not all of it, we look at this as a much larger play.

Can you give us any hints on what you think would be adjacent to file storage besides what you talked about with Spot? But sort of picture how this offering might evolve.

So there are certainly some internal development around other optimization compliance, data management tools because, again, we think of ourselves as a data company, not a storage company. So as they deploy more in the cloud, what are some of the challenges that they run into? Another great area is we -- for a long time, one of the acquisitions at NetApp was OCI, which was on-command cloud insights, which is -- think of it as a monitoring tool. We've now port it -- we still sell it on-prem, certainly, but the bigger focus is now we sell that as CI, which is a cloud monitoring tool. So think about all the stuff that goes around companies need to manage their data in the cloud, protect it, optimize it, compliance, all of those things that those are the areas that we look to. And then, of course, as they move towards compute, what can we do to help them optimize their spend, is where we are today. We think this is just going to get bigger and bigger.

Okay. I know that your file storage efforts have been a little bit different at Microsoft than at Azure versus other cloud platforms, but pretty similar. I'm wondering though, as you guys look out the next 2 to 3 years, and you look at evolving this platform, does the product offering look different on different cloud platforms? Do you see it being ubiquitous across all of them regardless of which one client of yours is using?

Yes. So I do think it will adapt to what that hyperscaler really wants to drive out of the relationship. I think the fundamental ONTAP, call it, the fundamental product will stay relatively similar. How they want to go to market, what data services do they want to wrap around that, how do they want to deploy it, I think, will vary. We certainly would never speak for any of those, exceedingly large companies are going to have their own strategy. From our perspective, I think that the go-to-market and how they want to market it will continue to evolve with a base foundation across all of them, which is, hey, our great ONTAP file storage system. I think that, that serves as the fundamental base. And then on top of that, I do think it will be a little bit different. But again, that's going to evolve as they evolve and as we do as well.

Okay. So let's talk about the CVS numbers a little bit. Your ARR reached $216 million. You're targeting only $250 million to $300 million by the end of fiscal '21. So you seem like you're pretty well on track, if not ahead of track for that. But then your long-term target is $1 billion by fiscal year '25. And I wonder if you could articulate a little bit what needs to happen to get us from this $250 million to $300 million level up to that $1 billion level.

So when we looked at that, and we've had obviously a lot of questions about that, especially given that we -- that was a new number that we had. I think different than a couple of years ago -- let me start with this, Rod. We know a lot more about the business now than we did back then in terms of what's required really to have a scalable product across all those cloud platforms. So we feel a lot better about seeing how our customers adopt it, what happens when they adopt it. Obviously, we've started to talk about the net dollar retention rate, which is a very important metric for us. So we see that. When we built the $1 billion, we looked at what do we think is going to come from core storage, file storage; what do we think is going to come from expansion in our customer base, new products, acquisitions; as well as how we think the hyperscalers will roll out, and then what we're going to be able to add. So it was a multidimensional model that we built, and we looked at it. And as we build to $1 billion, we have said that, we think the majority of that will be organic, but we absolutely will continue to do organic adds there. And we think that, that's important to bring new capabilities as we've just talked about, but also be able to access new buyers. Again, that was one of the great things about Spot, is it got us into the cloud buyer that we probably know every storage admin in the world. We don't know everybody buying cloud services, and that was a big part of that. And those are the kind of ads that we want to continue to look at.

Are you going to -- is it just a matter of tracking the ARR for us and you providing us those numbers? Or do you think you'll get -- are there other big milestones or other data points that you tend to give us over time to help us understand where things are going?

So yes, we -- look, this is a different business than the storage business, things like land and expand, obviously, the dollar-based net retention is huge, cross-sell, upsell, ability to sell multiple products retention rates, all of those things will play into it. We haven't decided yet what those metrics are. And as you know, we got a lot of questions about, hey, is the customer count, is it coming from your existing customers, how much is new. So all of that, we're looking at. And as the business gets bigger and more mature and our tracking gets better, we'll certainly look at other metrics to help people get a good view of how we get to that $1 billion and beyond.

Okay. I know that -- I wanted to ask about capital expenditure associated with CDS and gross margins and margins in general. I know that you really would have -- at least talking to the guys that developed it, NetApp would have preferred not to provide hardware, but your hardware was so good, they kind of had to. So now you're having to depreciate hardware costs. Against its revenue stream, how does -- how do margins evolve as a result of that over the next few years with CDS? Help us understand the trajectory there. Or is there one? And then maybe a little longer term, when does this become a software-only market, and you're not having to provide any hardware into it? Or do you even want to see that happen?

Yes. And I think the answer to that question is will the software product be good enough for it to happen. So let's get to that first. Let's get to that in a second. So yes, today, we deploy hardware in those data centers. And it's because of the products that run there, SAP, big databases, HPC, VMware or VDI, all that, you need the hardware to run those workloads. So we are deploying those. To your point, we spend the CapEx, and then we depreciate them. The depreciation hits COGS. Super importantly, those are depreciated over 3 years. There is, call it, an upfront investment, Rod, to deploy there. I think where we'll get to and if it's in '22 or '23, we'll see how it works out, where you get to more of a steady state model, where really the CapEx is just replacement or you've had such great demand in a region that you're adding incremental or supplemental hardware. I think that will -- that's not too far out. At the same time, we will start deploying software-defined storage, which will enable us to run, call it, the workloads that don't have to run on the hardware. That will help immensely. So when you take all of that together, the ability for us to grow the business, scale in that business to drive down the margins. Get the benefit of really being able to, call it, sweat those assets, which our customers do today, we'll get to do that in this business. And then the incremental value that ONTAP adds to become more and more efficient. That's why we were very comfortable saying today, the gross margins in the cloud business are below the company average. We do expect those to get at least at the company average, and those are the reasons why we feel good about it. It's a great question which asks about, hey, can it ever be no hardware? I mean even everybody that delivers cloud, right, the big 3, they probably spend more on CapEx than anyone in the world. So I do think at some point, it will mitigate. Probably not all workloads will be able to be run on software defined. But then again, software is a wonderful thing. It may become so efficient that you don't need it. I wouldn't bet on it. But that's something probably 3 to 5 years out, we can continue to have that conversation. But I feel very good about being able to get the cloud business gross margins to the company average, such that as our customers deploy on-prem or in the cloud, we're really ambivalent from a margin perspective where that dollar goes.

Do you anticipate -- I could see this as it gets bigger, you having to do a lot of explaining about cash flow because you have bullet CapEx and then you're depreciating the CapEx. Your thought about how you might present that to the market? Would you ever think about normalizing cash flow so that people understood kind of what the normalized levels are versus the -- or does that -- would that ever make any sense? I'm just curious kind of how you're thinking about communicating that over time as it gets bigger.

Yes, great question. So I think going into 2022, what I'd like to talk about is, hey, here's basically, here's the incremental CapEx required for the business. And to your point, what do we think is a normal run rate going forward? Just call it, maintenance CapEx or adding on to certain regions. So I think '22, you'll see it go up a little bit. I think by '23, we'll get more to that level. So there -- and in our CapEx, we also have facilities, obviously, the internal business. So breaking out the components of that free cash flow we have talked about, and we'll give some additional visibility in '22 because it likely will be, from a CapEx perspective, at least sitting here today, probably the high watermark, and then it should kind of start to come down.

So we kind of get to more of a variable cost model from a cash point of view in '23 and beyond.

Yes. Exactly.

That's really -- that's helpful. What about competition? Talk to me a little bit about the worry on this stuff is that Amazon and Azure and these big players increasingly try to compete with you for these products. Can you provide the counterpoint to that? What are some of the competitive barriers to them doing that?

Yes. So again, never speak for those big 3 companies. And they're great partners. What I'd say is, hey, file systems -- storage systems are really hard. People for 20, 30 years have tried to copy what we've done. We feel like we have the best OS in the industry, and that's largely why we believe that they've partnered with us. I think it comes down to, is this where they want to spend their time and resources or would they rather partner with NetApp? It's incumbent upon us to continue to make the best product such that, that question is a lot easier to answer, which is why would we want to chase that? We have the partnership with the best product in the market. We'll continue to go down that path. So that's our hope, and that's really our goal to be able to continue making it better and better.

Okay. You guys have been pretty outspoken about taking market share. I don't think it's secret who that share might be coming from. Talk to me about the evolution of competition recently in the market. And how do you expect it to evolve as you look forward? It's remained a very competitive market, but yet we haven't seen share shifts like this occurring until relatively recently, at least in this current cycle, and you can go back a ways and see previously, of course.

Yes. And to that, to your point, Rod, it's always been a competitive market and it always will be. It's relatively -- usually relatively rational. Every once in a while, someone will do something to maintain a customer. It happens in all industries. I think one of the interesting things is as all-flash continues to be a bigger part of it, certainly, the competitive dynamics there are different. There's really only 3 or 4 or 5 of us playing in that market. The core storage market, there's a lot more, call it, legacy competitors. So I think the dynamics are changing a little bit going forward. So -- and that's really our focus is around that all-flash market. So we feel good about it. Again, pricing has largely held. We can't speak for any of the other folks. But as the nice part of that is now a growing market, it's not that we're all trying to go after a declining market. I think all-flash does all give us -- gives us all some growth opportunities, which certainly helps from an industry dynamic.

What do you think your runway for taking share as a result of this difficult power storage transition is? I mean do you think it's 18 months, 12 months? How long before they come back with a tougher product?

Yes. So look, I never -- we never want to underestimate them. They're formidable competitor. Certainly, this has given us a chance. Whenever you go into a customer base that's been expecting a product and they have to do a lift and shift data migration, all that new training, it opens that discussion up, and we've seen it in other businesses, and NetApp went through that several years ago. So our goal is, hey, we feel really good about where the product is, do as well as we can now. I think the big -- I'll call it, other vector to your question is, over time, what we really want to make sure is we're selling the value of NetApp's data fabric strategy to get to the cloud. So as they go down that path, we have -- it's incumbent upon us to continue to innovate as well, such that those conversations become more and more focused on NetApp. So don't want to underestimate them. Clearly, there's a time. And we and our other friendly competitors are doing everything we can to access that market. We'll continue to do it. But importantly, as we go into '22, we'll continue to focus on that as well as really driving innovation around that data fabric strategy.

Okay. Maybe a quick comment on commodity price impacts and also adoption of QLC in your products.

Yes. So commodity pricing. So NAND pricing, as we've talked about, for the first half of our fiscal year was up materially year-over-year. Last year was certainly the low point of pricing. We do think in the second half, that pricing will come down, and we've seen that already. So it will be a little bit of a tailwind to our margins in the second half. Going into next year, I think it really depends on supply and demand. As you know, so much of that demand is driven by consumer and mobile. So what happens with the economy will largely drive that. Hopefully, it stays relatively consistent. QLC, for us, we're running it in the lab. It's not to the point yet where we think it makes economic sense. We want to see that get a little further on. So it's still more of a future than today.

Okay. Let's talk quickly about sales rep, sales rep productivity. And I'm mostly curious, I know you've added these 200 sales reps, you've add them in different categories. And I thought most of the focus there was hunter rather than farmer, but I know there's a split. Where is their -- given COVID, where is their productivity relative to where you thought it would be pre-COVID, as this plan was developed last year or the year before last now?

Yes. So to your point, we added about 200 quota-carrying sales reps, the vast majority in the U.S. and most of them, to your point, on hunter, so go get new logos. We have seen some nice benefit there. Obviously, it relates back to the conversation we just had on the Dell situation. It really depends. So overall, the productivity is consistent with what we thought. It was certainly a very good investment from bringing those folks on from a return on investment. It does depend significantly even if they're all hunters on where you put those folks, in terms of those regions. But overall, the productivity is about where we thought, and it's really -- that was -- that decision was made before I got here. I think George and Ron made the exact right decision, which was to build that capacity, especially in some of those regions, and we'll continue to look at that. Also importantly, we've also been building in the existing cost structure, obviously, the cloud sales team. And that's also helped as well. So all of that capacity add in sales, I think, has been a big tailwind for us.

And do you think it would have been better without COVID? Because it seems like as a -- if you're a new salesperson coming into this environment, it'd be hard to sell things. Or do you think that they just found other ways to do it, and it didn't make much difference?

So yes, awfully tough question to answer. What I'd say there is that if we just look at the NetApp situation, there were regions and territories we just didn't have enough coverage. And you can debate hey, is it coverage, is it skill set, what is it? Just the fact that we've been able to add those folks, not only do you add more capacity, but the people in those regions then can narrow their focus as well. So I think almost always, capacity adds will add. There's certainly a point where it becomes diminishing returns. We weren't anywhere near that.

Okay. Just remind the audience, there are -- there's an opportunity to ask questions. I don't have any yet. But if you have questions, please put them in the system. Running down to last 10 minutes or so here. You mentioned -- you talk about not having enough coverage. I'm curious, you're -- you've come in fairly fresh to this business, how to look at the cost structure, how to look at the way the company is spending its money. What are your observations as a result of that?

So I think as a whole, the company that especially run, and George, when they went and did the restructuring several years ago, they really optimized it quite well. I think the large majority of where we spend the money is the right area. Are there areas that we could do better or worse, or more or less? So a couple of those areas. I do think that as we look at, call it, the allocation inside of the operating spend, there are probably areas and product that we could spend more on. I'm a big believer in that the product is really the most important thing in a technology company. So there's areas around cloud that we could probably accelerate, more data services, better optimization, the ability to really meet some of the road map items, and we're focused on that. I think within the core, what you saw in August was the reallocation of hey, moving dollars from the HCI business into the core as well as funding the Spot acquisition was all the right things to do. From a G&A perspective, we try to be really efficient. I think the one area around sales and marketing is, hey, the pandemic has really shown, I think, a lot of companies that there's a different way to sell. And we have a wonderful go to market. We have a wonderful sales team. I think over time, do we try to continue to evolve that and in the new buying behavior, that's always a tricky area. But I do think that there's opportunities there over time as our customers want to buy differently. And we've always said, "Hey, we'll follow our customers there." So there's areas that we can continue to tweak the dollars. But overall, I think it's in a good spot.

Okay. Great. I've never had a conference before where a dog was coming and going on the podium, but here we are. So the -- do you think maybe that lower sales cost long term in an enterprise environment? You think maybe there's opportunity for further efficiency then? Is that what I hear you saying as you look forward?

I think we can continue to get more productive with how we go to market. And again, largely due to those -- you see so many, especially the cloud businesses, have a different selling model in terms of it's more inside, they break up renewals, all of those things. I think the question for NetApp and a lot of larger technology companies is how do you make that shift in the right way. So I think over time, we can become more productive. But again, we want to be cautious there. We want to be prudent. I don't ever want to be in a position that I think the company was where you have to do a step function because you cut back in an area. So we'll be thoughtful about it. But I do think that the -- this new work environment will have opportunities for all of us to do business differently.

Okay. Let's talk about Keystone a little bit. Could you just give us an update on the as-a-service offering, progress you're seeing moving towards subscription-based revenue? Everybody is starting to talk about as-a-service on-prem and I know you have an offering there.

Yes. So we're excited about Keystone. So it's now -- we're fully GA pushing forward on that. We're starting to see some smaller wins already and then the pipeline build. So for us, Keystone, it is -- for us, it's an important step in that cloud journey as companies have them. And the ability to be able to offer that as a service, different consumption models, we think is important. Obviously, you've seen some of our competitors do the same thing. So we wanted to, as we say, go slow to go fast. We now feel really good about where we are, and we're starting to see that build.

Do you -- how economically attractive is that model to you as the CFO? You look at it versus a traditional on-prem model, would you really like to see a world where everything was consumed as a service or does it matter that much to you? I'm just curious what your take on that is.

Yes. So it's a super interesting question because I think what this brings in is there's certainly some competitive offerings. It's more of a lease, right, where, hey, we're going to take the fixed assets, put it on someone else's balance sheet. From that perspective, I'd rather not be in the hardware business. But I do think that the consumption model is absolutely here to stay. So to the extent that our customers want to have that as a service, it's all in the pricing. It's all in how that's constructed. So I do think that there is absolutely a part of our business that will go to as a service. Some companies just don't want to buy that way. So I don't think you'll see it be all of it. I don't think it will be 0 either. And again, we want to have the offerings that support our customers. Some do want to buy that way, we absolutely want to be able to complete that.

I forget on Keystone, are you taking the default risk on the equipment? Or do you have a third-party taking that?

So we have -- so we do, do leasing, but we also will own the hardware, and we'll provide it as a service. We'll do both.

So it seems like there's an opportunity for somebody to emerge to take the default risk away from companies like you and let you then just choose which model you want to go to. And we've seen that with other like Apple, for example, and it happens in other places in hardware as well.

Yes. And we do -- and again, we'll do that, we'll do a lease and offer it as a service or we will take the hardware. Either way, it really depends on how the customer wants to consume it.

Yes. Okay. M&A, once we've got a couple more minutes here. Anything else? Is it CDS, the primary area that we're likely to see M&A over time or there are other things we ought to be thinking about technologically that you guys would like to bolt-on to the business?

Yes. So most of it will focus on the cloud business to expand the cloud to add more software offerings, and they'll really be -- and they'll be that way because we've also talked about, hey, more bolt-on acquisitions, not something significant. Something like that comes up, we'll certainly take a look at it. But our focus is on adding tech and talent, where you have a great product that needs a go-to-market engine, right, where we can buy high-growth companies around cloud that enable us to really be able to also add fuel to that fire. And that's something that's more of an established business that brings us either new capabilities or new selling motions, which is what Spot really was. So we're focused on those. Where they'll be, call it, bolt-on, is our focus. Again, something else may come up, and we'll look at it, but that is our focus around M&A. We want to make sure that they are bite-sized enough that we can integrate them effectively, Rod.

Makes sense. What's your take on asset prices, Mike?

I wish some of the public comps would come down. I don't think that helps any of us. But I think it also depends on where our company is in that cycle. Look, there are someone you should talk to that just have such a -- you just say thank you very much, and you move on. But that's why we have a great team there. There are deals there that we can do that we think are -- that we absolutely will be able to pay back. We bring value that other folks don't that we can bake into those models. So there are deals out there. There are some that you just have to walk away from and say, "Hey, when it gets back to normal, we'll come talk to you."

All right. Maybe we've got 1 more minute. We'll -- I don't have any questions from the audience. So let's finish up with free cash flow. That's a popular topic. You restarted the buyback. Be interested in your capital return thinking for '21 and beyond. I'm especially interested, I'm starting to hear a little bit more, predictably, tilt toward dividends away from buybacks. Curious what your philosophy there is and anything else there is to say about capital return.

Yes. So it's really an interesting question. So what we said for '21 is -- well, number one, the #1 priority for us is dividends. I do think share buybacks are important. It is important for us to be very prudent around our equity structure. And our goal is to be able to offset the dilution from our equity plan. I think the easiest and the best way to return money to shareholders is through a dividend, but people have different views of that. So right out between that dividend and share buyback, we'll always look at that mix. Importantly, we do want to allocate some parts of free cash flow for acquisitions, a conversation that we just had. Also, overriding all of that. Look, our credit rating is super important to us, the investment-grade rating for our customers, for our employees, our ability to raise capital. So even though it may bump up in a year, I don't think you should expect to see us in any long-term fashion spend more than 100% of free cash on especially return of capital. So we want to make sure, again, there may be an event or a transaction that pulls us above, but we will absolutely have a plan to get right back into the right leverage ratio. So we'll continue to balance dividends and share buybacks, but dividends for us are super important, offset dilution and then make sure we have enough free cash to grow the business. Because in my mind, we'll always be disciplined. We'll always be prudent. Our job is to grow shareholder value. And that, in my mind, is we need to grow the business in the right margin structure and free cash flow.

Great. All right. Well, we're out of time. That's a good place to end on dividends. I love dividends. So thanks for your time.

You bet. Again, thanks for having us.

Yes. Great to have you, and thanks, everyone, for attending.

Thank you.