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

So good morning, everyone. Again, thank you for joining the UBS Global TMT Conference here in New York. My name is David Vogt. I'm the enterprise hardware and networking analyst, and we're excited to have NetApp with us today. Mike Berry, [indiscernible]. Welcome, Mike.

Thank you, David. Thank you for having us.

And before we get started, you can ask quite the [Indiscernible] questions. NetApp has asked me to read the following statement. So today's discussion may include forward-looking statements regarding NetApp's future performance that are subject to risks and uncertainties. Actual results may differ materially from the statements made today for a variety of reasons, described in NetApp's most recent 10-K and 10-K filed with the SEC and available on their website at netapp.com. NetApp disclaims any obligation to update information in any forward-looking statements for any reason. And with that out of the way...

Well, you have a second job waiting for you.

I do, too. This is a very manageable one. And before we get started actually, if you want, we're taking questions from the audience. There's a QR code in front of you. You can submit it anonymously if you [indiscernible] we can ask a question. Yes, I have a second job, I think, lined up as a conference call operator.

So maybe before we jump into the bigger picture of kind of what NetApp is doing and what you're seeing, I just wanted to start with the most recent quarter, right? So I think there's a lot of evidence proving out there in the marketplace that there is definitely signs of slowing economic growth. Enterprise companies are trying to do a little bit more with less. And you guys talked about it on your call. But I think it's helpful for people that might have missed your call, just kind of how you frame the impact -- or the impacts that you're seeing by different category, whether it's macro, FX NRR, maybe you could start there, and then we'll move on into the details.

Sure. So again, thanks for having us. Thrilled to be here. So yes, in Q2, we looked at Q2 as a really solid quarter in a tough environment. We'll talk about the guidance in a second. We set 5 record Q2 records for billings revenue and [indiscernible] as well. So it was a good quarter in a very tough environment. We'll talk about cloud in a second. During this time, we certainly focused [indiscernible] lot on making sure that we're driving operating margins, EPS. We also talked this in the quarter about increasing our share buyback, just to make sure that we're supporting the shareholders as well. And then -- and I talk about it on every call, we love cash, and cash is a big one to us. As we went through the quarter, and we'll talk about kind of the overall environment, we saw especially our larger customers started to take a little bit of a step back in terms of pace, either lowering size of deals, pushing them out or taking larger projects and breaking them into separate components, which we saw mostly. We talked about it. We have [Indiscernible] customers, especially in the high-tech area, and obviously we've all seen what's going on in Silicon Valley in terms of some of those layoffs and other things. The service providers vertical has been good as well. So those 2 both performed very well last year. And then everyone has, obviously, taken a look at all the unfortunate events going on in Ukraine and how it affects Europe. With all of that, we said okay, let's -- we'll take a step back. We lowered the second half outlook largely because of that. And I know we'll talk about cloud in more detail. Certainly, we still feel really good about that portfolio. Cloud is an enduring trend that's going to continue. We'll talk about some of those things that we bumped into in Q2. But that's I'd say largely, as we looked at the quarter, good solid quarter in a tough environment. And we did build some buffer hopefully into the second half.

Great. And we've heard from companies that have slightly different sort of outlooks and backlogs, some companies that have backlog that probably stand out for 6 quarters, but you probably have visibility for a couple of quarters based on your order rates and backlog. How do you think of the storage industry and NetApp specifically looks when we get back to a normalized supply chain and demand environment? Are we a book-to-ship or book-and-ship business again, and so we're going to operate in that sort of framework that we've operated in the past and putting aside the cloud business for a second, something on the hybrid cloud side? And are we getting close to that point where, yes, the economy's a little bit of a headwind right now. But for NetApp, specifically, you're back to a more normal cadence in terms of like your customer relationships, conversations and revenue recognition.

Yes. So great question. I think every company is a little bit different in terms of how much they have, call it, in backlog. We saw elevated backlog almost entirely due to the supply chain situation where we just were not able to produce enough to ship. So as we said, going into Q1 or going into Q2 out of Q1, elevated backlog. Now with the supply chain situation, hopefully, continuing to get better, we said, hey, coming out of Q2 as much more seasonally the average that we see, we'll always have backlog because there are deals that get booked either at the end of the quarter, we can't deliver. I think other companies, the way they do manufacturing may be a little bit differently. Different, bigger backlog, some may have left because they're able to produce. For us, it was obviously a headwind around cash flow as well just because of collections. And to your point on rev rec, we don't recognize that until we ship it. So if it's backlog, it's actually sitting in backlog. It's not even on the balance sheet because we haven't shipped it yet. It's not in deferred until we ship.

So can you help us maybe understand when you talked about the second half of this year, you feel like you've kind of got a handle on demand, supply, the macro. Does the backlog factor into -- what backlog you have, does that factor into your confidence, your comfort level on the second half of this year?

So as we said, the backlog, again, seasonally average where we would expect it. So it's not a big mover into the second half. For us, it was where do we think we see the macro, the customer conversations that we're having. And then obviously, again, we'll talk about cloud separately what that looks. So it's not a big mover for us.

So my point is you're not getting benefit from a backlog drawdown to help you make these numbers like maybe some other companies in the marketplace who've had book-to-bill maybe less than 1 and are just using backlog to kind of make numbers.

Which is why we were super -- we haven't talked about the level of backlog, but it's seasonally where we would expect it.

Perfect. Got it. And then maybe going back to the outlook for fiscal -- for the second half and all the moving pieces, obviously, on a constant currency basis, we talked about this on the call. I think it was the question I asked you guys. The dollar has been a big headwind, right? I think it was 5 points in the most recent quarter. Besides the translation effect, what else -- where are you seeing the impact of the dollar? Is it making maybe products a little bit less competitive relative to maybe an overseas competitor? Or is it just purely a translation effect point that you're seeing from a strong dollar perspective?

Yes. So great question. For us, it's been a material issue. So it was 5.4% this quarter, I believe, from a revenue perspective. From a gross margin perspective, it's been a significant issue as well because we procure almost all of our parts in U.S dollar. So we're -- all of that headwind flows through the gross margin and then down into the operating [indiscernible]. There's obviously the translation, and we do a good bit of business internationally, which is great to have. The other thing is it's just made the competitive environment especially tougher in some of those countries. I mean, obviously, the Japanese yen has gotten bonded, the euro, the pound. So because of that, when you -- if you have local competitors dealing in local currency, then you have some of that as well. So it's not only translation, but it's just -- it's made everything a little bit.

Does that show up in margin in addition to the component manufacturing issue, meaning that you maybe need to be a little bit more price sensitive in those markets, and that hurts product gross margin a little bit as well?

So it will take [indiscernible] be a little bit more aggressive. It will hurt revenue and margin. It's not -- it hasn't been a huge mover. It's a nuisance. And in certain countries, it's been bigger. And you talked about it, the bulk of our business is still in the U.S. and in our government business, but that hasn't been impacted.

And then maybe just to quantify, I know it's kind of difficult, but you've kind of talked about it. If I look at your guidance for this fiscal year, the range of, let's say, 5 40 at the midpoint, right? Is it a reasonable assumption to say, given all the different moving pieces, translation, gross margin, maybe a little bit of a competitive pressure there is like $0.50, $0.60 currency embedded in your guidance from a headwind perspective?

So on a year-over-year perspective, if we take the midpoint of our guidance, and we say that we had currency last year versus this year, it was $0.73. It's a big mover. And again, because it goes all down to gross margin. So -- and that's the other part. FX has been a huge headwind. For us on a margin perspective, we've also dealt with these premiums, which is a company issue. And then -- and we'll talk about NAND [Indiscernible].

And that's separate from [Indiscernible] logistics?

No, that's all together.

Oh, that's all together.

Premiums is where we've had to go procure parts in the open market from -- really from the distribution network because we don't buy directly from those manufacturers.

Got it.

And then freight in that number as well.

Got it. Okay. Yes. I mean, like we were surprised to hear about the magnitude of how much you're absorbing when you roll it all up together. So I think that's helpful to give a sense for the true underlying earnings power of the business.

Yes, we've talked about it's been, call it, around $50 million a quarter. It's a big number. And that's why when you look at '23, yes, the macro is getting tougher, but the headwinds that turned to tailwinds around FX, hopefully. Premiums, absolutely, because that's getting better. And then we all get the benefit of NAND. We'll see how that flows through.

Right. So sticking to that point in terms of the swing factors. I know there's no guidance out for fiscal '24, and I don't want you to stick your feet in water where you haven't really done it yet. But just from a business model today, things that are in your control, so currencies are not in your control, but hopefully they move in the right direction. At least on the data that we track, logistics and expedited freight prices are coming down, premiums for aftermarket prices are coming down. When you think about your '24, if you had to roll up the budget, you took the conservative approach from currencies. I think you used the spot rates at the end of October, which is conservative. When you think about planning, I just want to understand philosophically, do you just budget or you just budget for spot prices for currency then have an assumption based on spot prices where you, let's say, exit the quarter? So if the price for this widget or this golden screw is X today, just kind of extrapolate that going forward into, let's say, the next fiscal year? Is that how you budget? Just trying to get a sense for how we would think about fiscal '24 from these inputs that could swing in your favor.

Yes. So keep in mind, when you look at the COGS line, almost all of that is USD, so we know what that will look like. For us, from a currency perspective, it's really top line and then OpEx. We do get some benefit from [indiscernible] as well. Look, we'll -- obviously, when we guide for '24, we'll likely use the rates as of the end of April. There's just no way we can spin it every month. So as we look into next year, again, there's some of those tailwinds, FX, almost assuredly the premiums, NAND, we'll think about it. And then, the other thing in our control is OpEx that talked about it. We will take -- we still want to invest in the growth areas. And we still -- again, we feel great about the cloud business, and we're going to invest behind growth, but we're also going to reallocate dollars to make sure we're prudent around our spending given the uncertainty of [demand].

Got it. Okay. Maybe you may not have the data in front of you, but will ask it anyway. I looked at your OpEx, to your point about OpEx, you've done a really good job. You go from '19 to '20 to '21 to '22 to '23. If I just look at the absolute dollar numbers, it looks like the cadence is about up almost $100 million year-over-year. Are you managing to growth, basically investing into categories of OpEx to drive growth? Or is it more of we have this multiyear model from a margin perspective that you laid out at the Analyst Day on how do we get there over a multiyear period? Well, take into consideration obviously being sensitive to the macro, right? You've done a really good job of controlling costs near term. So once we get past this macro, I guess what we're trying to understand is what's the algorithm between accelerated top line versus maybe EBIT margin, for example? Like what's -- how do you preference each of those different line items?

Yes. It's a great question. So for us, it's a balanced thing, which is we certainly have margin targets. And we have goals, especially around cash flow and shareholder return and other things. We -- so looking at the last 3 years [Indiscernible] we have done, I think, a really good job of reinvesting in some areas to drive growth. So most of the incremental OpEx that you see are focused around cloud, cloud product, specifically cloud storage. Obviously, we've done the acquisitions that bring in new OpEx as well, David. And then around the sales force, really building on the go-to-market, really great customer success motion. This is part of the Cloud Insights, which is -- we're really good at, call it, that core sales, selling hardware with multiyear support where you have a cloud business where you need to be talking to those customers all day. Hey, how is the product working? Do you need some help? Can we sell you other products? And then the renewal is just part of that function. And when you get to, call it $1 billion plus of ARR, most of the activity that goes on in cloud and software is upsell, cross-sell renewals. So we've invested in that as well. Great example is we got out of the HCI business about 2 years ago. We reallocated hundreds of engineers to drive cloud growth. That's a perfect example of what we'll do. So for us, it's a balance in terms of driving growth and making sure that we are driving -- there is leverage in the model, absolutely. And it's really a question of how much we want to let through.

Got it. All right. Maybe just since you just highlighted cloud, let's maybe pivot there. Obviously, [Indiscernible] investors have [indiscernible] some deceleration in maybe not just your business, but maybe some workloads, maybe moving a little bit lower to public cloud. Obviously, you've had this quarter, there's a little bit of a wobble in terms of some execution, 2 quarters ago, the same. Obviously, this is a very preliminary point in the journey. You've got a year, '25, '26 targets out there. But maybe can you kind of talk to obviously, acquisitions were part of the story for the 3 years. We've had some challenges from an integration perspective. I think you said what [indiscernible] kind of you kind of suggested. In that scenario, what do you think in this environment sort of public cloud looks like for you from a growth dynamic, putting aside acquisitions?

Yes. So hey, lots in that question. So let's -- can we take a step back for a second because we've talked about acquisitions. And I like wobble with -- so the Q4 wobble that we had was largely related to Spot and Cloud Insights sites and a couple of things. The acquisitions have been Spot, CloudCheckr [indiscernible]. Cloud Insights is an internally developed storage monitoring tool that we've taken on-prem and moved into the cloud. And the issue that we've had there is as our -- it goes to your original question, as our bigger customers especially have made that journey, it hasn't gone as quickly as they thought or we thought. And so they would purchase a deployment of Cloud Insights when they were still on-prem as well. And then, we're not moving as fast. It's still -- it's still the biggest growth driver out there, right, cloud, but it's just not as fast as we make, so they would end up renewing just at a lower rate. We're not -- there's not big customer losses. It's more of a deployment scope than anything else. The cloud storage side has been -- 3 years ago, it was about 60% of that total. Today, it's still about 60%, even with significant acquisitions in CloudOps, which shows you the growth of cloud storage. Now to your first question, we have seen some of our larger customers say, hey -- especially on the cloud volume services, which is a managed service. Hey, folks, it's still more expensive than on-prem if you have the hardware to support it. And so what we saw in the quarter was outside of the project base where we saw some customers actually delete a bunch of data because those projects came to their natural termination is -- we have seen customers looking at it and saying, "Hey, instead of keeping 24 months or 12 months of data in the cloud backup, I can go to 3" or "I can move it back on-prem because I have capacity and so I can leverage during this macro uncertainty." And I think you'll still see that. We actually saw one of our very large customers pull down their deployment in the cloud and actually buy on-prem equipment because the workload at least our understanding is a lot more efficient for them to run on-prem. So -- and that's that whole hybrid cloud. It will be a balanced, cloud is a great, enduring [indiscernible]. But yes, we have seen the growth of workloads moving to the cloud, I say, slow a little.

But maybe I could take a step back. So that 60-40 split that you referenced, within that 60, some of that is consumption, right? And that's what was a bit of a challenge this quarter. Is that -- when I think about, let's say, the next 3, 4, 5 years in this ARR model that you've thrown out there, is consumption a key driver of that ARR? And if so, how do you think about that from a retention or stickiness perspective, right? So I would have -- to be fair, I never would have thought that a customer would change their priority or their requirement for maintaining storage in that capacity. So it's a little surprising to me sort of kind of get your perspective on consumption is a bigger part, does that maybe change the dynamic of what the ARR ultimately look like?

Yes. So great question. And if I could, you heard at least a couple of the big hyperscalers talk about it. A lot of software companies that use consumption. It's one of those things where -- when things are going well and they're consuming data, it's great. It also now enables them to be flexible, which is why they love it. So in cloud storage, there's really 2 pieces to that. There's what we call fully managed services, CVS. That's where ANF, which is Azure NetApp files and FSX for ONTAP spin, as well as our relationship with Google. That's all consumption-based because that is typically the hyperscalers selling to their end customer. And again, not to at all opine on their business model, it's -- that consumption is really great when you're getting them up and running. That's been the highest growth in that, and we actually talked about CVS last quarter grew by over 100%. Yes, so great growth there. The other part of cloud storage is what we call bring your own, which is our ONTAP software. Typically a storage admin will buy that either through us or the marketplace and then deploy in the public cloud. The pricing is very different. Fully managed service, more expensive than bring your own. So we've -- that's really where the consumption pressure will be. We haven't guided past the 700. We said, hey, consumption on the whole number because keep in mind, Spot's consumption as well is a little over 50%. We expect by the time we get to 700 at the end of the year, that's going to be closer to 60 because the growth drivers are the consumption businesses. And that's great. We just -- and we raised their hand and said, hey, execution. We need to be better at talking to our hyperscaler customers, their end customer, what workloads are they deploying, what big project-based solutions are out there. We fully expected that, for instance, what we talked about, the issue in Q2 to come. It just came sooner than we thought.

Got it. And maybe just one final point on that. Is there anything else in your ARR that has that consumption dynamic that we should be mindful of that maybe there is an end of life in some capacity? Or are these just unique sort of EA projects that, to your point, ended a little bit sooner than expected?

Yes. So within cloud, we're going to have those. Our goal is -- and we love them. It's a great use case, first data in the cloud, don't have to spend on infrastructure. And what we need to do is get that to be a bigger piece, so that our call it [indiscernible] we saw in Q2. But we hope and expect that to continue, but we need more than just a handful. We need much more.

Okay. That's helpful. And then maybe just big picture thing to step back, we set that wobble aside, I think the data that we've seen is like 15% to 20% of on-prem customers use cloud-based storage. And so given your market share, given competitive market shares, obviously, there's at least a tailwind or theoretically should be a tailwind as more and more customers move workloads to the cloud, and we take on more public cloud journey here. How are you thinking about that in terms of your longer-term growth rate dynamics? And so when you contemplate, let's say, the 3-year or the multiyear targets that you have out there, I mean, obviously, share gains matter. But what's going to get customers over the hump faster, given that we have this kind of economic climate that we're living in right now?

Well, it's all let's do cloud source and then we'll flip back to cloud for a second. So -- and thanks for the question because we talked about this on the call. One of the great -- outside of the project based and the consumption, we've seen really, really good dynamics from a customer perspective and cloud storage. The number of customers with more than $1 million of ARR has doubled. We still have less than 15% of our core customers using a cloud product. Now it's higher as a percentage when you get into the big enterprises. In addition, we continue to drive more multiproduct use. We still have a lot of customers that only have one product. The dollar-based net retention, even though as a percentage came down, it's still at 140%, still very healthy. And then the gray part is when you talk about share dynamics is, hey, pick your favorite number, if we have somewhere around 12% or 15% of total storage, every time someone deploys to the cloud, and we're able to -- there's a better than 80% chance that's a customer that's not a NetApp [Indiscernible]. So our ability to go grab that market share in cloud is great, and that's one of the big growth drivers we see. In CloudOps, especially around Spot and CloudCheckr, in this tougher macro environment, we actually have high expectations for them because that's -- their role is to help customers manage that -- their cloud deployments. So we like that as well, Instaclustr as well as they deploy new apps in the cloud. So we feel good about the portfolio as it stands. Outside of the 2 big wobbles that we had, there's a lot of great growth. And that's what we look at, David, we put $1 billion or the $2 billion target together. And the other thing, again, we've said this multiple times. Hey, and that $2 billion, we fully expected to do acquisitions. You asked about that earlier. What we said there is that we were going to take a step back on CloudOps acquisitions while we integrated CloudCheckr [indiscernible]. We are -- there's still other assets that are interesting in cloud, more to support the cloud storage piece. But here's the other thing is we're going to let the valuation wins kind of make their way into that public market. You see it every day in the public markets and the private markets -- excuse me. There's still a bit of cash there that they're burning through. I think that's going to get a lot more interesting come calendar '23.

That was going to be my next question. So counterintuitively, the economic slowdown that we're experiencing could actually be a net positive from your public cloud piece. So have you seen any sort of potential acquisitions be more available or more amenable to a conversation at this point over the last, let's say, 90 to 120 days? Like has there been any noticeable shift in sentiment where companies are burning cash, and they may not necessarily have a runway to the public markets and they need sort of an exit through a strategic?

So the conversations, I would say, have increased. Have they fully grasped the valuation? Not yet. That's a group that for all the right reasons, reality is kind of their own, which is why they've done as well as they have. But I think that's really going to change going into calendar year '23.

I mean, when you look at cloud service lease or even CloudOps, if you're looking at some of these privately held technology-centric companies, who are you competing against right now when you're going up against? Are you seeing the large 800-pound gorilla in the room looking at these deals as well? Or is it more unique to you, given what you're trying to do in the public cloud space at this point?

So every time we look at a meaningful acquisition, there are other strategics as well. There's always the private play as well. It's a little bit tougher, I think, from a PE perspective, to be able to do a transaction just because of the tougher to put all the leverage on that model. But yes, it's mostly going to be strategic as we look across because a lot of these will be also good product add-ons for other strategics in that DevOps cloud [indiscernible].

Got it. I've got a long list of questions here, but I also have a bunch from the audience. I want to make sure I get to them. So let's try one from the audience. So Mike -- so it looks like -- okay. So this -- I'll paraphrase here. So Marvell is talking about a little bit of inventory problem in storage controllers. What does that mean for the market as a whole and for your business?

Yes. So I won't speak for them. For us, we have continued -- up to this point, continued to invest in inventory, and I won't get the numbers exactly right. But inventory, I believe, year-over-year is up about $80 million to $100 million. The majority of that has been 2 things. One is coming out of Q4 with certain manufacturers in the SSD market shot themselves in the foot and us by having a [indiscernible] industry there was all this hey, inventory is going to be a problem. But we did put some on the balance sheet. About 2 weeks later, it's like, yes, the world came back to reality. It's a little bit like high school. The drama is crazy in this market. And then the other thing is we have put inventory related to the premiums that we've had to buy the analog part. So for us, we look at that as, again, that's been a headwind. That's a tailwind in the second half because we'll continue to work on that inventory. Availability of SSDs has not been an issue at all. We were just worried about really the pricing environment coming out of that contamination problem. And then from a premium perspective, we just are having to buy a lot less. So for us, it's going to be hopefully a significant tailwind. And again, our inventory is really in those 2 areas, the inventory build.

Got it. And then maybe just dovetailing that a little bit. Can you kind of characterize the relationship or sort of the battle between disk and SSDs out there near line with the hyperscalers? Like what are you seeing? Is SSD getting share? And do you care what the media that's being used in near line of hyperscalers at this point in your mix.

Yes. So what I'd say, just look at the industry as a whole, in all the industry data that you'll see, I think all flash is now somewhere around half of it. The use case is continue to get better. The price performance is better. You have QLC coming in, in terms of even a better option. But we've seen our customers over the last 2 quarters. We've seen as we call it the hybrid business, which has got spinning disk and SSDs really perform well. There's still a lot of workloads that run more economically there. I think over time, flash will become a bigger piece of the market as well. We -- for us, about 33% of our installed base is all [Indiscernible]. We still have thankfully a very large base of customers that have other spinning disk or hybrid. We expect that pick your favorite number, 70% to 80%. It won't all move. But in this time, tough macro, there's a lot of workloads that run just as well there. And so we think there will always be room for that. I know other vendors say, "No, they won't," but we'll see where it goes.

And just maybe as a follow-up, what percentage of your shipments are all flash if your base is in the 30s?

So it's going to be closer to that 50% number.

So you're 50-50.

Yes. Are you talking about product shift in a quarter versus the 33 as product revenue plus -- I'm sorry, the percentage of controllers that are out there, and there's a long tail again [indiscernible]. And then the $3.1 billion that we talked about in terms of run rate is both product and support.

And support, okay. That's helpful. And then just pivoting or staying on cloud CapEx for a second. Obviously, there's a ton of debate in the marketplace in terms of what the right level of CapEx from hyperscalers look like, on enterprise CapEx, and so on and so forth. But specifically on cloud CapEx, growth slows, what are the sort of the first quarter, maybe 2 quarter impacts on your business?

Yes. So thank you. So for us, CapEx is really 2 big drivers. One is the ANF business, where we deploy our hardware in their data center. For the last several years, we've been seeing really that worldwide. The great part is going into '24, there's a couple of nice tailwinds. One is yes, we still see new data centers, but most of the deployments are in existing locations that have seen a great ramp of data volume. And both -- and we love that because the return on that is a lot better than somewhere new. In addition, that's where we -- you'll see CapEx for Keystone, which is our as-a-service offering. If cloud slows a little bit, I think what you'd see is we've probably deployed less in those existing data centers. Keep in mind, too, FSX for ONTAP, all software. There's no hardware deployment there. So the ability for us to scale up and down is a little bit easier. GCP is a mix of both. The other thing that -- and we've talked about it, just to make sure everybody knows is, we depreciate all that equipment over 3 years. I know some of the hyperscalers went to 4 or 5. We debated it and said we're going to leave it at 3. The great part about that is a lot of those assets will then reach their depreciable life, starting in '24. And then towards the end of '24 to '25, you're going to see that crossover, where actually depreciation flattens out and maybe even decline. So all the benefits that our customers get on-prem from using an asset longer than the useful life will accrue to us, which is one of the big drivers of that 75 to 80 margin target that we've had out there.

But we might not see that if you grow faster, right? Because as you add -- if you win business, you're adding, obviously, capital intensity [indiscernible] goes up. So that mitigates maybe [Indiscernible] coming down from older installed deployments. Is that fair? I mean, it's a good problem to have.

So if that problem happens, I'll be doing -- I'll be super happy. So -- but it also depends on where you grow. If it's in FSX, no. If it's in CloudOps, no. Because there's no hardware -- it's really ANF.

Right. right. Okay. And then maybe just thinking about sort of your growth flows, one of the questions that we got on the call yesterday when I was talking to a couple of clients was you talked through sort of like maybe past economic cycles and how NetApp is different or the same, and how do we think about your resiliency and customer resiliency and durability going forward. Is there a point in time over the prior cycles that you'd say, look, obviously, nothing is identical, but history tends to run. Where would you point us to? And where would you kind of think that maybe NetApp -- what NetApp might look like in the past versus today?

Yes, it's a great question, and we've gotten it. And I think this is where, I've been here for a little over 3 years, almost 3. So I didn't live through the dot-com verse. I didn't live through all the different recessions. I -- if we have one, I think it is very different than the past ones because I don't think there's a fundamental -- I mean, the debt issue and the debt crisis in 2008, I think it's wholly different than where we are today and certainly the pandemic. What I would say is, NetApp is a very different company. And I think the industry is different because, yes, we're all subject to CapEx spending. And if that stops, it affects multiple -- but where we sit today, if you look at CIO priorities between cloud transformation, digital cloud journey, digital transformation and security, that all plays into [Indiscernible]. With the new workloads and use cases around AI, ML, that is driving significant data growth that I don't think you had in the past. And the other big part, which is why we feel so good about it is, we have by far the best [indiscernible]. What we sell to our customers is your storage and your data journey. We're the only ones that can take you all the way from on-prem to hybrid to a true -- I'm going to say it again a true cloud solution, not cloud watching. So we feel great about that. Even in this environment, if spending slows, we feel like we're coming from a position of strength. We'll do everything in our control around expenses, around management, around cash. But we'll get through this. We've been through 3, 4 in the history of NetApp. And we feel what we want to make sure is to be cognizant of the bottom line and margins, but to not shoot ourselves in [indiscernible]. So that when we come out of this, we come out stronger.

So [indiscernible] but I hear from investors all the time will remind me that there's ever been a period where storage's not [indiscernible] several years of relatively strong growth. And obviously, an economic disruption. And one point that you just articulated, I think it's a little bit different this time. But when you think about your long-term or your medium-term planning, is that a consideration that you take in terms of like a scenario analysis, in terms of look at storage? The industry in calendar '23, which covers roughly 2 of your quarters and in the back half -- the first half of '24. If the storage market is down, does that mean that your hybrid cloud business is down in -- effectively calendar '23? Or is there enough share gains where you can potentially not track the market that closely is, I guess, the question. And then public cloud would be additive, I would imagine, where maybe you can still grow. I'm just trying to think through like what's the risk to the numbers in a really deeper economic climate than we're currently in.

Yes. So this is exactly what we talked about at our Investor Day, which is because of the areas of storage that we're in, all-flash, hybrid to a certain extent and then cloud, we feel like we're in the highest growth areas of that market. If the world falls apart and it's 2008 again, all of our businesses get impacted. We certainly don't see that scenario. We're trying to be prudent and say, the first half of calendar '23, we need to be mindful of the macro. Cloud is a big piece of it, also CloudOps. That's a part. And the other nice thing here is that to the extent that people are doing new or refresh, they're going to renew. People talk about ARR and I have a -- hey, we have $2.4 billion of ARR support revenue. Add cloud to that, now you're up to $3 billion of true recurring revenue. So that is also a nice buffer. Again, we will do our best to manage within a reason. But again, every downturn has an upturn, and we want to make sure we'd be cognizant during this without coming out. Here's the call I don't want to have to make is before I got here when the company had to say, "Hey, we didn't hire enough direct quota reps. We need to go hire [ 200 ]." We're not going to do that, right? Because that's a customer disruption, then you get this big step up. We want to make sure that we're prudent, but yet we're investing in growth.

Right. That makes sense. Yes. Now [Indiscernible] to your point, why you shoot yourself in the foot.

Right.

And then maybe just a final question on cash flow. You talked about business generated using cash flow. Working capital is a bit of an issue near term for everyone in the marketplace. So you said 100% of your cash flow is going to go back to shareholders through buybacks and dividend. Would you be willing to take leverage on despite the economic climate right now because your stock is trading where it's trading? I'm just trying to get a sense of how you view your outlook versus where your stock is trading effectively in the public markets. Or is it being mispriced? Or do you think it adequately reflects sort of the economic concerns that you -- we all have that you're sitting today?

Well, here's what I'd say because I think a bond in the open market 3 times I think it's way undervalued. Look, from where we sit today is that we said actually more than 100% of free cash flow, and we're going to modulate share buybacks really with that position. And it's a great question in terms of -- here's what I would tell you is, hey, we have investment-grade rating is super important. We deal with the biggest companies in the world in government. I never want to sit in front of one of those customers and have to explain [6x] leverage. However, what I'd say is because of the leverage in the model and cash is there -- if there was an opportunity where we said, "Hey, we'd have to lever up for a period of time with a full delevering." Sure, we would take a look at that with a clear path to delevering. That, I think, would be more focused on is there an acquisition, again, at some point that we'd want to do. I'm not a big fan of levering up just to buy back your shares. I think you're -- within reason, yes. But I don't -- and we've said it publicly is, hey, don't expect us to dip significantly into the cash balance just to buy back shares. We want to use our cash generation and our balance in our firepower on the balance sheet to build the business.

Got it. All right. I think we're out of time. So thanks, everyone. Thanks, Mike, for joining.

David, thank you.

Generous with your time. And if anyone has any questions, please feel free to reach out. The IR team is here today [indiscernible] here, and I'm here. So thank you again.

David, UBS, thank you for the time. Appreciate it.