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

Welcome, everybody. While everybody gets settled, we'll get -- very efficient with the disclosures. We're going to read Morgan Stanley's first for Morgan Stanley's research disclosure -- please see the website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representatives. And I'm going to read NetApp's safe harbor disclosure. 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 statements made today for a variety of reasons described in our most recent 10-K and 10-Q filed with the SEC and available at NetApp.com. We disclaim any obligation to update information in any forward-looking statements for any reason. All right. I passed the reading test. All right. Well, Mike, we are delighted to have NetApp here with us today. we have Mike Berry, CFO of NetApp here with us. I'm Meta Marshall, I cover the storage space here at Morgan Stanley for those of us who don't know me.

Obviously, it was a big wake last week for you. Fiscal Q3 was another bright spot for NetApp, seeing record gross margins and operating margins and year-over-year growth for the first time in 4 quarters, seen 21% growth in ARR of flash, that was 6% sequential growth. Maybe starting with the top line. Just how are you seeing the current macro conditions with customers? And for everybody in the room concerned we will get to AI questions, and I'm going to start with the quarter.

Well, I thought I'll talk for 35 minutes and then just shrink that time. So Meta, thanks for having us. [ Excited ] to be here. And thanks for playing [indiscernible] on cannibals to get us ready. We appreciate it. So yes, I would say -- we had a really strong quarter last quarter. Although we were guiding for growth, we're super happy to get back to it. So when we started fiscal '24, we did say, hey, it continues to be challenging, but relatively stable. That's largely how it's played out. I think now they're talking about economic growth similar to '23, which is great. We've seen some pockets of strength, but it's still cautious. We still run into a little bit of elongated budget cycles and approvals. Higher interest rates move all of those decisions up a little bit. So we've seen that. But as we look -- and we talked a lot about our enterprise customers took a little bit of a step back in our fiscal '23, we have seen some of that come through, not all of them. There's still some cautiousness there. But in Q3, we saw some enterprise strength and some really good public sector strength as well. So we expect it to be reasonably stable, still uncertain. There's so much going on in the world, but we feel really good about our product position.

Okay. Maybe part of that product position that you feel really comfortable about is that the C Series has been a great kind of early success. Just what customer types or use cases are you seeing adoption of C Series the strongest with?

Yes. So we are super excited about C Series. We had a QLC product before. But with the introduction of the new capacity flash, it's really -- it's taken an awful lot more than we thought, which is wonderful. I do want to make sure we hit the go-to-market changes in conjunction because I think both of those go together. So a lot of the use cases is -- the great thing is that it really fits all verticals in all parts of the world as well. We seen not only in the U.S. but other areas. Virtualized environments are some of the areas we see databases, secondary storage, backup and even some AI. I'll throw that in there. We've seen that as well. . And the good part for us is we really expect capacity flash to as a lot of that mid-range hard disk drive arrays come up for refresh, we think it's a perfect area for an upgrade to capacity flash. And -- we saw -- George talked a lot about some of our competitive wins and displacements. In the past, we haven't had products that have enabled us to go after net new workloads in our customer base, but also net new customers. And so for -- we saw for example, 3 competitive displacements across Europe and in the U.S. as well. And those are really focused around unified storage in terms of file and block and data management. We actually had a couple of displacements where we sold A Series and C Series together. So it fits the use cases that we were not able to get to before. Either we had to kind of bring high-performance down or hybrid up. And I do think just really quickly on this. The introduction of capacity flash was very important. But also the go-to-market changes we made at the beginning of the year to really focus the client executives, our sales engineers around the core storage, especially flash, and then separating the cloud piece, the cloud specialist has really helped. And as I've told a lot of investors, I think 1 plus 1 equals more than 2 here because we did it at the same time. So great product, wonderful use case fits a niche we weren't able to get into. We think that, that will drive outsized growth versus other areas of storage. And it allows us to get to net new workloads and new customers we weren't able to.

Okay. And this hasn't come -- played out in the results, but I just want to highlight it. People were concerned about, would this kind of erode some of your higher-end flash market opportunity. Clearly hasn't been the case, but you can probably give a better explanation as to what you're seeing in terms of new markets that C Series is addressing.

Yes. And so importantly, let's focus on two big rationales for C Series. One is to get us into those markets we couldn't before. And we've talked about that. The other thing is, this was on purpose. We knew we would cannibalize the hard disk business, the hybrid. And this has been the big driver. And gosh, we might talk about product margin some time during today. It's been a big push in product margins. And because -- and that goes to -- as those 10-K arrays come up for refresh, that especially now with the compression of the NAND market, but from a total cost of ownership, it's almost the same as hard disk drives, depending on how you run your numbers. So we really think that that's going to translate into more capacity, both for us as well as us enabling to go after that huge midrange installed base of some of our competitors.

Okay. Okay. Perfect. We got to question 3 before. As you look through the AI opportunity, there's clearly been a lot of enthusiasm post the quarter about storage or just the AI opportunity with storage. Just how do you see net adds value proposition in the various steps of AI? And how are you seeing that play out with customers?

Yes. So let's go through a little bit of this. And actually, we had a bunch of announcements today that were perfect timing. So first of all, we've been in AI for a long time. We have hundreds of customers that have trusted NetApp for AI. You could say that's more predictive AI, machine learning, drug discovery, oil and gas discovery, financial services, a good bit in different governments across the world. So our customers trust us on their AI journey. So that's number one. Number two is, hey, we've had a long partnership with NVIDIA. A number of our competitors have as well. We just announced today certification in their latest pod for our C Series. We were certified with A Series before. We're also one of the only storage providers actually the only one certified on their OVX platform as they continue to widen their breadth as well. And then we just introduced new AI reference architecture for our FlexPod, which is our go-to-market with Cisco. So we've had a long-standing relationship there, and we continue to expand on that. The other big part about Gen AI is there's a lot of work going on in customers around the world, just getting their data management in order. Where is their data? Do they have the governance, do they have the right security so that they can responsibly roll out AI. The use cases that we're starting to hear from customers and see in the basis, the training is obviously the biggest piece, very compute-intensive. A lot of work around data like modernization, inference now is starting to pick up. I think somebody talked on their earnings call, NVIDIA, about 40% of workloads are there. And we're really starting to see now the model fine-tuning in this RAG, Retrieval Augmentation Generation, I believe it is, where people are doing large language models on the Internet publicly. And now they need to bring it inside and use their own data and enterprise data. That's going to -- that's all the model fine-tuning that we'll see. I think that will really be the driver of storage, especially as we talk about unstructured data. So -- we feel really good about our AI journey. We've done a lot of it so far. It's still early days for Generative AI, but we feel like we're in a really good position.

And maybe just outlining what is some of the timing -- it's early days, but how do you see kind of the timing of those 3 different bands of kind of interest? And -- is it different storage needs as you -- or different pieces of the NetApp portfolio that kind of get used in those various stages? Or is it just kind of increasing amounts as you go over time?

So I think that, that will depend on the customer and the workload. And also how much is in the cloud versus on-prem. And I think that's still to be decided in terms of -- the cloud is such a great place to burst data. And we do see a good number of customers doing their LLMs in the cloud because otherwise, you're going to have to buy -- get everything implemented. So they'll burst it in the cloud. But then once the data gets to be a certain amount and obviously, there's cost that goes with that, we're starting to see it pull back. So I think some of that will sit on-prem. And that's really where I think you'll see, hey, C Series, all performance/the work -- some workloads will drive different usage. And because so much of Gen AI is around unstructured data, that is certainly much more storage intensive than text files or other data. So we'll talk a lot about or more about the timing we see when we do our Analyst Day in June as we roll through '25. I think it's fair to say hey we've done a lot of predictive AI, if I could use that phrase. Gen AI is just incremental to this piece. And we do think that, that will help in '25 when we're still working through with our customers.

Okay. And you just alluded to it, but how do you think your public cloud solutions for enterprises kind of fit into all of this? So you said, okay, maybe I'm using my public cloud for more [ burst ], are they using your NetApp public cloud solutions in there, just -- we've spent a lot of time talking about C Series, but where do we kind of bring in your cloud portfolio into that?

Yes. So just to take a step back for folks that don't know. In our cloud storage, we are not only the only provider with a first-party natively integrated cloud storage solution in one of the hyperscalers, we have all 3 and we've seen some of our customers as well as some of the providers of AI solutions using, for instance, FSx for ONTAP to train their models to do that. We have at Google Next, we showed how we work with their Google Vertex. So we do -- because we're natively integrated, it's super easy for us to connect with our customers into those solutions. And I think that you will see, especially as they roll out the large language models and they want to burst to the cloud them use those. Where it ends up is going to be interesting in terms of on-prem to cloud. But we feel like we have a huge head start because keep in mind, too, especially our first-party native solutions, they are focused around high-performance workloads. And if you want to run Gen AI in the cloud, there's a really good chance that our solutions are the best fit for that.

Okay. And maybe just before we kind of jump into other areas of the business, you've mentioned kind of some of these competitive displacements. What has been kind of the biggest driver of that? Is it the breadth of the solution, just where are you kind of seeing those -- the biggest opportunities for competitive displacement?

Yes. Great question. So I think there's a couple if we could talk about product and go to market. So from a product perspective, C Series gives us the opportunity to go into those customers that we didn't have something to go sell them before. Or if we did, they didn't think of us as a capacity flash provider. So that's number one. When the block optimized solutions roll out and they're rolling out, that's another area for us as well. I would go back to probably the biggest short-term driver are the go-to-market changes that we made, not only to focus the sales team on that. But also, hey, we've moved the majority of our renewal business out of the core sales team into the customer success team. We talked about that on the call to free up more capacity. And refreshing our base is hugely important, but net new workloads and then going to get those competitive displacements because that's a lot of capacity than maybe it was on the renewal motion that's now focused on Go Drive net new sales. So you add all those things up, I think go-to-market is the first piece, and then product will carry the day.

Okay. Got it. Before I step off of AI, does anybody have any other AI questions they want to ask. All right. So moving on, your public cloud business has undergone a number of changes over the last year. Can you just talk to some of the changes in go-to-market and within that product portfolio?

Sure. So just for everyone in the audience. So if you look at the public cloud revenue, now about 65% of that is in cloud storage and then the 35% is in cloud ops. What we've talked about is our focus is in -- when we did the strategic review, we really want to focus on our native first-party offerings, which is, again, across all 3 of the hyperscalers, different products and marketplace. And I'll talk about that in a second. There is -- I don't know how much other folks see. But this kind of vortex of the big 3s marketplace to suck dollars has been pretty significant. . The other part -- so that's one part of cloud storage. The other part is what we call bring your own. This is where they'll buy CVO or our software solutions either from us or -- and then they'll deploy it in the public cloud. And what we're seeing is that's more of a subscription business. That is being pushed to first party or marketplace because there's -- every big company in the world has made commits to 1 or more of the big 3. And when everyone was spending a lot of money on cloud, that was easy. And then when we hit a little bit of the softness and they pulled back on cloud, now that gap became bigger and them wanting to burn down their commence. So why buy it from us when you can buy the same product in the marketplace and burn down your commit. So we think that, that is a trend that we're going to continue to see. But that all goes to the growth in first-party marketplace. Those businesses grew 35% year-over-year this past quarter. So that's a big part of cloud storage to strength. Where we're looking to optimize is we had a couple of smaller products that we killed, we stopped. We are also within cloud storage, we had some products that really weren't products that were more features. We're going to stop doing that and roll it into the core product. And then the big work is around our cloud insights, which is a great monitoring tool for storage. And we got a little over our skis on, hey, it does a little bit of network and it does some security, and it does some optimization. It's a great storage monitoring tool, and we're going to refocus that to support storage on-prem and in the cloud that meter has been the biggest drag on the subscription that we've talked about. And then Instaclustr as well in terms of the open source database really supporting storage. So a lot of the work was bringing that down, it's going to likely be smaller exiting the year, but more healthy. In addition, when we talked about the go-to-market changes, as important as that was for the hybrid cloud business. The other thing that we did is when we had the cloud specialist, so we had cloud teams based off against Azure, Amazon and GCP. But when we rolled them under our Board, they were aligned with how we go to market. Well, the other 3 go to market 3 different ways. So there was a lot of angst and concern from them which is, "Hey, I don't know who to call, I used to call me and now I have to call Mike, what about Gloria. So when we did the go-to-market changes at the beginning of the year, we pulled those teams out, and we aligned them vertically with their hyperscaler. And that's been a great success because now we're so much more aligned because even though their sales team will sell it, it's their product, once it gets to be rather technical, then they bring in our team to help. So that's helped as well.

Okay. I mean visibility had been an issue there over the past year, how does moving to -- I mean, my mind for in there? Or just how have you gained more visibility of that business over the last year?

So we'll do subscription first. The visibility we lost was how much of that business was going to get renewed or especially in CI where there were big plans that go to the cloud, they pulled back on those and then they may renew but for a lower amount. So we lost visibility there. On the consumption business, the lack of visibility was when everybody optimized. And everybody was all 3 hyperscalers in massive numbers were growing significantly. And then when the economy soften, they optimize and that was the visibility. So the cloud specialists now we're so much closer to that business in terms of what that end customer is going to do. So the visibility there is a lot better. Are we surprised every once in a while, sure, because at the end of the day, all 3 of those, that's still their customer, but they're also ours as well.

Okay. Perfect. And we just spend a second on it, but cloud optimization has clearly -- when we were here a year ago was kind of a big headwind. It seems like we're past peak, but just what -- are you seeing encouraging signs there? What signs are you seeing there just about kind of improvement within that cloud business.

So we are encouraged by -- it seems to have -- while it's still there, it seems to have lightened up. You hear all 3 of the hyperscalers talk on their calls, hey, it's still out there, but it seems has stabilized. The nice part as well is that I think now where there was -- I don't want to say over deployment, but there are other folks where they had really deployed quite a bit in the cloud, and then they realized, gosh, that's a lot, and they pulled back. We had talked about one particular workload that was like that. So that's now -- we have not seen that growth, therefore, we have that visibility. So we are encouraged that it has stabilized. That business all along, Meta has you get some customers that go up and some down. But from a downside perspective, it's a lot more stable.

Okay. I mean in the past, a lot of that cloud business that you had sold was kind of net new customers. And maybe there hasn't been kind of the highest penetration or below what some investors thought of penetration of that into your installed base. With AI and just renewed moves into the cloud, are you seeing a pickup here? Do you have initiatives to kind of help with a pickup there? .

Yes, thank you. The cloud has been our biggest driver of net new customers. Now especially around FSx has been a really great generator of that new because those are typically customers that we wouldn't have. I think it is a little early to say Gen AI may or may not. To the extent that it's focused on larger enterprises may be less net new, but we -- that is the net new engine of the company. We do have significant programs to go drive net new. And then really that -- and it's that cross-sell, upsell. We talked about the renewals moving to the customer success team. We also have a customer success team whose sole job is to cross-sell upsell into that base. And if you look at the cross-sell numbers, it's -- I mean it's interesting you have some at the lower end, but actually our largest customers have the highest percentage of penetration. They're the ones most likely to deploy into the cloud as well.

Okay. How -- and then just kind of rounding out kind of the product portfolio. Just have you seen increased interest in Keystone or as a service offering for some of the more premise hardware, particularly as we've gone through kind of proper macro periods.

So we have continued to see a really nice increase in Keystone, but it's not a universal mandate. For us, the Storage-as-a-Service ultimate is the cloud. And because we're so uniquely positioned there. That's more of the conversations we have with our customers. But Keystone continues to do really well. It has every quarter set records. This past quarter, it grew by more than 100%. It's not a huge piece of the business because it is ratable. But we also -- any procurement model that our customers want, that's really what we want to is however you would like to deploy. We're not going to push it one way or the other. Most of the time what we see is it's an on-ramp to the cloud. Maybe they don't want to plunk down CapEx. They want to go to the cloud, so it's an interim or from an economic perspective because of interest rates, they say that's a better economic decision. They'll go that path. So we have seen great...

Okay. You've spent a lot of time talking about kind of your changes in go-to-market over the last year and quite so seamlessly. And so what is it that you feel like kind of helped this go-to-market transition, maybe more so than we've seen kind of in past go-to-market transition.

Yes. And some of my prior license software, someone -- I think an investor once said, when the year's go-to-market changes, he immediately takes -- he or she takes a step back. So I think the change here is the whole team bought into it. I think there was -- from a -- I'm not a salesperson, but I would also say, hey, those folks want great products to sell. They want a clear path to hit their number. And tell me exactly what you want me to do, not a whole bunch of stuff. I think where we erred and we'll raise our hand, we, the collective we is, we asked them to do too much. And to that extent, it just -- it dispersed their resources. So I think they all feel better, most of them, not everybody is super happy because, hey, I have this cloud deal. Are you not going to pay me on it. There's the one-off there. But it was the right thing to do from a company perspective. And I think more importantly, it gave them very clear guidelines and directions here's what we would like you to do. And I give kudos to Cesar and his team, then the comp plans aligned to that. It was -- here's the comp plan, here's what we'd like you to do. Here's the best products in the industry, now go forth and get your number.

Okay. All right. Just -- yes, we all have a [ PSV ] around go-to-market transition, but this one seems to have broken the mold. So just focusing on that for a second. So let's move on to profitability. Clearly has been another area where you guys have stood out over the last year. Part of this is from a mix shift, part of it's from attractive commodity pricing, part of it is from kind of costs coming off from supply chain. Just how do you rank the factors on gross margin increases year-over-year?

Yes. So can we do year-over-year and then we do quarter-on-quarter.

Yes.

If you look year-over-year, the biggest drivers have been cost. And the two have been premiums. We talked about that. And to talk about PTSD. Every time someone says PTSD. So thankfully, those are gone, hey, it was $40 million to $50 million a quarter. We were pretty open about that. That was a big drain on profitability and cash. And then as NAND prices really started to come down, especially in the first part of fiscal '24, that's where you saw the bump from, call it, 50% on average and 23% up to, again, the mid-50s. We did 55% and 55% in Q4 and Q1 and then 61%, 63% and then we guided to 60%. The majority of the quarter-on-quarter has been mix. . Because we large -- we said we locked the large majority of our NAND purchases. So throughout the Q2, 3 and 4, costs have stayed relatively consistent, that's really been the great growth of capacity flash. So in 3 areas there. One is instead of us selling hybrid, which is at a lower margin, now you're selling a higher-margin solution. All the net new is coming in at capacity flash at a higher margin and then higher revenue does help because there's some fixed costs in that base. So that's why we felt so good about resetting after we saw the success of C Series resetting the structural margins because, yes, NAND will go up, and it has. We have locked a majority of our purchases for '25. You can't do it all. We have TLC and QLC, so just forecasting gets to be fun, but albeit at a higher price. But it's really that mix change and it's a material driver, especially when the net new comes in at a higher margin and you're selling less hybrid. That's why we felt so good about resetting it. So year-over-year, it's mostly cost. This year, quarter-on-quarter, it's mostly mix.

Okay. And so just to refresh for everybody, last week's call or fiscal Q3's call, you noted that you now think high 50s to 60% can be the product gross margins from mid-50s traditionally. Just maybe level setting, what would get you to kind of the high 50s and what gets you to 60% just as you think about factors over the next year?

Great question. So assuming supply chain stays relatively constant, let's pull that variable out. Why we guided lower in Q4 is it's our Q4. And there's two big drivers for intra quarter. One is pricing. And in terms of not only competitive but from our team as well, Q4 is always the quarter where we pushed to hit our number and comp plans end. The other piece is the mix within the product family. And so if we sell more high capacity than low within flash, you'll see that move around. Those are the two variables in a given quarter, assuming costs stay relatively consistent. Those are really market factors, what do our customers buy and then how is the pricing environment? .

Okay. But I guess the question there is, and I know some of this will get into more at the Analyst Day, but it's just C Series continues to be a huge success is it that you get to -- can we push above 60% again? Or I guess, is it the mix of C Series versus hybrid? Or is it kind of the mix within flash that's kind of most influential to gross margins?

I think at this point, given the strength of all-flash, it's probably the mix within the product family. It's pretty clear. There will be some workloads where hybrid still works, which is great. Outside of some people think disk is going away. I'm not sure if that's the case. So that is an enduring growth. I think we'll see that no matter what. So for us to be able to tip over 60 really depends on the mix within the products as well as just the general pricing environment. And I always want to -- I'll just be blunt -- especially in Q4, I always want to leave room. If there's a good deal that comes in, I don't want to have to worry about, "Oh, gosh, I don't meet a bigger number. We're going to do the right thing for the business. And that may mean lower margin percentages but higher margin dollars and we'll take that every day.

Okay. You also were going to utilize your balance sheet in fiscal Q4 for a lot of NAND purchases into fiscal '25. You just mentioned you expect to kind of -- there might be some instances of modeling. But -- so you expect now with Q4 purchases to have taken care of the vast majority of fiscal '25 or just how do you think about the purchases you're making this quarter?

Yes. So we have done, as we call them, prebuys or price locks for not the large majority, but the majority of fiscal '25 NAND demand, where -- so a couple of things. One is, it's a year out, so -- because we have to forecast QLC and TLC and that gets to be a little dicey, plus all the manufacturers have severely limited supply. Some of the [ pundits ] are talking about really big increases, we're going to let some of that play out. So we feel good about what we've hedged. But there's some variability there, and we want some flexibility. And so you expect to see inventories grow in Q4. And then we will also most likely write those checks, hence, and that's all baked into our new cash flow guidance. But yes, to the extent we can use our balance sheet, I'd much rather do the right thing and pay 90 days before to drive the margins even with a little bit higher interest rates, it's still a better economic trade-off.

Okay. You've been quite conservative on OpEx over the last year, particularly headcount, work cut, macro, some of the cloud businesses underwent changes. Just how do you think about OpEx growth and where you would invest incremental dollars, particularly just given this last page of questions we're all about all of your growth opportunities.

So keep in mind, in Q4 last year, hey, we did a pretty significant risk, and it was, I think, 1,200 headcount. And management doesn't take that lately. I think when you have to do that, it's a failure of management to plan, me in particular. So as we've gone through the year, we want to make sure and invest in the right areas. But we're also -- we're also -- we know there's some uncertainty there. So our goal is we want to invest where we know we can drive growth. And there's really two areas. One is, as we've talked about all the AI, is there some road map things within -- especially on TAP because we're -- that's -- we are a software company. Around AI, some of those use cases, making sure the certifications that we're addressing where we think that market is going. There's also some things we want to do in cloud storage. We have great relationships with all the 3 hyperscalers, but there are 3 different companies that have different road maps. So there's some work to do there. So we will spend some more in engineering there. On sales and marketing, it's more of there are certain areas where we need the capacity. Hey, we freed up a lot of capacity by moving the renewals to the customer success team and we've funded that underneath the covers over the last couple of years. So those are the areas, especially where we can go drive net new, we'll do that. But it was before you joined us. I mean when I first joined, we added 200 headcount. It was kind of a bomb. We don't think we have a capacity mismatch. We watch this all the time, but there are areas that we want to fund. In general, George and ours goal is, hey, we want to invest in growth, but we will invest in OpEx at a lower rate than revenue because our goal is to continue to drive gross and operating margin dollars and EPS. We will fund investments where we need to, but we have knocked down [ drag out fights about ], well, can't you reallocate? Is that really growing? Can you move those dollars? And the team does -- the whole NetApp team does an awesome job doing that. And you've seen it -- if you take out the variable comp year-over-year, we're actually down OpEx. But yes, we are growing 10% product revenue this past quarter.

Okay. Perfect. Another part of your story has been kind of the significant amount of cash you've returned to shareholders over the last year and a couple of years. Just how are you balancing investments in these -- fights you are having internally versus shareholder return, particularly with just given how the stock has meaningfully kind of re-rated over the past year.

So as a CFO, I'll say, yes, it's rerated, but not high enough.

You're obligated to say that well.

I truly believe it -- when RPE multiple is higher than the S&P 500, then we can have a glass aligned and have this conversation. So what we talked about 2 years ago at Analyst Day is that -- so the dividend is $2 a share. That's about $400 million a year. When interest rates were 0, that was a meaningful yield. Meta, we're not going to chase the yield curve. It's a great foundation but we're not going to be a dividend-yielding stock. So don't expect that to go up meaningfully. Then we said we will always offset dilution depending on stock price, that's between $400 million or $500 million a year in buybacks. The rest of it, we will toggle between acquisitions and more buybacks. Given the work we've done in public cloud, we've taken a step back in acquisitions. We'll still look at them, but it won't be a meaningful driver, likely at this point. That means that we will over-index on share buybacks, and that's what we've done. And we've -- the last 2 fiscal years, '23, we knocked down share count by 4% and this year by 4%. So our goal is we will -- if we don't do acquisitions, we will spend about 100% of free cash flow on shareholder returns. And we still have between $500 million and $600 million of net cash. Importantly, hey, that investment-grade rating is really important to us. We never want to have a conversation with a customer about our financial condition, so we want to keep investment grade. We can run the business for less than 0 net cash if we need to, but we like to have a small cushion.

Okay. And then maybe just last question for me. You mentioned M&A. You guys have been acquisitive in the past around the cloud ops business. Just how are you judging where inorganic investments might make sense? Or where are you kind of evaluating those opportunities.

Yes. So we're -- if you look across the M&A spectrum, we're mostly focused on what we call tech and talent where it's more of a road map accelerator build versus buy versus, hey, when we did the cloud ops deals to 3 deals, those were really adding adjacent businesses that had net new TAM. And we've now looked at that and said, okay, that probably doesn't make as much sense as the smaller acquisitions where we've bought technology and people. We've then wrapped that into our product, and it's enabled us to increase the value of our product. That's mostly focused around storage, on-prem and in the cloud and the services that surround it. So that's where the focus is now. We still have a great team. There's some interesting stuff out there in that kind of tech and talent. But that's more like $20 million, $30 million type of deal versus $200 million, $300 million, where you're buying a big business, you buy 300 people, and then all the fun that comes with that.

Okay. All right. Well, congratulations on all the success over the last year and look forward to hearing more at the June Analyst Day, but thanks so much for being here with me.

Thank you for having us. Appreciate it. Thank you.