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

Good day, everyone. I'm Katy Huberty, IT hardware analyst at Morgan Stanley. And it's my absolute pleasure to host this discussion with Anthony Lye, Senior Vice President and General Manager of NetApp's Public Cloud Services business unit. Anthony is responsible for the strategy and execution to further NetApp's cloud innovation across public, hybrid and hyperscaler cloud models. He brings more than 25 years of diverse leadership experience to NetApp, spanning roles in development, product management, marketing and sales and was a 2-time CEO. For the last 15 years, Anthony is focused primarily on cloud innovation, most recently as Chief Cloud Officer at Guidewire Software and at Oracle, where he was SVP and GM of CRM. Anthony, thank you so much for spending the time with us today. And for those listening in, please do feel free to submit your questions via the webcast. I will incorporate as many of those questions as we can in the 45 minutes that we have scheduled today. Before we start the discussion, NetApp has asked me to read their safe harbor. Today's discussion may include forward-looking statements regarding NetApp's 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 NetApp's most recent 10-K and 10-Q filed with the SEC and available on their website at netapp.com. NetApp disclaims any obligation to update information in their forward-looking statements for any reason. Please also see Morgan Stanley disclosures at www.morganstanley.com/disclosures -- research disclosures. If you have any questions, please reach out to Morgan Stanley representative. So with that behind us, Anthony, thank you again. We thought it would be helpful for you to just set the stage a bit with a few slides laying out the public cloud services portfolio, and then we'll jump right into questions.

Yes, Katy, thanks very much for inviting me. It's great to be here and to share what I think is a very exciting strategy along with, I think, good execution from the company. I thought I would start just with 3 slides just to try and frame the strategy for everybody, and then we can, as you said, Katy, take questions. If you just bring up the slide deck for a second, I'm not seeing it if it's up for some reason.

I think we won't see it on our...

Okay. So if you're looking at the slide called NetApp: The cloud Management Platform for Applications. I came to NetApp about 4.5 years ago to take the intellectual property that existed, that was core to NetApp and to combine it, both with our own further development as well as acquisitions. The simple view was to try and provide a platform that would sit between the applications and the public clouds that would give organizations the right infrastructure for the right application at the right time at the right cost. We felt there was a huge opportunity to bring NetApp's IP, primarily ONTAP, onto the public clouds. And most recently, we completed the set, Microsoft and Google, and as of last Thursday, Amazon all sell ONTAP as their own service. We orchestrate ONTAP through the public clouds and surround it with a rich set of services through our cloud manager platform. That's really our platform for IT operations. We acquired Spot a little over a year ago. It's been hugely successful for us. The business has grown tremendously. Spot is a platform for cloud ops, the more modern cloud-native users to take advantage of our infrastructure and our services to drive automation, and through that automation, a significant amount of cloud optimization. And Cloud Insights is a SaaS-based version of our very, very successful OnCommand Insight, an enterprise software platform for performance monitoring. That is the gold standard in the Fortune 1000. Cloud Insights is a multi-tenant, high-performing cloud version of OnCommand Insights and has extended our reach in our -- in the Global 1000, but opened us up to a much, much bigger segment. With these 3 platforms, we chase the enterprise applications. Those applications built on-premise that rely on file-based technology and block-based technology, as we extend them or migrate them. We chase the SaaS vendors, and we get the SaaS vendors to build in our APIs into their applications, as they deploy from their sort of 1.0 co-locations onto the public clouds. Through an acquisition, we now have a very strong continually optimized platform for end-user compute, we call Spot PC. And then, of course, we want to be relevant in the new modern microservice-based architectures that are being applied to modern application development and increasingly to Big Data. If you go to the next slide, then just a double-click on our presence in cloud native and big data, as well as sort of having services for the enterprise SaaS and end-user compute markets, we have, as a company, doubled down on our cloud native technologies. And within each of our platforms, we have very, very strong offerings that we provide to these application-centric teams. Cloud Insights, we have a platform for monitoring, managing, observing Kubernetes, we call the Kubernetes Explorer. Spot really leads with 2 fantastic products, 1 called Ocean, a serverless platform for automation, and Wave, the equivalent for Spark. And then most recently, we've made Astra generally available. A complete application data life cycle management platform for Kubernetes, particularly for stateful applications, whether they're being deployed on a public cloud or on a private cloud using any distribution of Kubernetes, whether that's Microsoft's Azure Kubernetes service, Google's Kubernetes Engine, Amazon's Elastic Kubernetes service or the other distributions like Red Hat's OpenShift, Anthos. So together we feel very good about our products and our services. They are in use in thousands of customers today. If you go to the last slide, what's really interesting, and I think we feel very, very good about is the market for our cloud, our public cloud services, is bigger than the NetApp market. Now we certainly do very, very well in our installed base, and we help our customers extend their existing data centers to the public cloud. More often for things like business continuity, things like disaster recovery, backup and restore, but modern cloud, things like DevTest, where the elasticity of the cloud is so valuable. But we have great offerings today to non-NetApp customers. And our traditional competitors have not embraced the cloud as we have. We at NetApp took a very deliberate approach to make our public cloud services as good to our customers as our infrastructure was on-premise. And so migration is a big part of our business. And if customers want to lift their enterprise applications and move them to Azure, to Google or to Amazon, uniquely, NetApp can do that. The last thing we do is we have through Spot and through Cloud Insights, a platform that automates, optimizes and monitors NetApp infrastructure, non-NetApp infrastructure. And we provide tremendous value to those cloud natives, those customers that were born in the cloud. So our portfolio has progressed. It's been very exciting this last 4.5 years, Katy. And I think we're demonstrating exceptional growth and value that we sort of publish on a quarterly basis.

That's a great summary or foundation for the conversation. There's already a question here on the webcast as it relates to your really important comments around customer expansion, which is really what's going to help drive sustained, above-market growth for NetApp's business. And the question here links back to a prior comment that you've made in past years that the cloud business had 2,000 customers. Is there a comparable number today as to how many customers the PCS business has today?

I would probably defer the question. I don't think we've given a number, but I think the results clearly speak for themselves. If you look at our public cloud ARR, if you look at our revenue growth, if you look at our net revenue retention rates, I think we demonstrate very clearly that we're able to acquire customers at a rapid rate, either directly through the NetApp brand or through the unique relationships we have with Microsoft, with Google and now with Amazon, the biggest infrastructure company in the world. So we're able to acquire very, very efficiently from them, and we're able to both retain those and grow those. And that's, I think, all been demonstrated in our financial results.

Okay. And just to take a step back, going back a couple of years ago, NetApp's cloud services business got off to a bit of a slower-than-expected start. But you really hit a critical inflection over the past 1.5 years. And exiting last fiscal year, this was a business that was running $300 million revenue run rate, growing triple digits. What are the key elements that drove that inflection in organic growth rates?

Well, so I think the first thing I would say, Katy, was building what we have built was incredibly difficult. The public clouds were not set up to do the things that we have done, and we have in all 3 clouds broke new ground. We have gotten ourselves behind the consoles, behind the APIs, behind the command line interfaces of Microsoft, Google and now Amazon. It's very difficult to build what we wanted to build. And it took a little longer than we wanted. I think that's both, I think, a testament to the uniqueness of our services and to the value of ONTAP, but also, I think, demonstration that NetApp can operate in a cloud environment. And now we're behind the consoles of these 3 massive companies, we can now execute much, much faster than we had originally thought. So it was -- it took a little bit longer. I would argue now that's a barrier to entry. And I think we continue to do things that no company has, right? We're now available as a fully managed, what we call, first-party service in these public clouds. And we have a breadth of availability in all the regions of our cloud partners. We have endorsements and certifications of the leading enterprise applications and SaaS vendors. And we have a very strong base of customer references that those things in aggregate, I think, really give us the confidence now to scale the business very, very quickly.

Now you mentioned that NetApp has showcased really deep integration with all the major cloud providers, but last week, you extended your partnership with AWS. Can you describe your relationship specifically with that cloud service provider? And what changed recently? And what does this say about NetApp in the cloud?

Well, so I think the first thing to know is we've been developing with Amazon on the Amazon platform for about 9 years. And we have always, I think, worked very closely with AWS. And we have been a pioneer for their marketplace. We were a first-partner adopter of the Amazon's Outposts. And we sold very successfully ONTAP, Spot and Cloud Insights to Amazon customers through their very successful marketplace. What we wanted to do was we wanted to build a service together. We wanted to build a service that would bring all the benefits of ONTAP, but to do it as a native AWS fully managed service, something they had never done before. We wanted to basically create a sort of an API-driven ONTAP that would not only provide value to NetApp's customer base, but to non-NetApp customers, who were either extending or migrating as well as the Amazon customers that we're building new applications. So for about the last 2 years, Katy, I've had to bite my tongue. And I've had to keep very, very quiet as we went through a very extensive joint engineering project. And last Thursday on Storage Day, Amazon announced through its press release the general availability of a service called FSx for NetApp ONTAP. And that is exactly what we wanted to do, a native, fully-managed service, behind the API, behind the console, behind the command line, that Amazon sells, that Amazon builds for, that Amazon supports, and Amazon runs. So we have now, I think, extended ONTAP into the Amazon services. What that does, Katy, is when you're on the inside of Amazon, you have access to all the native Amazon services. And so the connectivity that, that gives us to things like key management servers, directory services, fantastic compute services around AI and ML. It really opens up a tremendous opportunity for us. And I think what's interesting is this appeals, of course, to storage administrators. They don't have to do as much administration. They can focus on data and application capability. But we're super excited to see ONTAP embraced by the application owners, the application builders and the research scientists. And I think what was interesting was Amazon clearly saw what we had done with Microsoft. It clearly saw what we had done with Google. And we were very successful, honestly, in beating Amazon with Microsoft and Google in a number of key deals, and we were able to demonstrate something that I call symmetry. We wanted to prove to customers that we would make our services as good in a public cloud as they were on-premise. Now, it's great, Katy, because Amazon is selling ONTAP now. The AWS ecosystem is selling ONTAP now. We can acquire lots of new customers to NetApp through the Amazon console. And it's a wonderful opportunity actually for NetApp and Amazon to upsell our data services, our compute capabilities. So cashing, backup, cross-region replication, Cloud Insights and Spot are all now fully aware and can manage and optimize Amazon's FSx for NetApp ONTAP. So it's one of those sort of breakthrough moments, Katy. And in 4 years, I've got all 3 of them now to partner with us at very unique levels that no other software vendor has achieved.

That's really exciting news. I was speaking to somebody earlier this week and saying this idea of sort of a 1P or native business versus only being sold at the marketplace is a really big differentiator. I mean it's almost as if when you buy an iPhone, there are a few apps that are preloaded when you turn on that phone, right? And NetApp is one of those apps, instead of having to go into an app store or marketplace and customers to search out that service. So it's a really important competitive differentiator.

If I may, Katy, I'll tell you, the other thing that we decided to do is we decided to launch in every region on the same day. So every single Amazon region, there are a couple of exceptions, China, but every single Amazon region is basically now fully enabled and customers can as of last Thursday at 9:00 in the morning Pacific Time consume ONTAP. Consume ONTAP is just as they would consume any other Amazon service, knowing that Amazon has chosen ONTAP to offer as its own fully-managed storage service.

So Anthony, talk a little bit more about what exactly FSx for NetApp ONTAP is. What -- how is that different than consuming NetApp in a cloud marketplace? And what are some of the features that customers have available to them now that they didn't before?

Yes. Well, so let's sort of start with what's the same, because I think that's very, very important.

Okay.

So Amazon FSx is a service that makes it easy and cost effective to run popular file systems and what we call block interfaces. We provide access to the Microsoft SMB protocol and a very popular POSIX standard for NFS, the network file system. We also provide in a full FSx for NetApp ONTAP block-based interfaces. So the nice thing is the customers, who have ONTAP knowledge, who have understanding, know that we have created a service in Amazon that supports all of the intellectual property, the APIs that NetApp had built, as well as now exposing services through the AWS APIs. So the first thing, as I said, is every ONTAP customer now knows that their investment is protected, if not, enhanced, and they now have access to all of the AWS services, compute desk networking technologies. What we do is we basically are part of the FSx family at the low end. Amazon offers something called FSx for Windows, a very simple Windows file server. And at the very high end, it offers FSx Lustre, which is a big scale-out file system. NetApp very, very neatly sort of sits between those 2 and what we believe we address a very sizable amount of the very fast-growing file storage market on public cloud. What people obviously get is they get capabilities to things like Snapshots, our technologies that help people take very, very efficient pictures of an application for things like disaster recovery and backup or for things like DevTest. It enables an Amazon customer now anywhere around the world to connect to a NetApp server on-premise and to use our very efficient SnapMirror technology to move data between the 2. It exposes us to non-NetApp customers, who can use either our Cloud Sync technology or AWS' Data Sync technology to now connect Amazon's FSx for NetApp ONTAP to EMC or HP servers. Those customers that didn't have that same familiarity or that same capability in AWS that now they know and have confidence with ONTAP that they can migrate their applications. We do a lot of intelligence behind the scenes to help customers with optimization. FSx for ONTAP exposes intelligent tiering. So if files or blocks on the primary are not being consumed and haven't been consumed for a period of time, we intelligently move those cold blocks over into Amazon's S3 service while maintaining the integrity of the file system, bringing down people's costs and just exposing the high-performing file shares that are necessary on a day-to-day basis. We provide access to cross-region and cross-zone replication for various different DR configurations. We provide a full backup and restore service on Amazon's FSx, again, taking advantage of Amazon's very popular S3 service. And we then provide services like our Cloud Data Sense on the backups to check for things like GDPR, PCI issues or concerns that may cause risk to a particular customer. So customers sort of looking to deploy a workload or an application, basic file shares to enterprise apps, now to cloud native apps, well, we believe both Amazon and NetApp customers will benefit from that -- this sort of high level of data management, data services, all through this sort of enterprise-hardened ONTAP operating system.

Perfect. And then as the business scales, as I said earlier last year, organically, you grew triple digits in terms of revenue run rate. As the business scales, are you seeing a change in mix around new versus existing NetApp customers or the type of workloads, primary versus test dev or backup, as you scale and you mature in the cloud?

Oh, yes. I mean I think the first thing is we've given every single customer, who chose NetApp and ONTAP on-premise, that wonderful, I think, confidence that an investment in us, whether it continues to be on-premise or is in the cloud. We have essentially provided them with that symmetry and that sort of protection of their investment. And what's been great is our legacy competitors just haven't. If you look at them and compare them to us, at best, they're offering a sort of a self-managed service for disaster recovery, backup to the cloud. None of them have really jumped in and provided the same capabilities that we provide for primary. So we've seen growth in our business through the cloud offerings as our existing customers purchase more on-premise and connect their on-premise environments to the cloud. We see significant growth in customer acquisition as companies migrate the primary application from on-premise environments to the cloud. And then, of course, we're seeing a wonderful, I think, new customer, those companies that were born in the cloud, the applications that are now being built using microservice architectures, Kubernetes, AI, ML, DL. A lot of our customers at NetApp in my organization have never purchased on-premise ever. These are the ever-growing list of unicorns. The companies that sort of started with digital and have continued to grow and take advantage of public cloud services from 1 or more of the big 3 clouds. And increasingly, they're choosing NetApp to provide incremental services to their application teams, as they rapidly innovate using the sort of the capability in the cloud and the broad distribution of the public cloud.

To your point, one of the benefits of removing some of the friction in the cloud as customers can scale very quickly, and you've seen really impressive public cloud dollar-based net retention rates among your customers, 192% last quarter. Are you seeing -- how would you compare the scaling of capacity in the cloud versus what you see on-prem?

Well, so I can talk to the scaling on the cloud. I -- my background, as you so nicely pointed out, was really in applications. And now I'm living in the infrastructure, and data is a fantastic thing. And to be in the management of the data business is a great business, because people are just not deleting the data. The data sets are growing faster than they've ever grown before. And cloud, I think -- offers, I think, a combination of things. And I would tell you, Katy, one of the things that I'm most proud about is our customers basically get what we would call an elastic service from NetApp. And yes, it's great when it grows, but it's great in some cases when it shrinks. And that may sound a little counterproductive, but we have customers who use us at busy periods during the quarter. We have customers that have jobs that need to be completed in the media and entertainment business or in pharmaceuticals and genomics that burst into the cloud to use the capabilities of the public clouds, where they don't have those same services on-premise. And so we're able to offer a utility to these organizations that didn't exist before the public cloud, and NetApp can benefit from those. We had customers during a hurricane in Florida, who basically migrated their applications to us for the hurricane season and then migrated them back. They were able to use these wonderful elastic properties, and our customers can purchase our services on annual subscriptions, but they also purchase our services on a monthly pay-as-you-go model and that willingness to adopt a very sort of transparent pricing mechanism, a very transparent capacity or savings-based model, I think, gives customers the confidence to use us for a broader set of capability than they did before.

So how would you characterize the competitive landscape for public cloud services? Who do you see most often in deals? And how does your offering stack up against some of your other core storage competitors?

Yes, it's interesting. I'm often asked this. We never see the legacy competitors. Honestly, never. We don't -- and I never considered alongside an HPE, a Dell EMC, a Pure, Nutanix. We honestly never see those companies in my business in public cloud. The simple answer to the question is probably more often than anything, we are compared and contrasted to Object Storage or Block Storage. And file has been late to the cloud. The public clouds didn't have good file systems. And for us, we have now shown the public clouds that we can provide them with an enterprise-grade file system that brings a lot more of the enterprise applications over to them and faster than they could through refactoring. File has tremendous sort of speed capabilities, performance capabilities and latency capabilities that Object Storage does not. And it provides a richer set of capabilities to an application that a simple Block Storage service wouldn't. So it's an interesting question, Katy. And as I said, the old guys, they're just not in the deals. And we are, as I said, compared and contrasted to the other 2 storage types that reside on the public clouds, Object and Block.

So the other question I get asked often is as you scale file-based storage in the cloud and Amazon and Microsoft and Google see how successful of a business it is, why wouldn't they introduce their own cloud file storage offerings either through organic investment or through acquisitions? And why would it be compelling either to the cloud vendors to continue to work with NetApp or to customers to look at NetApp solution versus something that they would develop natively on their own?

Well, they all started. They all attempted to build file systems. And today, Microsoft has something called Azure Files, Google has Google Filestore. Amazon has the Elastic File system. And all 3 of them have since added ONTAP to their platforms. And the reason they choose ONTAP is we are the gold standard for file. We have now -- I think, we're coming up on our 30th anniversary as a company. And we've demonstrated leadership in the file -- in the file-based market throughout those 3 decades. We continue to out-innovate them. While they're big organizations, Katy, they have a lot to do. And what we've been able to demonstrate to them is we can do a sizable amount of the work for them, bring to them an enterprise-grade platform, innovated cloud speed and allow their teams to focus on other capabilities and technologies where they can differentiate. So I think the good news is over 4.5 years, we've been able to grab a bigger and bigger share of the file system market and outpace the public cloud offerings and capabilities and continue to grow our share as we continue to push ourselves into the public cloud consoles, and we become the preferred choice for that capability on 1 cloud. Now of course, more and more customers cannot and will not do business on 1 cloud. They will do business on multiple clouds. And what they like is they have the same performance, the same capabilities, the same services from NetApp on all 3 plans. And that gives them more and more confidence to use the public clouds across their organizations where they see fit. So I won't tell you it's easy, Katy. You have to work really hard. You have to be able to prove that you can differentiate and compete with them, and you have to show them that you can bring them business that they wouldn't be able to get themselves. And I would tell you that last Thursday was about the best validation a company could ever get. We were able to convince Microsoft. We were able to convince Google, and last Thursday, we announced the results of 2 years of hard work with Amazon. And Amazon, as you know, sort of invented the public cloud in 2006 and built a fantastic business, sort of that democratized innovation, and I think it's a testament to our innovation and hard work that we're able -- we've been able to partner with them now at such a unique and deep and embedded level that they haven't done before.

Now earlier this year, George talked about stepping up investments in the cloud business, essentially at the request of your cloud partners that have seen how well the business is doing. Can you talk about what are those areas of investment? What are the strategic focus areas to accelerate areas of growth as it relates to go-to-market or product innovation or even further expanding your partnerships?

Well, I think like as we demonstrated last Thursday, we've made a huge investment to bring on Amazon as a first-party company for us. That was a very sizable and continued piece of investment that we made. We continue to acquire, and we continue to scale our business proportionately with our growth. My organization continues to grow and scale all over the world as the business does. I think as well as FSx for NetApp ONTAP, the big thing that we chose to do this fiscal year was to really empower our entire global go-to-market organization to be as good with cloud sales as they were with traditional storage sales. Prior to that, we basically partnered with the big 3 public clouds, and we had a specialist sales organization that took our products to market. But now we've got such critical mass and such, I think, good repeatable solutions and use cases and playbooks, it was very obvious, I think, to George, to really change the selling organization to take advantage of the size, the scale, the ecosystem of partners. We've opened all of that up now to my public cloud services. And so we've gone from a few hundred sellers now to thousands of sellers, as well as building the product for Amazon, we get the entire Amazon sales force now quoted and selling FSx for NetApp ONTAP. We'll continue to be acquisitive. We like a number of different scenarios and market opportunities. And we feel now that we have a very good sort of dimensions to our business, and we know where the pieces are that we think we can build and we feel very comfortable that we know where the pieces are that we can acquire. We're very, very confident in our commitment to the $1 billion, and we continue to invest, I think, wisely, and as I think was demonstrated in the last quarterly earnings with very, very good gross margins. And we believe that we can actually not just sort of accelerate the business, but we can also accelerate the gross margins. And we feel, in the public cloud, we can achieve SaaS-like gross margins somewhere in the range of 75% to 80%.

You are speaking of sales force changes, are salespeople incented to sell cloud in that they earn a higher commission if they're selling a solution that includes some element of cloud? Or is it just more so about adding resources to -- in sales capacity?

Every single salesperson in NetApp carries a cloud quota. They carry that cloud quota as a peer of their traditional on-premise quota. And nobody at NetApp can get into these sort of sales accelerators unless they've made their on-premise quota and their cloud quota. What was great actually, Katy, was the field asked for it. The field really felt now that we had demonstrated enough success, enough referenceability and enough use cases that they themselves really wanted to add cloud to their particular compensation plans, to their customer conversations, but yes, 100% of our field carries a cloud quota.

Okay. And you mentioned that the new Amazon solution was available as of last Thursday. When would you expect for that to have meaningful contribution to the revenue run rate for public cloud services?

I'm not going to give any particular guide. I think we've had a really good launch. I think we were covered really, really well by the industry analysts. We received very favorable reports. We had been testing with a number of customers, who were giving us very positive feedback to the service. And we knew that there was a very sizable backlog of interest in our technology, but vendors that wanted it to be sold, supported, build and run as a native Amazon service, not a marketplace service. So we're very, very excited about the early days, the current feedback we have. Really, really good customer activity all over the world now. It's great to see how -- just how easy it is for every Amazon customer to now consume ONTAP. There's no separate terms and conditions. There's no separate negotiation. Anybody that has an AWS log-in and password can now consume ONTAP in all the regions of the world.

You mentioned $1 billion-plus revenue run rate goal by the end of fiscal '25. You also have a goal of $450 million to $500 million by the end of this fiscal year. What do you -- what are some of the biggest risks to achieving those targets? And do those revenue numbers require additional M&A?

Well, so the first thing is we're targeting $1 billion in FY '25, not by the end of FY '25. I think you're going to see us innovate organically and inorganically, and you should expect some M&A. We're going to balance, I think, sales team composition and compensation. So our teams work with customers to deliver the right mix of cloud and on-premise, as many, if not most or all have these hybrid worlds. We've expanded the customer base. We've added references, workload certifications, and we're getting into more and more deals. So you can, I think, have confidence that our commitment to that $1 billion in FY '25 is still very much our commitment to our shareholders and to our investors. And we will basically continue to grow organically, and you should expect some M&A to come in through the mix. As I said, Katy, we have a very, very good and very detailed strategy, much like a sort of a jigsaw puzzle. I know where the pieces are that I need and I know where to get them. The question I have really on a daily basis with George and the rest of the leadership team is whether we approach those pieces ourselves or whether we acquire. And I think our acquisitions have proven to be very successful. Spot really extended NetApp from storage in the cloud to compute in the cloud. And we continue to make reference of Spot's success in every one of our most recent quarterly earnings calls.

You mentioned the goal of SaaS-like margins in the cloud business, 75% to 80%. That compares to NetApp's overall gross margin in the high 60s. What are some of the levers that you can pull to continue expanding margins?

Well, I think the one thing is funny because I'm showing my age here, but I always remember NetApp as a software company. And the idea of a network appliance was really, I think, the uniqueness of the company's ability to invest in an operating system, in software, and to use commodity hardware. And inside of NetApp, we are largely software engineers. We use our hardware in Microsoft and in some parts of Google to essentially offer very, very unique performance characteristics to a set of different applications, but our margins will increase as software increases in the mix. So it's sort of -- it's about hyperscale and once you reach critical mass, as we are now in sort of 36, 37 different Azure regions, where we can complement our hardware investment with a growing software investment. And so you can think about us as being sort of nearly what we would say, fully seeded in the partner regions. The Amazon relationship is a software relationship. We take advantage of Amazon's hardware, its compute network and storage, and we provide ONTAP as a service to them. So think of us really as increasing the software mix, which, as you all know, significantly improves upon the overall gross margin of the business. So the 75% to 80% is something we feel very comfortable with and something that we can get to, we believe, quite quickly.

Okay. And I imagine that as that software mix increases, particularly with the extended Amazon relationship that you would expect to see gross margin scaling through even this fiscal year in the near term?

Yes. I mean I think as we acquire more customers in more regions using more technology, we absolutely believe that we can accelerate our top line and accordingly our gross margin.

And then just to wrap up the financial part of the discussion. We talked about the revenue goals, the gross margin goals. There's been less discussion around what the OpEx model looks like relative to NetApp's broader business. How should investors think about the operating expenses that are associated with the public cloud services business?

Yes. I would say up front we are not segmenting down to that level. I think it was really good of the company to show the different gross margins, the different top lines. I think that helps investors significantly in that they now understand that the public cloud business is a real business. It's a business that is accretive to gross margin. It's a very, very rich, recurring revenue business model with high net retention and organic growth and successful acquisitions that have impacted our growth even further. We get a tremendous amount of OpEx leverage from services that are shared across our public cloud and hybrid cloud segments. If you compare us to, again, the legacy competitors, you can count the number of different storage-based operating systems they have. At NetApp, ONTAP is our platform, and the same ONTAP that I release to Amazon, to Google and to Microsoft, it's exactly the same ONTAP that's released to on-premise. The engineering investment, the performance, scalability, reliability investment that the ONTAP engineering team provide to our on-premise customers, I provide to our cloud customers. The rapid rate of release that we can achieve in a public cloud through a fully managed service. In turn, that is our on-premise customers. So a lot of leverage comes from a sort of a central team of people, who engineer for both environments.

Perfect. This was -- this is really helpful to give investors a foundation of the business and a forward look on some of the work that you're planning to do and just announced. I know you have this fast-growing business to go run, including a meeting that you need to get to right now. So we'll wrap it up there, but I want to thank Anthony for his time. I want to thank everyone for listening in. Please don't hesitate to reach out to myself or to NetApp IR if you have any follow-up questions. And have a great day, everyone. Thank you.

Thanks, Katy.