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

[Audio Gap] William Blair. I'm very pleased to introduce Mike Berry, Chief Financial Officer at NetApp; and Lance Berger, Director of Investor Relations, for our fireside chat today. [Operator Instructions] So I will get going. And first of all, Mike and Lance, thanks for being with us and participating in this event.

Thank you, Jason. Thrilled to be here. Thanks for having us.

Our pleasure. So I think I wanted to start out with kind of a very general question and get to the heart of the matter with NetApp, which is the company is really going through a lot of changes. And what I wanted to ask you is, most investors think of NetApp still as an on-prem storage company. But can you walk through how the company is really evolving from that narrow classification?

Sure. Well, again, thanks for having us. Good afternoon, everybody. So yes, I think the difference is I probably just talk about it a lot more, NetApp has always been a software company, Jason. And we view ourselves as a cloud-led software company. Everything that we've done in our products, we look at it that the major competitive advantage is really the software, ONTAP being obviously the largest part of that. So at the heart, we've always been a software company. And that has been our differentiation. So as customers, as they live in the hybrid cloud, because we use ONTAP on-prem and ONTAP also is the fundamental basis of what we do in the cloud, we're able to help them move their workloads either from on-prem to the cloud or even back, and that's really up to the customer. We do it either with their user software or we do it as a service as well. So customers are starting to think of us now more and more as a cloud company. Obviously, we've talked to you folks and the investors about the importance of a couple of things. One is the amount of software mix, and I know we'll talk about that later, especially as we go to all flash, software is more important for that underlying hardware. And then obviously, cloud is driven and run by our great software. So we have always been a software company. I talk about it a little bit more. But importantly, it's also because as that product mix changes, it becomes a bigger part of the financial model of the business, which is why we talk about it quite a bit more.

Got you. Okay. And what are those specific cloud offerings today that you can point us to? And where is the most demand?

Sure. So let's break up the public cloud services ARR. It's really we'll call it 3 buckets. The first bucket is our core storage products. And in there, there's 2 flavors, call it 2 flavors. One is what we call Cloud Volumes ONTAP, which is the software again. Think of that as a self-managed cloud. So the customer actually brings that and manages it. The other thing that we have is Cloud Volumes Service, which is a managed service. And so for instance, our ANF, our Azure NetApp Files falls under that classification. It's a managed service. So those are the 2 biggest parts of the cloud business. And that's going to be the majority of the ARR. It's obviously the foundation. Also on top of that, keep in mind that we have a lot of data services that go on top of that. We have Cloud Sync, cloud compliance, backup tiering, Global File Cache, other things like that, that really help in that storage part. So that's the first big bucket. The next bucket is what we call our monitoring and controls. So that's what we have, it's called Cloud Insights. We had and still have a great product on-prem, we call on-prem, our OnCommand Cloud Interface, and that is being ported to the cloud. So CI, as we call it, or Cloud Insights. Think of it as a software monitoring tool that we've moved to the cloud. That's #2. And then the third big piece is our acquisition of Spot, our cloud optimization. And that's really been great because it gives us access to buyers that we have not had in the past. And this is really where you see cloud natives. You're going to get some smaller companies, and it's really helped us in that. Now we've brought a lot of synergies to them, but they've brought it to us as well. So if you think about the cloud ARR, those are the 3 big buckets.

And Spot is more of a compute offering, correct?

Correct. Yes. This helps everybody. And we use it internally. And as CFO of NetApp, I love it. It saved us and we have a lot of -- I may be one of the better salespeople. I always tell my CFO buddies that you're nuts not to use this because it saves you a ton of money in terms of your cloud spend. So -- and we feel great about that becoming our platform around cloud optimization going forward. So it's really been a good acquisition.

Okay. Great. And let's talk about the Cloud Volumes ONTAP for a second. Maybe just to give us an example of how a customer would use this, either an existing customer or a new customer.

Sure. So -- and we've talked about -- I'll give you 2 examples of customers that use it. One of them is more focused around ANF. So we had a very large integrated energy company that uses ANF. And what they really use it, it's their de facto standard for file access across all of their enterprise workloads. So it allows them to move workloads on-prem and in the cloud. And it's all again based on that -- on ONTAP both ways. And it works a lot better because it's much more efficient than what they would have gotten in their standard Azure tools. So -- and it also supports all of their DR and backup in the cloud as well. So there's one example. Now if you talk about just ONTAP, there's a very large European-based health care company that uses it to migrate workloads to Azure as part of their cloud-first strategy. And they were able to create that environment on Azure and it's similar capabilities to what they have in their data center. So again, they can move storage back and forth at very similar efficiencies in their data center. And it's really part of their hybrid cloud strategy. So there's a couple of examples. And we see -- certainly seen new customers use it just to get started in the cloud, but we also see existing customers on-prem also use it as they really are fulfilling their hybrid cloud strategy.

And let's talk about -- like in a new customer example or use case. Why would they -- why wouldn't they just go native to an AWS or an Azure? What's the benefit of having either like an Azure NetApp Files or a cloud volume on AWS? What are the specific, either efficiency or performance? I mean, it's got to be some -- or cost. I mean there's got to be some benefits for them to have this sort of software layer effectively on top of their cloud storage, right?

Well, when they use it in a hybrid -- so the answer to that is the performance of Cloud Volumes is so much better than their native tools. And they all have those native tools. But what you get with Cloud Volumes either ONTAP -- let's do ONTAP first, is you get much better performance in that -- for that file-based storage that you can't get in their native tools. From a CVS, that's a fully managed service. So it also allows them to say, "Hey, you run it for us." And they're getting the best technology out there, which is going to be ONTAP. So we have -- and they can certainly use those tools, but those are the competitive advantages. Plus if you have the hybrid strategy, it enables you to use the same tools across both of those and to move back and forth. So it gives them a ton of flexibility as well, Jason.

Got you. And is that -- is the primary use case that you guys see for the cloud services, this idea of somebody that's got an existing NetApp infrastructure and they want to start moving more stuff to the cloud and they want to have that same experience and same quality and therefore it's a kind of a cloud migration play?

That certainly is one of the use cases. It's not the only one. We also bring new customers on, as we've talked about. We expect the public cloud business to be the key driver of new customers because that also allows us to get into customers where their on-prem footprint may not be us for storage. But because we are really, as we think, the best fully integrated cloud service, it allows them also to move those from -- even not NetApp, but from other providers as well. So it's both of those use cases.

Okay. And I think one of the questions that I've had in other investors -- and investors have had is on the impact of your cloud services business on your traditional business. What evidence do you have that the cloud software growth is additive to the business and not cannibalizing on-prem array sales?

Well, the first evidence is I'd point you to the last 3 quarters, where we've seen billings growth and we've seen growth in the core business as well when you add both product and support. So we have been able to do well in the -- and by the way, the cloud business has grown by almost 200%. In addition, when we did the Investor Day last September, we also looked at -- now it's a smaller sample because, obviously, the public cloud business is a little bit smaller than the core business. When we looked at customers that use us on-prem and in the cloud as one cohort, and then we looked at customers that only used us on-prem, they were at -- actually, we saw much better growth in the cohort they used us both. So we have seen evidence. And again, we'll continue to look at it. This is something we'll probably talk about at -- when we do our Investor Day. It's one of those great metrics to throw out there in terms of, hey, we actually see revenue grow across the board. We don't see them pull down core and then increase in cloud, because keep in mind -- and one of your questions was, hey, what do you think people miss about NetApp? This isn't about on-prem storage. It's about data, and data continues to grow on-prem and in the cloud, and we're able to help our customers across both of those vectors. Lance, you want to jump in on that? Anything to add there?

Yes. I would think about it in the context, when you're talking about cannibalistic, if you look at the market share data, as Mike pointed out, in the last 3 quarters, we've actually gained share in all flash part of our business, in overall storage share, which is probably the leading indicator for the health of our on-prem business.

Okay. And that's a good segue. I guess you've sort of answered the question a little bit. But beyond the cloud, you've talked about your ability to take share in traditional storage, in the traditional storage market. What are the key drivers here? And how fast do you think the traditional storage market is growing?

Yes. So as Lance talked about, we've -- especially in this fiscal year, we think we've gained share every quarter. I would bifurcate that -- and let's talk about why. I think there's a couple of reasons. Certainly, the Dell refresh, their refresh has opened up opportunities for us. But more importantly, I think it is the value proposition with customers around the hybrid cloud that we just talked about, Jason, I think, is really starting to resonate, which is, as they look at who is the provider to help them in that journey, it's NetApp more and more comes to the forefront of that. And a lot of that is driven really by the performance of our software and ONTAP. And I think at the end of the day, hardware is important, absolutely, but it's really software performance that matters. So I think that's a big part. In September, we talked about the growth of the market, and we segmented it and said, look, even if the storage market is, call it, flat or slightly down, the all-flash market is growing 9%, 10%, 11%, pick your favorite external source. And then you have the rest of the market spitting disk or hybrid probably flat to down. But we are -- that's why we're focused so much on the all-flash part of the market. And that's been a big part of the focus. So that's the external piece. Internally, I would give George a lot of kudos. Coming into '21, he was very clear with all the company, which is, hey, we have really 2 big priorities, regain share in core storage, in the core storage market, and scale our cloud business. And that has really enabled us to focus on, especially the sales team, on those initiatives. And I think that, that prioritization, that focus has really helped in our execution.

And how much of a factor -- or how much of a driver has the investments you've made in the sales organization over the last couple of years? How much of that has contributed to the share gains, you think, over the last few quarters?

So I think it's helped, I don't think it's been a major driver. We saw in Q3 some nice results in the Americas, which is where the majority of those 200 sales reps came. I think in the first couple of quarters, a lot of those folks were still getting up to speed. I think they're now fully ramped. Hopefully, we'll see that going forward. So I think in Q3, it started to help in the first half, probably less so, just because it does take time for those folks to get ramped up. I would say that it's not just the sales team. Keep in mind that under the covers in the operating expenses, we've invested a lot in driving growth, not only sales, but also -- and we've talked about, hey, we've defocused on HCI. We're focused on the core growth areas. We've brought in the sales teams. At the same time, we've funded a lot around cloud. And I think all of that has really helped in terms of the investment to really go after the growth areas.

And what is your relative market share in all-flash versus the overall storage market?

Yes, I'm happy to take that, Mike. If you look at all-flash, it's about 17% to 18%. If you look at total storage, it's a little over 10% to 11%. If you look at spinning disk, it's 5%. So it really tells you this market is really coming towards all-flash from a -- if you look at the top 5 vendors in all-flash, they make up about 80% of market share. If you look at those same top 5 vendors within spinning disk, we only make up 45% of the market share. And the reason for that is there's only a real small subset of competitors who have really invested in a true all-flash portfolio. So that is good news coming our way for the foreseeable future.

So you just naturally will take share as -- because your relative share is bigger in all-flash. As all-flash becomes bigger part of the total storage mix, you'll just naturally take share?

Absolutely.

Got you. Okay. And then you mentioned hyper converged. I know you're deemphasizing it, but how much of a worry is it that, that space is growing kind of whatever, 15%, and it has a potential to eat into the traditional storage array market? And so there's sort of this exogenous variable that could impact the overall growth of traditional storage, and you guys are not a big player there.

Yes. So it's not a big worry for us for a couple of reasons. We still certainly still have SolidFire, which you could put in that group. We -- what we've really defocused on is we don't want to chase the market where it's going to more of that, call it, that generic compute. And that's really where a lot of it has gone to. We've spent the last several years focused on the software portion of that to really managing application data. So in that market, we saw a long time ago, which is, hey, it looks like it's really going to the industry standard server platforms, which is a compute part, and that's certainly low-margin business. We have focused on the software-defined portion of that to [ meta ] application data, and that's really where we're focused. You'll hear us talk a lot about Astra, which is we're focused on that as well. So we still play in that market, just not in any area where we didn't think we had a competitive advantage and the margins were quite a bit lower. But we will still play in that market as it relates to managing data, especially around the software-defined portion. And of course, we still have SolidFire, which is a great product in and of itself.

You mentioned Astra. Could you talk a little bit about that offering? I saw -- I think there was maybe a press release yesterday or the day before?

Yes. So that's our software defined storage really focused around containers and Kubernetes. And so we're super excited about it. We're just getting started in terms of rolling that out in GA. And you'll still hear more about that, Jason, as we introduce even more products. And I think we talked -- and I know -- I think you have talked about software. This is the continued push at NetApp, which is to really drive product development to where we think we have a competitive advantage. Over 80% of our engineers are software engineers, that's what they do. And Astra is a continuation of the focus around software-defined and really focusing on where we can add value, which is around managing data. So yes, you saw the press release. We have basically announced the end of availability of the, call it, the old NetApp HCI platform, but we're -- we've moved those resources to really drive Astra.

And was this all organically developed, Astra? Or was it part of any acquisitions?

No. Organic.

Okay. And I would just to add to what Mike was saying, I think one of the key things about Astra is it really allows the customer to port their workloads and applications across any of the 3 clouds or on-prem using a managed service solution.

Got you. Okay. Right. And so there's -- there's no upfront purchase with Astra. It's a managed service. It's consumption-based.

I believe that's right.

Is that correct?

There will be multiple business models. Like most of the things we do, we'll make sure that we can serve our customers how they want to consume. So there will be multiple business models. As Lance talked about, whether it's on-prem, in the cloud, we will have multiple business models there.

Understood. And then talking about acquisitions a little bit. Can you walk us through the rationale, [ reach ] of the deals that you've done over the last year or so. I know there's 3 that I can think of. Just maybe walk through -- you mentioned Spot a little bit. Maybe you could talk beyond just Spot. And then how does everything fit together within the -- if you think about those 3 acquisitions, how does it all fit together?

Yes. So let's do the, we'll call it, the smaller of the 2. I do want to circle back on Spot again just to make sure because you asked how it fits together, I think that's super important. So the other 2 smaller transactions we did. We did CloudJumper, which is -- it's virtual desktops. And as virtual desktops move from on-prem into the cloud, this was a natural extension for us. They have a very big partnership with Azure as well. So that was to get into that market. Talon is a global file cache and it really syncs well with storage because this enables companies between Global File Cache and Cloud Volumes to get massive savings across all of their server consolidations in a secure manner. So those were -- and they were smaller, but they were important. So think of that as kind of fitting in, well, it's a modern workplace. It fits well with our storage. And then what also fits well is obviously Spot. So that did -- call that a different platform. It's optimization. But we're going to start also adding stuff on top of that because we feel like it's a super platform for us to grow. And as we talked about, that brought us cloud natives that -- I mean, we probably know every storage admin in the world. This product is a group that we didn't know as well, which was the cloud natives, we brought scale and breadth and obviously resources to help that. So we've been together now for, what, about 3 quarters. And it's performed at or better than our expectations. And we are excited about building onto that platform as we go.

And is there a play there for storage optimization across clouds? Or within the clouds?

There's a lot of internal development going on between the Spot and the NetApp team around that very use case.

Perfect. Okay. I want to move on to some financial questions. But before I get there, I wanted to ask you about the pandemic and COVID-19. It seems like you guys have performed pretty well, and -- I don't know, I guess, I would have expected there to be more pressure on the business, just given that its infrastructure and -- maybe you can push it off, sweat the assets effectively. How do you explain your pretty solid performance over the last 12 months?

Yes. Well, thanks for that. I do think that the -- all the 10,000 or so NetApp employees have really done a great job during this time. It's been something that I don't think any of us ever thought we or hoped we would ever see. So during this period, I think we've performed very well. I think there 2 main factors. One, externally. It did obviously drive the digital transformation and I think moved that to front for a lot of companies. As we saw once this hit, gosh, now almost exactly 1 year ago, think there were 3 big areas of focus for companies. And we all sought, which was, hey, make sure we can work, i.e. do this kind of stuff on Zoom or whatever tool. Security got a lot of money, we saw that. A lot of money went into security, which is, oh gosh, now we have people working from everywhere. We better be able to secure that environment and then their digital transformation. And I think those were the 3 big that we saw. We certainly got helped by the digital transformation. I don't think that will stop. And we certainly look in the future and say, "Hey, we think that will be a continued tailwind for us." And then I talked a little bit before about our internal focus and prioritization. It's -- look, as a CFO, you look at that and you say, "How much does it matter?" I think it matters a lot. When you have everybody on the boat rowing in the same direction, focused on our priorities, making sure that we're investing in the right areas, that we don't get distracted. I think during this pandemic, the team has really executed well and I can't underestimate what that does to your performance.

And how much of your success -- this just another thought, but how much of your success you think is due to kind of who you sell to? I mean, it seems like you're very strong in financial services, in government, areas that were sort of relatively less impacted by the pandemic. You're relatively strong in larger enterprise versus small business. How much of a factor was that in the success that you've had?

So to that point, we didn't really have any, I'll call it, headwinds from, I think, the unfortunate economic issues that hit smaller businesses. We focus mostly on large enterprises, to your point, Jason. Plus we have, obviously, our U.S. public sector and governments around the world. So I think the fact that we sold to larger companies who mostly did pretty well during this time frame and then governments clearly continue -- the digital transformation there continues. And those unfortunate industries that did have issues around, especially around travel and hospitality and stuff, we have a very small percentage exposure there. So we were in a reasonably good place from a customer perspective going into the pandemic.

Got you. And can you remind the group here, what other verticals. I know I mentioned financials and government, what other verticals are sort of top 5 for NetApp?

Well, so we serve large enterprises all around the world. So certainly, technology is there. Health care is a big piece of what we do as well. So if you look at enterprises, large enterprises, we're likely to be in any of those sectors, those sectors or industry segments.

Got you. Okay. I want to segue to some financial questions. [Operator Instructions] So we've got about 15 minutes left. Mike, let's talk about the subject near and dear to your heart, the financials in the model. Maybe walk us through the kind of hardware-software mix question. I think you and I talked several months ago, and I was -- I hadn't even noticed that you guys were breaking out software, which I thought was long overdue. But talk us through the changing hardware-software mix of the business. And how do you guys actually arrive at the distinction?

Sure. So let's do that. The former first, and then we'll talk about the trend. So as you know, virtually all of our sales are an integrated appliance that has hardware and software. And from an accounting perspective, that's looked at as one performance obligation. So we report it on the face of the financials as product. But we do track relative values of those for each of the products. And they're actually, at least internally, we look at it in terms of how much of that product is attributable to hardware and software. So that's how we break it out. That's why, Jason, we put it in the footnotes, because from a GAAP perspective, that's the best place to put it. Why we broke it out is, as we continue to make this transition, we talked about it, all-flash, if you look at spinning disks, hybrid to all-flash, the percentage of software, i.e. the importance goes up pretty literally across those groups. And as we sell more All Flash, that's so much more dependent on not only ONTAP, but also all the other software bundles that we have. So the percentage of software will be significantly higher there in All Flash than it would be in some of the older products that we had. So we knew that software was going to be a bigger part of it. Plus, that also goes into, hey, billings growing year-to-date 7%, product revenue actually declining slightly, but yet support revenue going up. So it all plays into the financial model, which is more of that also goes to the balance sheet and support as it relates to those products. So that's why we broke it out. Also, as we do things like Astra, as we do other software-defined solutions, we want to make sure and highlight how much of our business is truly being driven by software. And then certainly, the margins there are very different. If you look back to 2019, the software percentage was, call it, between 45% and 50% of the product line only. In the last 2 quarters, it's closer to 55%. And a lot of that is being driven by that shift to All Flash. And so we expect to continue to see similar trends going forward. Really, it depends on how much of the mix is All Flash and then as some of the software-defined drops in there as well. And we really want to show from a business model perspective -- the hardware is important, absolutely, but what drives the financial performance, software, support and cloud.

Got you. And is this something that you work with your auditors on in terms of estimating the value of the software within the integrated appliance? How do you calculate that?

So we calculate it internally based on relative fair values.

Relative fair value.

It's in all the SEC financials, so they certainly look at it. Given that it's not important to GAAP disclosure, it doesn't go through as much, I'll call it, scrutiny. But we had a lot of conversations about this internally with them as well as obviously the Audit Committee before we would put it in an SEC filing.

Got you. Right. So is it right to think that you basically sell the hardware at roughly cost and the rest of the -- like you're not making much margin on the hardware, I would imagine, right?

So if you take the data and you run the math, the hardware will have a small positive margin, but not a significant margin. There is certainly cost around the hardware, but it's not "losing money" but certainly, most of the value in -- and the customers' value is in the software versus the hardware.

Got you. Okay. Great. And then let's fast forward a few years. I mean where do you see gross margin and operating margin going, especially with that mix shift towards software?

So what we talked about in September is that, hey, we do expect to see gross margins getting back to the mid-50s as we come out of the pandemic. Also, that's helped us certainly a little bit by NAND pricing moderating a little bit. The first half of '21, it was -- we saw some significant price increases there. It's much more back to normal now. And then as we continue to grow software, that certainly will have an upward push on margins. The one thing I just want to make sure you're all looking at, which is why we talked about deferred revenue and support a lot. Keep in mind that, that's also driven by how much goes through the P&L versus the balance sheet. So as you look at our performance, always look at how much is going to the P&L, what's deferred doing, which is a great thing long term, but it also has an impact on in-period what we recognize.

And which are the products that you sell or services that you sell now that -- are not recognized up front?

So if you sell a product, there is a portion of the product that's recognized up front. All the support is recognized over the support term. Cloud is recognized either over the support term or when it's -- if it's a payco relationship, when it's billed. And professional services is recognized as delivered.

Okay. So if I do a 2-year ANF deal with NetApp, it's basically going to be ratable over 8 quarters.

So ANF is a managed service that will be recognized over that period. So it will be over those 8 quarters. Correct.

Got you. Okay. So not just are you seeing a mix shift towards software, but you're seeing a mix shift towards sort of kind of ratable type revenue?

Yes, which is the other reason why when you look at operating margin, also look at cash flow, because cash flow you get upfront. Some stuff you recognize over time, which is why we're going to -- we'll certainly talk about the P&L, but we'll also talk about billings, because billing just doesn't -- when you bill it is when it shows up. That, to me, is the #1 driver. Hey, what was the economic activity you drove in the quarter? It's what did you bill? And then it will flow through the P&L. Also keep your eye on cash flow because, obviously, cash flow is a better indicator of that economic activity, less so than the P&L, which is, hey, you got to recognize it for the accounting regs.

Got you. Okay. So when you guys think about billings as a leading indicator, do you do just the normal kind of revenue plus change in deferred? Do you do like a broader deferred calculation, including RPO?

Yes. So great question. So we don't have a lot of performance obligations that don't go into deferred. So we don't have a big RPO, actually very little, which is why it's not in the SEC's financials. Different than someone that signs a 3-year contract and bills annually, we typically will bill the contract upfront. And yes, our billings calculation is revenue plus change in deferred. But importantly, and you see it on the cash flow statement, the change in deferred is not for the balance sheet, it's per the cash flow because we back out the impact of FX of deferred in that period. So it's revenue plus change in deferred, and the change in deferred is from the cash flow, not the balance sheet.

But the revenue hasn't been currency-adjusted, correct?

Exactly. It is not a constant currency, but we back out the FX impact on the balance sheet.

Okay. So you get halfway there.

Yes, which -- and we looked and that's how most people do it. And we thought that, that was better just to not -- I don't want to talk about, hey, great growth in billings simply because the dollar weakened, right?

And what have you guided to or how should we be thinking about billings growth over the next year or so?

So it will jump around every quarter, but I think you should expect to see billings growth over time be higher than revenue growth because more is going to the balance sheet.

Got you. Okay. Great. And then you have a good balance sheet. You've done some acquisitions. They seem to be going well. Should investors expect you to continue to be acquisitive going forward?

We -- when we talked about our capital allocation, we kind of reserved or said, "Hey, we expect to probably allocate, again." It's going to jump around every year, somewhere around 30% of free cash flow on acquisitions. So that would say over -- we did almost exactly $1 billion on a trailing 12-month basis. So somewhere around a couple or $300 million, those are going to be focused around smaller tuck-ins or tuck-in talent. It doesn't mean that certainly we wouldn't look at larger ones, but that's our major focus now. And it's really focused in the cloud business to add talent or products that we can use to give to our sales team as well as accelerate those road maps or add adjacencies. For instance, we talked about Spot and other areas that we'd like to add on to that platform.

Got you. Got you. Okay. One area that sort of always has struck me where NetApp has had a position, but I wouldn't say it's been, as a leader -- has been in the data protection market, backup DR. I mean, you guys have had capabilities there. But you've part -- you've been, done a lot of partnering there. Is that an area that you feel like an adjacency that could be a bigger piece of your business over time?

You want to take the first part of that, Lance?

Yes, sure. I mean, I think if you look at it, it's obviously critical for data management services, right? And I think as we go through our journey, we will add incremental focus on that as well. But I'll let Mike speak to the M&A. I don't know if we'd be willing to go outside of our internally developed solutions to really get further into that market.

Yes, and it's a great question. And it's a key part of our core products, whether we won't want to look at that as, call it, a stand-alone. That's something we think a lot about, Jason, which is a lot of companies, you have to look at this, which is if you buy or you enter a market where that's a functionality that's expected in your core product, that gets to be a really interesting discussion. Because can you really charge for it? Can it be separate? Or does it basically have to get bundled in what you do? And so you have to think through that pretty carefully.

Got you. Okay. But it sounds like for now you feel pretty comfortable with your portfolio. There's no sort of gaping holes that would cause you to look outside the company. It's more about enhancing what you already have, maybe something like Spot every few years, which kind of gets you into a new space and drives some incremental growth. Is that the general philosophy right now?

Yes, I think that's pretty close. We don't think there's any big holes in the portfolio or anything that we look at and say, "Gosh, we wish we were there." There are some areas that we look at and say, "Hey, we see our customers asking about it or product functionality that we think we can add on where we see really good growth potential." So there are those, but it's not like we look at what we have and say, "Gosh, this is a big hole." It's much more about being able to capitalize on those future trends.

All right. Good. We have about 5 minutes left. [Operator Instructions] I'm going to keep going. Mike, as we think about 2021, what are NetApp's strategic priorities? I know you've talked a little bit about this already, but maybe just go through whatever the top 2 or 3 priorities are for the company in 2021.

Yes. So I think we will continue to focus on gaining share in All Flash. You're going to see us make sure to invest in that. Scaling the public cloud services business is a big piece. Obviously, we're all focused on that. We think that, that -- look, I'll tell you when I joined almost exactly 1 year ago, I thought the cloud business had really good potential. I think I underestimated. I feel better about it now than I did then because of what we see with our customers. Obviously, we will continue to focus on making sure that the road map is on areas that can drive growth, specifically around software-defined, and we've talked about that. And we will continue to focus on, hey, are there acquisitions and adjacencies or bolt-ons that can help us accelerate our road map or enter new areas? So those are kind of the 4 areas that I'd say as we look to next year. The other thing I just want to make sure, and I know that there were some questions after last earnings call is, hey, the other focus is we will continue to be disciplined around OpEx. So we have said, going forward, our goal is to invest in areas where we see growth. And I think a big part of '21 performance has been that. George made the exact right call and [ Ron ] to say, hey, we need to go add 200 salespeople and it's going to help. We've done a lot under the covers to reallocate dollars to drive growth. We will continue to do that. The pull forward that we talked about last quarter is, hey, we have a cloud business that's grown almost 200%. That doesn't happen by osmosis. You do need to invest in it. And as we get to know that business better, we also realize, hey, sales is important, but also customer success, hugely important. When we get to $1 billion, a lot of that $1 billion will be renewals, cross-sell and upsell. That's how that business works, and we need to make sure to invest in that. But we will do that all in line with what we see in revenue growth to make sure that we can continue to drive up operating margins. So that's the other focus is, hey, we'll invest in growth, but we will be super disciplined about how and where we spend money.

Got you. Okay. And I know this is a question we touched on a little bit before. You addressed it somewhat, but what do you think -- you talk to a lot of investors -- every week, you talk to investors. What do you think investors either don't get or underappreciate about the NetApp story from your perspective?

So I think -- I think that we are doing, and kudos to Lance and Kris, a much better job of focusing them on where we're going around software and cloud. I think the performance has helped. The areas that I think folks are concerned about is a couple of questions, which is I think there was a -- there used to be a perception that, hey, it's -- cloud is cannibalistic to on-prem. And I think we've proven, hey, we think it's additive, not cannibalistic, that the cloud business can and will be a very large scale business for us once we get to that $500 million up to $1 billion. One of the reasons I joined is, hey, we trade on a PE multiple based on our cash flow, which I love. I love cash. It's awesome. And earnings is great. But there is a huge growth area in cloud that I think is underappreciated. Now we have to perform. We have to execute. That's on us to do it. I think that those are some of the areas that we continue to talk about, is I'll ask -- the importance of software to the financial model of the business, and we'll continue to show that as well.

And remind us when the $1 billion cloud ARR, what's the target date there?

That in fiscal '25.

Fiscal '25. Okay. And today, it's how much?

So we guided for the midpoint of 2 75 finishing this fiscal year.

2 75 ARR. Okay. Got you. And so I guess you -- at some point, investors are going to say, all right, let's pull this out and do sum of the parts. I mean, I would think that, that's the approach some investors are going to take.

If they don't take it, I'm going to help them down that path.

Great. Well, on that note, I know we're out of time. Thank you, Mike. Thank you, Lance. Great discussion. And look forward to watching you guys execute on a lot of these initiatives.

Great. Okay. Thanks for having us. We greatly appreciate it. And thanks to everybody on the video.

All right. Take care. Thanks, everyone.