Okay. Hi, everyone. Thanks for joining the NetApp Fireside Chat. Before we begin, I just want to read a quick safe harbor statement. 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 Form 10-K and 10-Q filed with the SEC and available on our website at netapp.com. We disclaim any obligation to update any information in any forward-looking statement for any reason. Now to the Fireside Chat. Great. Well, good morning, everybody. Thank you for being here for day two of the NASDAQ Conference. My name is Hamza Fadderwala. I'm a software analyst at Morgan Stanley. And with me, I have the pleasure of having Mike Berry, CFO of NetApp. Before I begin, just a brief programming note on our end. For important disclosures, please see the Morgan Stanley Research Disclosures website at www.morganstanley.com/researchdisclosures. With that, Mike, thank you so much for joining us this morning. Hamza, thanks for having us. We're always thrilled to come here. Appreciate the invite. Yeah. And I was told this might be your last sell-side or conference fireside as you are retiring from NetApp. And I noticed you joined NetApp during the depths of the pandemic in March 2020. And obviously, the stock has more than tripled since then. So maybe I just want to start off kind of just what are you most proud of the last, I guess, four years since you've been or over four years since you've been at NetApp? OK, so that wasn't on the questions. I don't know if I'm ready for that. No, no, no. But it's a great one. So it's interesting. So my first day at NetApp was actually the day the world shut down when George called me and said, don't come to California because everyone's working from home. It's been a great ride. It's going to be a better one even going forward. So we did announce that I'll retire in May. If this is the last one or not, we'll see. It depends on how they do with the CFO search. But he's got plenty of time to go figure that out. What I'm most proud of is the progress that the NetApp team has made building a different NetApp. And I say that because when I got there and I think there's a lot of views still that NetApp is a hardware company. NetApp's not a hardware company. It's a software company that monetizes its software through hardware. And the team has done so great at not only expanding the market reach, but introducing new products. We are the only company in storage that has a first-party service with one, never mind all three of the hyperscalers. And during that time, we, the 12,000 employees, have taken NetApp from $4 a share in earnings per share to over $7. And it's been a great ride. I know it's going to be a better ride going forward. And I'm most proud of the team, especially the team I get to work with every day. Certainly, the almost 30% operating margins would indicate you have quite the software business. I was going through your last earnings call. One of the things that stood out to me that George talked about was similar to how NetApp helped bridge the world between on-premises to the public clouds when it came to enterprise data. You're now helping bridge the divide between AI systems and enterprise data. Talk a little bit about how the shift towards AI, data management, data resilience is really driving NetApp's business today. Sure. So we've been in AI for a long time. And we think not only is it a big business now, it's going to be even bigger going forward. And so we talked about our discernible difference, our moat is our ONTAP software. And it's so interesting because we talk with investors about AI, and it's everybody's focus. But yet you talk to our customers, and AI is a focus, but the number one focus is data protection and ransomware. Because if you talk to a CIO, hey, the last thing they need to do is get breached. And those two tie together. So we've been in the AI business for a good bit. Think about it as analytics and machine learning. And there's a lot of use cases from financial services to oil and gas exploration to autonomous driving cars where they've built analytics to do that. As they now move to GenAI, there's all the process to get ready for that. So it's not only buying a bunch of GPUs and servers, but now they have to actually modernize their data infrastructure. So what we're starting to see in their small deals and large deals, customers really trying to get ready so that when they're ready, when their GenAI comes and they move from training to inference or to edge, that they have all their data together. They understand the governance part. Responsible AI is a huge piece of it as well. So it's around the modernization of that data to be ready. Now, to be clear, we do have some very large customers that actually have AI centers of excellence. Only a few companies can afford to do that right now. Everybody else is getting ready for that. We've been in AI for a while. They trust us. And really, if GenAI is all about data, unstructured data, that's where NetApp really plays. We're super excited about that path. And then to your great point about cloud, we believe that this is truly a hybrid solution. And that it's one thing to train, data on the internet or in the cloud. Most of the data is still on-prem. We're trying to bring AI to your data, not data to AI, to allow you to actually run it where the data is so that you don't have all the costs and issues of moving your data. Because again, data protection, responsible AI, that's why we think it is a hybrid solution. That's really interesting. And you talked last quarter about, I think, over 100 AI and data lake modernization wins across various geographies and industries. Maybe could you give us a little bit more color what those deals look like? You talked about some of them are larger deals, some of them are smaller deals. But is it fundamentally around this whole preparing your organization for AI? Is that largely what it is? Yeah, the large majority is the preparation. And again, it cuts across industries and size. It goes from five-figure deals to eight-figure deals. The majority, though, is around that AI data and modernization. And keep in mind, too, I think there's some perception that this is services. It's not. It's product and services. And that's the majority of that. It's going to cut across geos. It's going to cut across industries. But a large part is kind of Hamza, that progression we talked about, which is getting ready for GenAI. There are some SuperPOD deals in there, for instance, people that actually have centers of excellence. That's the minority. But hopefully, that will be the majority going forward. Yeah, certainly, it's a big priority for every organization around getting ready for GenAI and setting up their data governance frameworks. I wanted to shift a little bit to the financial side. So last quarter, overall revenue grew 6%. The product revenue grew 9%. You recently set out targets to grow mid to upper single-digit revenue growth at your analyst day. When you think about the drivers of that growth, because it's obviously very durable growth, if not even an acceleration relative to what you're doing today, what is driving that growth? How does AI fit into that? And maybe beyond AI, what are some of the drivers? Yeah, great question. So the answer that I'd give you, let's start with this. And it goes back to your first question. What am I most proud of? This is a different NetApp than it was three or four years ago for a couple of different reasons. There are secular growth drivers, and there are company-specific. So if we break those down, what we talked about at our investor day in June is four big drivers to growth. One is the movement to flash storage is one big piece. Cloud storage, which again, we have a head start and a huge moat as it relates to that. We are the only company that has a first-party cloud storage service that is sold by the hyperscalers, not only one, but all three. Then you have block, which is we do unified storage today, file, object, and block. But a block-oriented-only solution is another big piece. And then you have GenAI. So let's walk those. As we sit here today, flash has been a big driver of growth, and we expect that to continue, especially the movement to capacity flash. And that continues to be a big driver of growth. Cloud storage, our first-party and marketplace part of our cloud revenue is growing 30% plus. The rest of the business is starting to stabilize. So we expect that to be a big growth driver. So draw a line there. That's where we are today in the numbers you talked about. Going forward, the other growth drivers are block. It's the largest part of the storage market. It's where we have the smallest market share. And we've just introduced new products. Our go-to-market now has specialists related to that. So that's a future growth. And then GenAI. Again, we've been in AI for a while, but the GenAI part of storage is still yet to come. So we feel really good about the first two. And then block and GenAI is where we expect to get to that upper single digit that we talked about in June. Got it. Got it. And one of the things you mentioned early on about GenAI, excuse me, about NetApp really being more of a software company. Can you talk a little bit about the pricing and the delivery model of these services? I mean, there's one angle where the hardware is ultimately the beachhead for the software. So what do the software attachments look like on some of the newer hardware that you're selling? And then also, is there a shift to perhaps physical to virtual appliances in general in this market? Yeah, great question, so in the, call it the on-prem storage business, everything comes with hardware and software together. It's an integrated appliance, so the purchase is they buy the hardware, they buy the software, and then typically they'll buy multi-years of support to tie their support with their depreciation life, and that is across all of the solutions. The important part is flash, the use of software is much higher. As we talk about storage efficiency and other ways to get more efficient, especially as it relates to flash, there's a bigger proponent of software, hence the higher margins, which is great, and then that flows into support. As it relates to virtual, keep in mind, and it's a great use case in cloud storage, and we've talked about this before. Our ANF, which is our Azure NetApp Files, or their product that we support, we actually deploy hardware and software in their data centers. For FSx for ONTAP, which is the Amazon solution, they just took our ONTAP software and deployed it on White box. Google's a little bit of a mix of both. So we have deployment models both ways. We're very much agnostic to our customers. And this goes back to even storage as a service. We want our customers to decide on-prem as a service or in the cloud. The great part is ONTAP goes across all of those. And we have different ways to deploy. Not too many of our on-prem customers have said, hey, I just want to buy the software and I'll put it on Whitebox because to them it's an integrated solution. Does that change over time? Possibly. If it does, we're very well positioned for that because we're actually running that in one of the biggest public clouds. Got it, and one of the things that really stood out to me was the improvement that you made in your growth and your operating margins, particularly driven by the improvement on the public cloud margin side. Can you talk a little bit about that, and then what are some of the puts and takes around gross margins going forward as you drive more software business, but also, I think your product gross margins probably are going to face some headwinds as well. Just talk a little bit about that. Yep, great. So let's take a step back. If we look at gross margins, keep in mind that at NetApp, we focus on driving gross margin dollars like most companies. Dollars drive the bus, so let's take a step back, and there's three big pieces of gross margin. There's product, support, and cloud. In fiscal 2024, the majority of the increase in dollars and percentage came from product as component costs came down, specifically NAND and SSDs. Coming into fiscal 2025, we're still seeing growth in product. But to your point, we did a bunch of prebuys to lock those margins. Those are going to start to, call it, we're going to amortize those through the year. So we've talked about at the beginning of fiscal 2025, higher product gross margins coming down a little bit as we exit. OK? We've had a lot of discussions about the product gross margins. I think the underappreciated piece of that is the support in cloud. Support, which has typically grown low single digits at very high margins, is a big driver to gross margins. What we've seen, and we've talked about this for three years, and finally we're getting there, is in the cloud business. We talked about target gross margins of 75%-80%. That was driven by scale, also better cost management as it relates to that. Importantly, we do deploy hardware in some of the hyperscalers. We left all that depreciation at three years. That's finally starting to wear off. That initial investment is now turning into a benefit. So for fiscal 2025, if you look at the gross margin dollar increase, it's almost a third, a third, a third between product, support, and cloud. That's a much better sustainable margin model going into 2026, whereas 2024 was mostly driven by product. So going into 2026, yes, there was a little bit of headwinds in product, but we've overcome that with cloud and then with support. So we would expect going into next year to be much more of a sustainable, evenly spread gross margin. And again, we look at the total number, the 70% plus in driving those dollars. That's great. Maybe a couple of questions, and then I'd love to open up to the audience as well. Can you talk a little bit about the spending environment in data storage just more broadly? It does seem like we're gearing up for a pretty solid refresh cycle heading into 2025 in a lot of areas, but storage specifically. But what are you seeing there already? What does the pipeline look like? What are customers telling you around that front? Yeah, we're super optimistic about calendar 2025. The macro is still relatively consistent. There's some good spots, some call it thawing of that spend. I do think, especially in the U.S., which is our largest market, we have great business in Europe and Asia as well. With what happened with the election, I think there is at least optimism that it's a more business-oriented administration. It would also be darn nice to get actually an approved government budget, fiscal budget, and then, hey, at some point, it would actually be nice to know where's the tax structure going to go? Is there going to be a minimum tax? All those things, that would be nice to have, so you're starting, I think, to see more optimism in the U.S. Plus, if that whole deduction of R&D, that was a biggie in terms of, hey, where does that spend go? So all of that stuff, I think, bodes well from an optimistic part of the U.S. There's some areas of where, especially here in Europe, where there's still a little bit of concern, and then, of course, armed conflict never helps anybody, so if we can get through some of those, I think that we are cautiously optimistic going into 2025, and then as it relates to storage, all the things we've talked about, the refresh cycle, the movement to flash, the lower operating costs, preparing for GenAI, all is a great secular tailwind to data management and storage. Yeah, and that refresh cycle opportunity, I imagine, would also open up those larger deal conversations as customers pursue their data modernization efforts. Do those sort of come hand in hand? Would you expect that to pick up as more customers refresh some of their assets from recent years? So we would. And I'm going to tie that to not only their refresh, but then also net new workloads. And that's the big difference that I would, from my seat, NetApp now versus a couple of years ago. We didn't have the product breadth to go after all the net new workloads. And we would have to take our high-performance flash, call it, squeeze it into those. Now with capacity flash, we're able to address all those use cases. Block optimized, we're able to address those use cases as well. And we couldn't before. And I would say it not only because our president is here, the product matters. The go-to-market matters just as much. And I think that's the underappreciated part of NetApp is new products are awesome. Somebody has to catch them. And both of those, that one plus one is equal to three in my mind. We get a lot of questions about why has NetApp overperformed versus some of our other folks? Great product introduction, a go-to-market that was ready, and a macro that started to get better, and good secular growth. Any questions from the audience before I continue? OK, I'll keep going then. So I think you had some new product releases. I think you've done a fantastic job with the release of your C-Series product. Can you lay out what portion of the market this helps you address and why you've been able to outgrow your peers with that product cycle? Sure. So if we look at the flash market overall, almost 10 years ago, we started to see the introduction of our A-Series, which is high-performance flash. That largely replaced those 10K RPM, or I'm sorry, 15K RPM drives. That's a relatively mature market now. And a lot of that has happened. The bigger piece of the market, the mid-size, that's where capacity flash plays in. So the 10K drives, the refreshment around the hard drives and hybrid drives, especially as the price of NAND has come down, the cost almost came equal in terms of hard drive versus SSDs. And the operating costs are a lot lower. And the environmentals are a lot better. So we're seeing a big refresh cycle there. That's going to then move through the market. As normal, that mid-tier is the biggest piece of the market. Nearline drives, 7.5K RPM drives, we'll see what happens there. I think that's where the economics start to play a little bit bigger. It's a bigger gap right now. So A-Series has been great. We continue to grow. We've also replaced and refreshed all the infrastructure. We talked about hardware. The hardware is super important. The software drives the bus. But we do have the new platforms across both A and C. That also allowed us to introduce Block at very little incremental cost because it uses the same infrastructure. So that's A and C, and then Block, and then Block is yet to come. Got it. Got it. And then so the A-Series and the refresh kind of ties in with the C-Series. There's been some concern around whether we could see the same sort of tailwind, especially as you lap sort of more difficult comparisons. Just curious how you guys get confidence on the durability of growth around that? Yeah, so we're confident because it's such a large market. And it's not only us replacing, because there is some refresh in our great installed base, but now we actually can go get net new workloads and new logos that we couldn't get before. And the great part about the storage market is you don't see those hockey sticks because you have to replace that infrastructure. And it typically occurs over time. So we feel really good about the durability of growth because of that. Keep in mind too, though, that Block is still a very small part of our business. It's the largest part of the market. And when you talk about replacing the existing infrastructure, that's where we're going after. So it's not only refreshing our installed base, net new workloads in our installed base, and going to replace those legacy providers. Those are typically going to be block. Got it. I wanted to dig in a little bit on the public cloud business. Can you maybe walk through a little bit the evolution of the public cloud business? I think there's been some changes that you've made. Curious how the business has been performing since those changes, and where do you still see the greatest opportunity within public cloud? Yeah, great question. So let's take a step back if we could. So the public cloud business, as of the last year, call it $650 million of annual revenue. It's now about 10% of our total business. Let's break that up. About 70% of that is cloud storage. We're going to spend most of our time there. And about 30% of that is cloud ops. That's where we did some acquisitions around optimization. That part of the business has historically struggled a little bit because we ran into some headwinds around subscription and other things. That's largely moderated, where it's relatively consistent. OK? Let's shift to cloud storage. Of the 70%, the largest part of that is our first-party products. And that's where we're spending most of the time and effort from an R&D and a go-to-market perspective. So that part, first-party and marketplace, which is a, and you know this as well as I, that's a huge vector of purchasing, people buying through the marketplace. We as well have a 10-year advantage there in terms of what we offer, bless you. So that part, first-party and marketplace, is growing at about 30% plus. And that is a bigger piece every day. As of the end of our last fiscal 2024, we said that was about half of the total business. That's growing very quickly. The rest of it declined. We took a hard look at that whole business. We ended life some products. We made a lot of changes that relates to that. And we knew 2025 was going to be, call it, a reset year in that business. So we didn't grow in entering 2025. We grew a little bit in the Q1. We grew 9% in Q2, and we've guided back to that double-digit growth in the second half, and we feel really good about that trajectory going into 2026. The great part about that, to your earlier question on gross margin, those gross margins are actually accretive to the company average, so as that gets bigger, that's going to help pull up gross margins as well. Super interesting point. You've also had, you talked about how a lot of your product is deployed within the hyperscalers and their data centers. You've had strong partnerships there. You've had a strong partnership with NVIDIA. How has that momentum been building, especially as you address these new markets within GenAI and others? Yeah, so all across that, because as much as there's been a focus in GenAI, call it, in our on-prem customers, also in the cloud as well, so in each of those are different relationships. Again, those first-party relationships are nobody else has those. We feel really good about Microsoft, Amazon, and GCP. They're all in a little different spot, and there's a lot of, and you see this, and we talk about new product introductions. As much as we like the A-Series and C-Series and Block, there's also been a ton of innovation in the cloud, and then with NVIDIA, our ONTAP AI and the solutions we have there with SuperPOD and the integrations that we've done have been super helpful. Of course, everybody wants to be tied to NVIDIA. The good part about that is even a couple of quarters ago when they did their big conference, they talked about NetApp, where the majority of the unstructured data is housed. So they recognize the value of us as a partner. And then we're slowly but surely going through those product qualifications with their solutions as well. Got it. One or two more questions, and I'd love to open up to the audience again. The U.S. public sector segment, it's been a bright spot for NetApp, despite, I'd say, some mixed results from others in recent quarters. Just curious, when you think about the federal business going forward, given the uncertainty around the new administration, the budget resolution, what are you seeing there? What gives you confidence that's going to continue to be a durable tailwind for you guys? Yep. So it has always been a good piece of business, and we expect it to even increase. So call it lower double-digit teen revenue numbers. That's the one piece we do disclose. And that's made up of both federal and state and local. The majority of that is U.S. federal. So defense, intel, civilian piece of that. And we have a little bit different. I know there was a lot of headwinds with some folks. A lot of the projects that we do there are longer-term project-based solutions. So even when you don't have a budget approved and you're under the world of continuing resolutions, we were still able to get funding there. And again, we have some very good long-term projects that help drive that growth. In addition, state and local, which is a smaller part, continues to be super strong as well. So, going forward, and there's been a little bit less, call it, I'll say, push to the public cloud. You're starting to see that a little bit more now. And public sector as a whole at NetApp, even though we don't disclose it worldwide, is a very big sector for us. And we talked about that last quarter, the strength of our public sector business internationally as well. So we expect that to continue. That is one area where hopefully the new administration and Congress can actually approve a budget. And we know, I don't think people want to fight so much about what it is. Just give us the certainty that there is that. But we expect to do well either way. Great. I just want to open up one more time for the audience. Is there any questions? I must be doing a good job. Either you are or we are. Sure. NetApp has had a great history of returning cash to shareholders. Just curious how you think about balancing capital return versus M&A opportunities that you might see down the line. Yeah, it's a great question. And this has evolved a little bit over the last couple of years. So two or three years ago, we were a little bit more focused on, call it, 70% return to shareholders and then allocating about 20% or 30% for acquisitions. So we did do the acquisitions where we entered new adjacencies specifically in Cloud Ops. We've taken a little bit of a step back there because we realized, hey, those are a little bit harder. They're a little bit bigger. And you're also talking about a new buyer. So what we've done in the last two years is we've said, hey, we're going to focus on 100% free cash flow return to shareholders. That's made up of dividends and buybacks. We did increase the dividend a little bit this year because of our confidence in cash flow. For the last two years, we have reduced share count by 4%, 4%. This year, it's probably closer to 1% or 2% just because of the rise in stock price. We are still focused on M&A, though. I don't want people to think that we're not focused on that. If you look at M&A being small tech and talent, where you buy, it's really more of a roadmap accelerator. You buy code, you integrate it into your existing solution. We continue to focus on that. The adjacencies, we've taken a step back because we do think that the better growth is organic. Larger acquisitions, everybody looks at. At this point, it's not been a big focus. We are still focused on M&A, but smaller tech and talent, tuck-ins. Yeah. Definitely, you have a lot of drivers for that double-digit EPS growth. And those are targets that you laid out on your recent analyst day. Just curious, as you think about chasing some of these new markets, these new opportunities, which there are certainly a lot of, how do you balance that with the desire for continued efficiency as these double-digit EPS targets apply? It's a great question. It's probably what George and I spend the most time on, which is how do you balance, hey, driving that growth, double-digit EPS growth, and making sure you're investing in innovation and growth. So a couple of things. One is, and we talked about it early, the business model, that's probably the one thing that surprised me the most to the upside when I started is the resilience and the leverage of the model. So this year, if you look at our guidance, it was almost the same last year. For every dollar of net new revenue we'll bring in incrementally, we get about $0.50 to the operating income line. It's got great throughput because of the margins and the way we manage the operating expenses of the business. So that helps a ton. If you look across the different initiatives, we've probably introduced more new products in the last two years than we did in the three years before that, largely with flat R&D. The team has done a great job saying, "Hey, there's growth areas. I want to go focus on that. I'm not going to focus here where it's not growing." And we reallocate dollars. From a go-to-market, we made changes about 18 months ago to really focus on storage and cloud separately. And we did that within the envelope that we had. So we do want to make sure that we're funding net new account managers to drive capacity. But we've also done things like, and I know a lot of your clients in software have done this, "hey, we brought renewals in-house to a lower-cost solution." We continue to drive add-ons and move things digitally, which are hugely important. And then as we look at leveraging our channel, we do a lot with partners. How can we leverage that as well? So all of that has allowed us to continue to invest in growth, but yet drive those double-digit growth rates in EPS. And you should expect that to continue. Of all the things I worry about at NetApp going forward, that's probably at the bottom of the list. It's a great model. It's got great leverage. And the team does a wonderful job on all OpEx. When they come and ask for money, my first question is, what are you going to not do to do this? And they're really good about reallocating versus, hey, I need new money. Mike, congrats on a great run on NetApp. Congrats on a great run over the decades running multiple great organizations. We wish you the best for retirement on your next journey ahead. Thank you very much, and great to be here. Thanks for having us. All right. Thank you.