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

Okay. Yes. I think we're going to get going here. Good morning, everyone. Welcome back to Day 3 of the Goldman Sachs Technology Conference. I am very pleased to have with me, Kris Newton, who's the VP of IR from NetApp. So Kris, thank you so much for coming.

Thanks for having me. I know many of you were expecting Mike. Unfortunately, he was unable to make it today.

Great. And I'm Rod Hall, and I'm the hardware analyst at Goldman Sachs Infrastructure Technology and Consumer Systems. So welcome. I think, Kris, you had a couple of things you wanted to say, and then we'll get going with questions.

I'll just got to go through our safe harbor really quickly. 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 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 any forward statement for any reason.

Great. Okay. With that exciting statement done, I guess I'll kick off with the demand question we've been asking every company here, what's going on with demand? You had reiterated in your fiscal '23 revenue guidance of 6% to 8% growth in your last earnings call, so for NetApp. And you've kind of called out that you haven't seen any demand impacts. Others in the enterprise IT industry have called things out, Dell, for example, and so on. So I'm just curious if you could maybe give us an update, what are you thinking about demand here, enterprise IT spending late this year and as we head into next year.

Sure. So certainly, some of the big full-stack players did talk about some weakness in parts of their business. But if you parse back what they had to say, storage pretty universally seems to be hanging in there, and that's consistent with what we have seen. When we talk to customers, we see them continuing to invest in data-driven digital transformations and cloud initiatives. They're driving forward with those things where NetApp has strength, and we believe that will continue to support our business. We have some companies that are looking to delay some projects. Others are accelerating projects, but we haven't seen anything that I would call thematic across our customer base.

Great. Okay. We noticed Americas Commercial revenue growth decelerated a little bit in the last couple of quarters. I think in the earnings call, you had indicated that was supply related. And I was hoping maybe you could double-click on the supply issues there and why that particular part of the business has been affected.

Sure. So a lot of our Americas Commercial business is done by some of our really large global accounts that happened to be headquartered here in the U.S. They tend to buy a lot of AFA, and that's where we've seen some of the supply constraints having greater impact on us. So I think that had some impact on them. Also, they can be a little bit lumpy as they're doing big projects and that can sometimes create a little head or tailwind.

Right. Okay. For those may be not as familiar with the story, one of the positive attributes of NetApp's story is the cloud push. And certainly, that I think is the main reason -- the main growth driver as we look forward into the future. But I wonder if you could kind of take us through the development of the public cloud business and maybe overview the offerings now as they stand because they're kind of multiplied over time. So...

Yes. They've really evolved over time. So about 8 years ago, we introduced our first cloud-based offering in marketplace. We followed that up 5 years ago with a fully managed service sold and delivered by the -- by one of the cloud providers. So if I were to describe the journey of our cloud push, we started by creating a rock-solid storage service available in marketplace as well as sold by -- as a first-party service, all the leading cloud providers. We've added to that a set of data services, like security and compliance tools, that help customers feel more confident in migrating to the cloud and utilizing NetApp services in the cloud. Then we started down a path of compute optimization, both for virtual machines and Kubernetes-based applications as well as performance monitoring for stateless applications. And then most recently, with the acquisition of Instaclustr, we've moved into the application deployment space. That moves NetApp earlier in the purchase cycle as we help customers deal with some of the challenges associated with open-source databases.

So is there any way you would characterize the cloud strategy like any way that investors could get their heads around all these different things that are going on, how NetApp sees its future in cloud services?

Sure. I think NetApp has been an infrastructure player, and we largely will kind of stay in that infrastructure delivery and optimization space. I think there are 2 primary themes. If you look at what we're doing in the cloud, one is all around optimizing the use of cloud, right? So our storage services and our cloud ops portfolio have a lot of optimization capabilities, making it more cost effective for customers to utilize the cloud. We also have a lot of security features and monitoring tools that help customers feel more comfortable in using the cloud. So it really is the theme of more cloud for less cost with greater confidence. And the more that we can get customers to utilize the cloud, we believe it will benefit NetApp not only in the cloud, but it has a follow-on effect to the on-premises business as well.

Yes. You've -- I think you've been early, if not first, amongst the hardware-oriented companies that we cover or hardware/software stack companies would be probably a way that you'd like to hear it more. But amongst those companies, NetApp has been very early to make this move. And since then, we've seen lot of other competitors say, "We're cloud, too, and now we do this." And I wonder if you could somehow differentiate what you see other storage players saying about their cloud services and what they're doing in the cloud from what NetApp is doing because I think that would also help people to kind of understand the differences.

Sure. Yes. And so remembering that cloud storage is only a portion of what we're doing in the cloud. But for that portion, we did give an early jump on it. We saw a huge gap in the cloud where enterprises especially, but also a lot of cloud-native companies, wanted a high-performance, really robust file system in the cloud. right? Cloud is great at object. It's great at block. There weren't really any gaps there. But delivering a high-performance, robust file system was a big gap. It inhibited a lot of enterprises from moving workloads to the cloud. And also, we saw inhibited a number of cloud-native companies who are looking to do some big AI and analytics projects in the cloud. So NetApp being known for having the best file system for the past 30 years really had a great opportunity to move into the cloud. And so when we started putting ONTAP, our flagship operating system, in the marketplace of cloud providers, we saw great customer adoption. I think that got noticed by some of the cloud providers themselves who were struggling with enterprise accounts who wanted to shift certain workloads to the cloud but were unable to find a solution that was performant enough for the application. And so that started our journey initially with Microsoft, with Azure NetApp files, which is a fully managed service running on ONTAP sold by and delivered by and fully integrated into the Microsoft cloud console. Most recently, we announced a similar relationship with AWS, for FSx, for NetApp ONTAP. And we have a NetApp sold fully managed service available in Google Cloud as well. When I look at what the other players are doing, it seems like they're doing one of two things. There's a group of companies to say, cloud isn't a destination, it's a state of mind. And if you give us a couple of months, we could put some hardware in your data center, and it will be just like the cloud, which doesn't seem very cloud-like. And then you've got some others who have block services who are porting their block services into the marketplaces of some of the cloud providers. That really doesn't give customers anything beyond what they could have gotten from the cloud-native services. So I think that market is really for their existing installed base who want to maybe have a cloud backup, use cloud as a DR service but not really run primary workloads in the cloud. And the unique first-party relationships we have with Azure and AWS have been very labor intensive on both sides to do that full integration. And so I think as long as we can continue to perform, it does create a bit of a barrier of entry to others.

Great, okay. So let's talk about targets a little bit. In spite of our cautious views of enterprise IT spending, we've been pretty optimistic about your ARR. We've actually been ahead of consensus on that. And you actually have increased that target now to $2 billion by fiscal year '26. So the ARR growth...

Actually, exiting '26.

Exiting. Yes.

It's a big difference.

So -- and that was back in March. So I wonder if you could talk about some of the milestones that you're looking at that investors maybe should be tracking as you progress toward that goal?

Sure. So as you said, in our most recent Investor Day in March, we did update our cloud ARR guide. While we didn't give the -- we used to have a $1 billion target in FY '24. We didn't update that, but you can see based on the trajectory, the midpoint of our guidance for exiting this year is $800 million. So it feels like that $1 billion is pulled in a bit. We -- if you look at kind of our guide, cloud should be about 10% of total revenue exiting this year. We've got really strong dollar-based net retention. We think that will continue to come down towards the high end of industry norms, so 120% to 140%. The most recent quarter, we were 151% driven more by the growth of the base of the comparison rather than a slowing of customer usage. And we have a great opportunity to cross-sell from storage services into cloud ops, from cloud ops to storage services. One of the great things about storage is no one ever deletes anything, even rarely in the cloud. So that tends to have a natural growth along with it. And so I think there's just a good opportunity for us to continue to push forward. We've got relatively low penetration of our traditional customer base. And we look at cloud services as a new customer acquisition mode. It gives us access to customer types that we wouldn't normally reach with our on-premises solutions. So things like SMB where it wasn't economically viable for them to buy a giant storage array for on-prem as well as cloud-native companies who just don't have anything on-prem.

So you said something there, I think it's interesting. You and I have talked about storage -- on-prem storage, people never delete anything. And that's easy because it doesn't really cost you anything. So at one point, we tried to build an installed base model in storage, and it failed because there are all these arrays sitting in closets and things that people never turn off. But that is -- because it does the cost, you can keep that going, except for maybe a little bit of electricity. In the cloud, though, it seems like -- you said you don't see people deleting things there either. Do you think that will persist as a trend?

I mean, it's hard to say, right? There are certain data types that you can't delete, right, because of regulations. I've been in the industry for way too long. And I remember people used to make a push of, "Hey, we've got this great tool that's going to go through your storage and like find old files and like migrate them off to tape, and then you'll -- you don't need them ever." And they just never took off. It sounded like a great economic idea, but people don't get rid of things. So we do see some interesting trends as people are migrating workloads to the cloud. So with SAP workloads specifically, you'll see a customer essentially stand up a full replica of their SAP on-premises environment, run it for a period of time and then blow it up and then, like piece by piece, recreate it and build it up over the course of a year or so. That's really the only time I've seen notable deletion in the cloud. Some test and dev stuff.

Yes. It's very interesting.

Also hard to figure out what you've got in the cloud, right? And it is harder than it should be to turn some of that stuff off. I know you and I have talked about some of your experiences. So some of our tools do make it easier for customers to understand what they've got. For example, with CloudCheckr and Spot, where Spot lowers your compute costs with customers who are paying the lowest possible dollar for compute. They turned on CloudCheckr and realized that they had a whole bunch of test and dev environments that should have been turned off but weren't, and we're still running that they were paying for. So...

But since you mentioned it, you talked about some issues with churn and expansion rates in the cloud ops portfolio a couple of quarters ago. Could you talk a little bit about the efforts to get that back on track? And then how are things going with that now, particularly with regards to churn and some of the expansion rates?

Sure. So what we saw in Q4 was some churn, some lower-than-expected expansion, specifically in the cloud ops portfolio, which makes up about 40% of our cloud ARR. In the case of Spot, we had some sales turnover that happened earlier in FY '22. By our Q4 call, we had largely refreshed that entire small overlay sales team. We had hired a new leader in Q3. And so we had solved the problem before it really manifested itself in slightly lower-than-expected Spot results for us. And Spot, based on our Q1 numbers, looks to largely be back on track. One data point doesn't make victory. So we're continuing to watch it, but Spot feels pretty good. With churn, that was specific to our Cloud Insights product, which is an internally developed solution that we had been selling as an on-premises software pack, pretty much to Fortune 50 companies, and that was the market opportunity for that product. It was really for very large enterprises. The cloud version is a lot more lightweight. And so the customer set is a lot larger. It is sold by our traditional sales team, and I think they were maybe overselling it a little bit too much like they have been selling the on-premises bit. So we saw customers when it came -- it's a term license. So when it came time for renewal, customers didn't renew at the same level. Some were pausing to kind of figure it out. And I think a combination of -- they didn't move as much to the cloud as they thought, and the product had probably been a bit oversold. Q4 was sort of the biggest hurdle that we had to face. And once we normalize that, we don't expect any other big churn hurdles to overcome. And we'll continue to refine that go-to-market motion.

Yes, I wanted to -- that was the last thing I wanted to ask you, go-to-market for these cloud services seems like quite a bit different than the classic on-prem storage stuff. So you talked a little bit about what you're doing there with go-to-market and how it's different and...

Sure. Yes. It's a bit of -- a little bit of everything. Some stuff is the same, right? So our enterprise sales team who's been selling to enterprise accounts, who are all under some sort of cloud mandate, sells Cloud Insights, sells the customer-managed version of Cloud Volumes. And that's moving well. We have a small overlay team who really goes in and sells some of the compute optimization services because they tend to be different buyers, more DevOps teams. And then probably, I think the least understood bit is Microsoft and AWS are selling service -- our services as if it were their own. The best analogy I can give is like they're OEM-ing the product, right? So their sales teams are incented to sell it the same way they would be incented to sell something that was created at one of their companies. And with Google Cloud, while NetApp is still responsible for the sale of the fully managed service, it can be used to draw down the enterprise agreements that they have. So sales teams do see some benefit, if not commission, but they do see benefit in terms of drawing down the agreement so that they can go back next year and renew at a higher level.

Do the -- one thing I don't know if I've ever asked you is how the economics of that channel, AWS and Azure, I think that's a really interesting point. That sounds like a very leverage-able channel, but do they -- how much does it cost? Is it expensive? Or is it cheap?

Yes. Well, their sales teams are bigger than all of NetApp. So it depends, right? So in Azure, we are deploying systems in the Azure data center. And we -- Azure sells the service. We receive money back from Azure for the software and the underlying infrastructure. There are performance price points, SLAs, and that's all based on our agreement with Azure. In the AWS case, it's a software version. So it's ONTAP running on the native AWS infrastructure. AWS sells the product to customers. They remit a portion back to us, but it's only the software portion because they are supplying the underlying infrastructure.

So the -- all the infrastructure costs, sales costs, all that kind of encapsulated in whatever that deal is. So it's kind of a flat -- whatever it comes back, comes back sort of a thing.

Yes.

Okay. And then it's up to them to figure out comp and all...

Yes, they're paying their...

Incentives and all that sort of thing.

Yes. And we have teams that work really closely with them because as you could expect, they're not storage experts. So we have teams that can go in and help customers figure out what the right deployment is, what the right service levels are, and we partner really tightly with them. So we're doing a lot of go-to-market -- joint go-to-market initiatives.

Okay. Finishing out cloud and then we'll get on to the AFAs and some of the on-prem stuff. What are you investing in? Or what areas of this cloud opportunity do you think have the most potential for further development?

Yes. So I think it's on both sides of what we're doing in the cloud. So with the cloud storage services, ONTAP is really robust. I don't think there's a lot of -- there's always ongoing incremental investment in features and functionality that is just normal run rate. Incremental to that, I think we're continuing to look at additional data services that would surround that core storage offering. So today, we have a product called Data Sense, that's a compliance and privacy tool that will look at your cloud infrastructure and let you know if you've got personal information that's outside of where it should be. If you've got data that's outside of a geo fence, what -- make sure you're GDPR compliant or California privacy compliant. We've got a security tool that will not only notify you if there's unusual activity, right? And this is because we've got such deep integration with ONTAP to let you know that there's unusual activity, either people are writing information, deleting information, copying information, accessing somebody else's files that they shouldn't -- that they don't normally access and allow you to stop that immediately. So a lot of data services that makes storage more valuable. And then in the cloud ops side, our road map for cloud ops has really been driven by the ongoing maturity of kind of DevOps as an IT, whatever function. And we see kind of corporate IT trying to get some control over DevOps and not let it be as free flowing as it used to be. And as a lot of those DevOps services are moving into corporate IT, they're looking for a singular tool set that can help them. And so as that continues to evolve, we'll see what they need and look for areas of opportunity there.

Great. Okay. Let's talk a little bit about the on-prem business, the hardware business, hardware software.

All right. Software, 80% of our engineers are software. There's not a lot of specialty in hardware engineering. We're not Seagate.

Azure wouldn't have bought the ONTAP stack if it wasn't a good software stack, right? Let's talk a little bit though about the all-flash arrays is where the action is in on-prem. Talk to us about your -- NetApp's competitive position in that? What do you think differentiates NetApp products from other offers out in the market?

Sure. So again, it comes back to the software. We run ONTAP on our systems that we sell for on-prem. It's got all the bells and whistles, unified storage, great data management functionality, 30 years of enterprise corner case, robust testing, cloud connectivity for customers who want a seamless path to the cloud, efficiency features. So kind of everything that you would expect, we can help customers really create a singular logical pool of storage out of whatever they need, be it high performance flash, lower performance capacity-oriented flash, hybrid arrays and disk, all managed under a singular architecture, and I think that has a lot of value for customers.

Right. AFA penetration, let's talk about that. So you called out 32% of your current installed base systems are all flash. And we've been -- we track this particular metric ourselves pretty closely. It just keeps grinding higher. Every quarter, it's another percent, another percent. And I guess the question I ask myself is how high can it go? So I wonder if you could talk about the headroom there.

Yes. So it's -- that percentage is based on the number of systems under active support contracts, and that measures in the hundreds of thousands, which is why that number percent doesn't change very much, a huge denominator. We've said that, over time, in the fullness of time, it could be around 70%. There are still some workloads that make sense on disk. If you're trying to retrieve a singular large file, disk is fine for that. Sequential reads and rights are fine for disk. But I think as the price of flash comes down, as newer technologies like QLC with a lower price point are introduced, all that helps expand the types of workloads that make sense for customers to use flash and ultimately will drive that percent up.

How -- you've been around the storage industry a long time, how long did it take? Tape is still out there, I guess, but it's pretty -- most of it's gone? Or what proportion of storage is tape now?

I couldn't tell you what proportion it is, but I can tell you that nothing in the data center ever dies, right? Like cases are still out there, optical platters are still out there, mainframes still exist. I'm sure some customer somewhere has a punch card.

What's amazing to me is that, that percentage grows at all, considering that it just keeps growing. Okay. So let's talk about selling systems to cloud players. You called out a big deal last quarter, which we thought was an incremental positive. Pure has been selling to Meta and is talking about more opportunity there. Just to lay the backdrop to this, Arista networks and the networking side of things continues to sell proprietary technology and the cloud has done really well at that. Storage seems like a natural place for this to go. We believe it doesn't make complete sense for the cloud players to keep spending on R&D. By the way, a little history, telecom companies did all of their own technology at the turn of the century in 1900. And that didn't -- they decided, this doesn't make any sense. Nobody else has the technology. And so then they outsource the R&D to companies that specialize in particular areas. I'm just curious what you think the opportunity for NetApp in selling your technologies back into the hyperscalers is? And what that pipeline looks like? Are you having people coming in and having more conversations on this?

So we've long sold to hyperscalers for their internal IT, right, the big hyperscalers. For some of the -- I hate to say Tier 2, but the other cloud providers out there, we sell to support their infrastructure. I'm willing to bet that most of -- or a large number of the apps on your phone and certainly on your kids' phones are running on NetApp. And those companies don't want to be public, and so we don't say their names. But it's always been a big business for us selling into customers who deliver services through the cloud. And now we're doing things like augmenting an on-premises AI workload for a hyperscaler with our cloud services. So there's huge opportunity there, but it's also been a place where we've been selling for some time. And I think we never chose to break it out because it was always -- is it the cloud service you're selling for? Or is it their internal IT? And do you say that's all cloud just because they happen to have a cloud service? So does that mean if you sell to someone purely for their own internal IT, like if you were selling to the AI group of a hyperscaler for their own AI development, is that really a cloud service?

Right. Right. Yes, there's a lot of gray area in there.

Architecture.

Correct. And certainly, the -- their own business part of it is just enterprise IT, the way it's always been. But it does seem like, particularly AI workloads, there is an opportunity to expand some of this AFA sales into the hyperscale people.

For sure. And I mean, for enterprises, we've sold -- we have ONTAP AI, which is the reference architecture done in partnership with NVIDIA, which is an on-premises sell, but we've also been doing stuff with them and others in the cloud. So AI is a great opportunity, lots of storage, lots of high-performance storage requirements.

Right, right. I want to -- we're down to just under 10 minutes. I want to check and see if anybody in the audience has any questions. So anybody in the audience have a question for Kris? Okay. If you think of one, raise your hand and I'll -- we'll have a mic brought to you. So let's talk a little bit about NAND pricing and maybe we'll dig into the supply chain a little, too, kind of what's going on there. So flash prices have been coming down given lower demand from consumer electronics. So creating a little bit of supply there. If things continue to weaken in consumer electronics, we were talking before this, nobody knows whether it will or won't, but I sort of suspect it will but with low levels of confidence. Let's say it does. What are your thoughts on whether those lower NAND prices create some either -- do they create pressure on your ASPs? Or do they create a change in your pricing approach as we look into next year? How do those dynamics play out if NAND does get cheaper?

So our philosophy has always been to pass on commodity price changes to our customers, right? Prices go up, we'll pass that on. Prices tend to go down, and so we usually pass that on. There's always some timing difference. So you'll see it in gross margin. It really doesn't have an impact on the revenue line. But NAND in the supply crunch has not been the thing that's been a problem, right? Storage media has been plentiful. It's been some of the more kind of analog IC components that have been the challenge.

Right. We'll dig into the supply limitation turn in a sec. The NAND -- one thing I've noticed historically or at least I learned a few -- several years ago, I guess, now covering storages. It's kind of like oil price, as the price goes up, the -- your price pass-through tends to be a little behind the increase. But as it goes down, the same is true. So you tend to see a little bit of a margin benefit a lot of times. I guess we should anticipate the same sort of thing as...

Yes. I think in the second half, we did raise our inventory levels of SSDs in Q4 to guard against any negative outfall from the KYOSHA contamination issue. And so we kind of need to burn through that inventory, but I doubt that will take terribly long. And so we think we'll see the benefit in the back half of that NAND price decrease.

Another question I've been meaning to ask you, SSDs. So Pure builds their own modules. Is there ever a day that makes sense to move to more of -- NetApp certainly has a scale to do that if you wanted to, but does that ever make sense?

So history has shown that it doesn't make sense in the long term, right? Your example of telecoms, it's not their specialty. There were people who were far more specialized in advancing that type of technology. In the history of storage, you'll remember, a company called BlueArc. Their whole thing was we build some of our own componentry. And they couldn't keep up with the curves, the performance curves that other companies who were specializing in that put out. And so we think it makes sense to ride the commodity curves. You might get an initial first of benefit, but can you invest at the same pace as a company like Samsung or someone else who's entirely focused on that layer of infrastructure? And then, again, we don't do a lot of hardware engineering. So it would be a little bit outside of our norm.

Do you think customers have a preference for how they buy the flash?

I think if you could give them a high-performance, cost-effective performance powered by hamsters, customers would be okay with that.

Right. Okay. Please don't start investing in hamster engineering, no. Okay. So let's talk about supply. You started down that road a little bit. It's been unprecedented. I've been doing this for over 20 years, never seen anything even remotely like this. It's hard to track all the changes, and of course, things keep popping up that we don't expect. NetApp hasn't been too affected by this, we should say. It's relatively speaking. I know you have been, but there are other companies that have been much worse impacted, not managed through it as well. I wonder if you could talk a little bit about what you're seeing out there in supply today? And what long-term impacts all of this has on NetApp's business, if it has any?

So as I said earlier, the main area of challenge is around analog components. And it's been a combination of low investment in that space, shutdowns and lockdowns in China. We all learned how many people are dependent on those components. We have done a good job at managing, but it has created a headwind to revenue. We do have elevated levels of backlog. I think in our Q3 call, we called out that we're paying about $60 million to $70 million a quarter in premium. So an expedite fee that -- to be able to stay in line, to get the order that's already been committed to you, which is a huge hit to our product gross margin specifically. That has stabilized, so it hasn't continued to go up, but it hasn't come down yet. I don't think the situation will resolve itself in our current fiscal year, but we do expect it will start to get better slowly but it's going to take some time. And it is a bit of a Whac-A-Mole situation. It's never like the same. You chase after a singular component. We're in the open market buying a lot of stuff, and then it turns out that it's something else. Internally, we've looked at reengineering our systems to be less dependent on those types of components to create a more modular architecture. So it's more like a LEGO system rather than like an -- there was a trend for a while to integrate everything on the motherboard. Now it's much more modular. So we're working through all of that, but that does tend to be a long pole in the tent. It will benefit us in the future. But right now, we just have to manage through it.

Just a lot more future sourcing resiliency in. But yes, right now, not a lot of impact.

Right, right. And we have gotten better internally at being more fungible with the pieces we have, but still we're beholden to the proverbial golden scroll.

Right. So you generate -- NetApp generates about $1 billion -- over $1 billion in free cash flow every year. At the Analyst Day, you talked about dedicating about 30% to 40% of free cash flow to public cloud acquisitions. And then more recently, you've indicated you might pause on M&A given the macro and all the uncertainty and so on. Could you just give a little bit of an update on how you're thinking about that right here today?

Yes. So we said that we would pause on doing cloud ops M&A for the first half of FY '23 while we focused on integration, right? We have that hiccup coming out at the end of '22, realized that we needed to really focus on integration. Instaclustr closed in Q1. We wanted to make sure that, that was successful. And so that was really our focus. And to underscore our commitment to that pause, we said we would return 100% of free cash flow to shareholders in FY '23. We didn't -- we accelerated the buybacks in Q1. We did about 350 million in buybacks over the course of this year. We think we'll bring share count down 2% to 3%. So we still have plenty of cash on the balance sheet if we see that there is an acquisition in the second half that we want to go get, we've got ample cash reserves to do that. And that the model that we laid out at our Investor Day remains unchanged, 30% to 40% over the course of any year or period in acquisitions to round out our cloud services. And then the remainder going back to shareholders in the form of dividend and buybacks largely to offset dilution.

Great. Okay. So let's -- I guess, let's finish out with thoughts on recession. But the way I want to ask this is not a macro question. I know neither one of us are macroeconomists, although we're all amateur macroeconomists now. But I wonder if you could talk a little bit about NetApp's, what planning assumptions NetApp is making or how is NetApp thinking about running its business in the context of all this uncertainty.

Yes. So we still see good demand signals from our customers. We're having good conversations with them about their big initiatives. But at the same time, we can't be blind to the headlines that everyone is seeing. So as we said on our Q1 call, we'll continue to invest in areas that we believe will drive growth, R&D, cloud, sales capacity but look to moderate our spending in other places, just so that we can be agile for whatever the future holds.

Great. Okay. Well, we're out of time. So that's a good place to finish it. Thanks a lot, Kris. Appreciate you coming.

Thank you.

Thanks, everyone.