Kris Newton Nicholas R. Noviello - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance Thomas Georgens - Chief Executive Officer, President, Director and Member of Strategy Committee.

Shebly Seyrafi - FBN Securities, Inc., Research Division Aaron C. Rakers - Stifel, Nicolaus & Co., Inc., Research Division Kulbinder Garcha - Crédit Suisse AG, Research Division Kathryn L.

Huberty - Morgan Stanley, Research Division Amit Daryanani - RBC Capital Markets, LLC, Research Division Maynard Joseph Um - UBS Investment Bank, Research Division Benjamin A. Reitzes - Barclays Capital, Research Division Rajesh Ghai - Craig-Hallum Capital Group LLC, Research Division Jayson Noland - Robert W. Baird & Co.

Incorporated, Research Division Steven Milunovich - UBS Investment Bank, Research Division Mark A. Moskowitz - JP Morgan Chase & Co, Research Division Louis R. Miscioscia - Credit Agricole Securities (USA) Inc., Research Division Brian G. Alexander - Raymond James & Associates, Inc., Research Division Bill C.

Shope - Goldman Sachs Group Inc., Research Division Ananda Baruah - Brean Capital LLC, Research Division Glenn Hanus - Needham & Company, LLC, Research Division Keith F. Bachman - BMO Capital Markets U.S..

Hello, and welcome to the NetApp First Quarter Fiscal Year 2014 Earnings Conference Call. My name is Mayisha. I will be your operator for today's call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the call over to Kris Newton, Senior Director of Investor Relations. Kris, you may begin..

Hello, and thank you for joining us. With me on today's call are our CEO, Tom Georgens; and our CFO, Nick Noviello. This call is being webcast live and will be available for replay on our website at netapp.com, along with the earnings release, our financial tables and the non-GAAP to GAAP reconciliation.

Financial information previously found in the supplemental commentary document will now be included in the accompanying supplemental data tables of the quarterly financial press release. Additionally, a historical supplemental data table providing historical multi-period financial information will be available on our website.

As a reminder, during today's call we will make forward-looking statements with respect to our financial outlook and future prospects, all of which involve risks and uncertainty. Actual results may differ materially from our statements and projections for a variety of reasons.

We describe some of these reasons in our accompanying press release, which we have furnished to the SEC on an 8-K.

A detailed discussion of these reasons is included in our risk factors in our most recent 10-K and subsequent 10-Q reports, also on file with the SEC and available on our website, all of which are incorporated by reference in today's discussion. All numbers discussed today are GAAP unless stated otherwise.

To see the reconciling items between the non-GAAP and GAAP, you may refer to the table in our press release or on our website. In a moment, Nick will walk you through some additional color on our financial results and then Tom will walk you through his perspective on the business this quarter. I'll now turn the call over to Nick..

Thank you, Kris. Good afternoon, everyone, and thanks for joining us. Q1 was another quarter of consistent execution and solid financial performance. Revenue of $1.52 billion was up 5% year-over-year and roughly at the midpoint of our guidance range despite some sequential FX headwinds and a continued uncertain macro environment.

As we anticipated, year-over-year branded revenue growth was very strong, partially offset by further reductions in OEM revenue. Branded revenue was $1.35 billion, up 9% year-over-year, representing the largest increase in branded business in 7 quarters. OEM revenue continued to decline, down 20% on a year-over-year basis.

Consistent with our expectations, we anticipate that OEM revenue will continue to decline on a year-over-year basis in Q2 and then normalize to the level we expected when we acquired Engenio. Indirect revenues remained strong, with 80% of Q1 revenue coming through the channels and OEMs.

Arrow and Avnet contributed 21% and 16% of our total revenue, respectively. From a geographic perspective, Americas grew 7%, EMEA grew 2% and Asia Pacific grew 3% on a year-over-year basis. Within the Americas, commercial was up almost 8% and public sector was up 5% year-over-year.

Non-GAAP gross margin of 61.3% was in line with Q4 and consistent with our Q1 and full year expectations. Non-GAAP product gross margin of 53.3% was up almost 2 points and service gross margin of 59.5% was relatively flat year-over-year.

As we discussed on our call at the end of May, early in Q1, we took action to better align our investments and resources to our biggest opportunities, resulting in a headcount reduction of approximately 7% from our Q4 exit and a GAAP restructuring charge of approximately $48 million.

Our non-GAAP operating margin for the first quarter was 14.9%, over 2 points better than last year and up 1 point from our previous guidance, reflecting the benefits from our realignment activities net of new strategic investments across the business. Non-GAAP EPS of $0.53 grew 26% year-over-year.

We derived $0.01 of benefit from our slightly lower-than-anticipated tax rate of 16.6% and $0.01 from our Q1 share repurchase activities. Excluding this net $0.02 benefit, non-GAAP EPS came in $0.01 above the high end of our previous guidance range. Now turning to the balance sheet.

We ended the quarter with approximately $5.1 billion in cash and investments. Days sales outstanding of 32 and inventory at 20 turns reflect seasonal improvement and strong operational performance. Deferred revenue decreased from Q4 by $68 million to approximately $2.9 billion. However, on a year-over-year basis, deferred revenue was up $174 million.

Cash from operations was approximately $286 million, an increase of 25% from Q1 of last year and free cash flow was 14.5% of revenue. Q1 is seasonally slow with respect to cash flows as cash generation is offset by payments of Q4 commissions and prior-year annual incentive compensation.

On our call last quarter, we outlined important enhancements to our capital allocation strategy, including a $3 billion share repurchase program over 3 years and the initiation of a quarterly cash dividend of $0.15 per share of common stock.

These actions not only demonstrate our confidence in the underlying long-term strength of NetApp's business, but also our commitment to generating value for our shareholders.

Consistent with our expectations, we returned just over $900 million to shareholders in Q1, which included approximately $850 million in share repurchases as well as approximately $51 million in our first cash dividend.

We remain on track to achieve $1 billion in share repurchases by this September and today, we have also announced our next cash dividend of $0.15 per share of the company's stock to be paid on October 25. As expected, we retired our convertible notes in June with $1.265 billion of U.S.

cash payments and the issuance of just under 1 million shares of common stock related to the excess of the average share price over the conversion price of $31.85, net of note hedges. Q1 diluted share count decreased by approximately 8 million shares from Q4, primarily related to stock repurchases as well as option and RSU activities.

Separately, the warrants associated with our now retired convertible notes will become exercisable in September and October and will create dilution if our share price is over $41.12 during this time frame. Our warrants are not hedged. Turning to guidance.

Our target revenue range for Q2 is $1.56 billion to $1.66 billion which, at the midpoint, implies about a 6% sequential growth and about 5% year-over-year growth. We expect year-over-year branded revenue growth at similar levels to Q1, implying a better-than-normal seasonal growth rate but a continued decline in OEM revenue.

We expect consolidated non-GAAP gross margins of approximately 61% and non-GAAP operating margins of 16% to 16.5%, increasing over 1 point sequentially and up to 2 points over Q2 last year. We expect our blended consolidated non-GAAP effective tax rate to remain at Q1 levels and then increase in the back half of the fiscal year.

Based on our average stock price of $41.56 for the first 10 days of the quarter, we expect our diluted share count for Q2 to decrease to approximately 351 million shares. We expect non-GAAP earnings per share for Q2 to range from approximately $0.60 to $0.65 per share, up 18% to 27% from Q2 last year.

The midpoint of our EPS range implies mid-teens growth in EPS from operations alone versus Q2 of last year. As we move into the second quarter, our expectations for fiscal 2014 remain unchanged.

Though ultimately dependent on revenue mix and growth, we are reiterating our expectation for approximately 61% gross margin and approximately 17% operating margin for the year. We continue to expect full year EPS growth in the mid-teens from operations and further supplemented by our capital allocation activities.

We are on track to complete our plan of repurchasing $2 billion of stock in the 12-month period following our Q4 announcement, $1 billion of which will be completed by this September. Our cash-generating capacity remains intact and strong. At this point, I will turn the call over to Tom for his thoughts.

Tom?.

mobility, big data, flash, software-defined and cloud. In Q1, we introduced NetApp Connect, which delivers mobile access to corporate data while maintaining the tight security and control that enterprise IT requires by keeping its data and business protected.

With our ability to unify structured and unstructured data into a single infrastructure, we are unmatched in our ability to manage the breadth of enterprise data at scale. Our breadth and adoption rate of flash technology has been a big contributor to our recent performance and our cloud and software-defined strategies are unique in the industry.

As CIOs look to optimize business outcomes for their enterprises, there are more options available than ever before. Emerging storage technologies such as flash and deployment models like converged infrastructures are impacting on-premise computing. NetApp has leadership positions in both.

In addition, customers have alternate off-premise IT delivered models available to them as well. Enterprise customers will deploy some hybrid combination of all of these models. However, regardless of the ultimate computing destination, the CIO will maintain responsibility for data stewardship.

The introduction of the cloud makes data governance even more complex because data is distributed and not under direct control. NetApp's vision is to create an enterprise data management solution that will span the customer's data storage landscape regardless of data type or location. We have our integrated FAS storage systems.

With V-Series, we can manage other vendor storage devices. With Flash Accel, we can manage flash in the servers. ONTAP in a virtual machine and NetApp Private Storage for Amazon Web Services are technologies that enable management of data in the cloud.

We believe that these capabilities and the future options that they create uniquely enable NetApp to deliver the vision of a unified multi-platform distributed enterprise data management solution. This is the epitome of software-defined and a more expansive vision than we've seen presented by anyone to date.

More importantly, much of it is available now, enabling customers to choose NetApp today with the confidence in our ability to meet their future requirements.

When I look at the evolution of clustered Data ONTAP, our broad flash portfolio, the growth of our E-Series branded solutions and the work we are doing around NetApp Connect and NetApp Private Storage for Amazon Web Services and storage grid, I see that we have more technology at the early stages of its product life cycle today than at any time in our history.

We believe we have more as yet unrealized potential out of this portfolio than ever before. Because of this, I remain confident in our ability to outgrow the market and gain share, not only today, but tomorrow as well.

Finally, I would like to thank the more than 12,000 NetApp employees for maintaining focus in the face of an uncertain macro environment and our recent realignment to deliver a solid quarter. All of your hard work across all aspects of the business is coming to fruition and we are seeing that in our results.

At this point, I will open up the call for Q&A.

[Operator Instructions] Operator?.

[Operator Instructions] Our first question is from Shelby Seyrafi (sic) [Shebly Seyrafi] with FBN Securities..

Can you talk about the product gross margin? It was up year-to-year, but it declined about 200 basis points sequentially. My checks indicate there's competition from IBM and EMC. So if you can elaborate on that..

Sure, Shebly. Nick Noviello here. So let me just reiterate the numbers that you're referring to. So product gross margin in the fourth quarter was 55.8% and in the first quarter was at 53.3%. Frankly, we typically see a decline in product gross margin in the business.

The other thing that you need to keep in mind as you look at the sequential and what happens on the seasonality here is that you're going to end up with a mix of business that's a little different because the branded business is going to be the one that is sequentially down.

And what you see on a sequential basis is that the OEM side of the fence was relatively unchanged, so there's going to be a mix impact as well. So we really have to look at a combination of mix of business, right, branded versus OEM. We look at the seasonal that happens anyway from Q4 to Q1 and we look at a variety of other components here.

There is nothing that I would say that's abnormal in discounting or competitive that's showing up in these numbers. They're all pretty consistent..

Nick, if I can follow through.

Do you expect the gross -- product gross margin to return to like high 55s, 55% to 56% by the end of the year or over the next 1.5 years?.

So what I would say there, first of all, so we gave you the guidance for Q2, Q2 guidance, approximately 61% on gross margin. Again, if you look at the seasonal over time, we generally have a higher gross margin on the product side in the second quarter. I would expect that to come through again.

So we would see an increase in product gross margin there and, over time, we expect an increasing product gross margin..

Our next question is Aaron Rakers with Stifel, Nicolaus..

Tom, last quarter, you had talked pretty candidly about what you were seeing in terms of bookings, in particular, branded bookings. I think you had said double-digit growth year-over-year.

Can you update us on what you saw in the July quarter from that perspective and then just kind of dovetailing that with linearity in the quarter?.

Well, I think we stay away from bookings. It's not a -- we need to be careful of the definition there and it's not an auditable number. So we don't disclose bookings for the company. But I think as the quarter plays out, 9% branded growth is pretty strong.

The fact that we're forecasting 9% or so branded growth again next quarter would indicate that we clearly have ongoing momentum in that area. So it certainly wasn't a one-off thing. And we see it across the board. Clearly, the clustered ONTAP uptake is key here.

I think that the flash story, the all-flash array around the E-Series has been very, very powerful. I think we're very, very pleased with the momentum that we see there.

So as far as I look at it, I think -- if I just took actually a bigger step back, I'd say the first half of last year, we were in a pretty big product transition around clustered ONTAP and we certainly saw the growth rate. And then we saw momentum build and market share gain in the second half of the year.

I think we finished strong and I think we started this year relatively strong in this market. So I should think that we built some momentum last year. We talked about it in Q4. And I think it continues and it's reflected in our forecast for our branded business next quarter..

Our next question is Kulbinder Garcha with Crédit Suisse..

The question is for Tom.

Tom, with the pickup in revenue growth you're seeing last quarter, this quarter and what you're guiding for in the branded business, I'm kind of curious as to what you think is happening to the end market storage and your market share, just in terms of you're obviously probably gaining and probably gaining again in the mid end as well.

Can you speak about some of the competitive dynamics? And are you getting any signs that with this pickup in revenue growth, that just the end market environment at least for the storage segment, it seems to be proving not only resilient, but maybe reaccelerating as you head into the second half of the calendar year?.

Well, I think we can -- we need to focus on what we see and where we're winning. If I look at 9% branded growth, that's really the component that drives the market share number. I don't see anybody close to that number. So I think unquestionably, this is a pretty strong market share quarter for us, I think that goes without saying.

I want to be careful about the industry at large. If I look at recent announcements, EMC storage business, a bit over 3.5%. I think Hitachi reported 1%. IBM was down and we'll see what HP and Dell report. But overall, I think that unquestionably, the demand for the products in our suite is clearly stronger than it certainly was a year ago.

So I think we feel better about it. But I wouldn't go so far as to say that we've got an economic tailwind driving us. I think NetApp, the competitive position is stronger than it's been and I think we're making the most of it. So I think unquestionably, we're gaining share.

That said, certainly, we saw a little bit better economic news in terms of GDP growth out of the EU reported this morning. And I think things probably feel a little bit better than they were a year ago, but I wouldn't use the word dramatic turnaround or anything like that.

And certainly, as we think about our guidance, on the federal side, that's an important part of our business, we have the sequester component that's out there. I think we've had the sequester all year and NetApp has done very, very well there. I expect that to continue up until the end of the government fiscal year.

But our quarter also includes October, which is the first month of the next fiscal year. And I think there's a little bit of concern about what it's actually going to play out there. So I'm not worried about anything NetApp specific on that front, but clearly, that's going to be a politicized process.

But between now and the end of the government fiscal year, I expect us to continue to take our own fair share of the government business..

Next question is Kathryn Huberty with Morgan Stanley..

I think somebody asked about linearity, but I'm not sure you specifically commented. Did you see an improvement in demand or just uptake in NetApp products as you move through the months of the quarter? And Nick, maybe you can comment on why DSOs came down so much and whether that speaks to linearity in the quarter..

I would say that in general, the quarter was pretty typical. We also had kind of a NetApp-induced wrinkle this quarter is that we were doing the realignment and the restructuring this quarter. And clearly, that had the potential of having a big impact on our sales organization.

We've certainly seen that to be disruptive to companies in the past and I think we've managed through that. But I think that, that probably had some impact on the timing. So I think there's probably a little bit of an anomaly. But I wouldn't say that we were any more back-end loaded or any more back-end coasting in than any quarters in the past.

So I think it kind of played out the way we would've thought, but we did have a little bit of disruption in the middle as we, basically, realigned territories and reassigned quotas and did all things associated with the restructuring..

Yes. And Katy, just in terms of the DSO, yes, it was 37 in Q1 last year and down to 32, but we think -- we've seen 32 before. And I actually think there's a little bit here around all of the integration activities around Engenio are completely behind us. You see inventory turns up as well.

I think there's a normalization there of that type of integration behind us. And then just strong execution across the board. And we're really pushing on that execution, I think, as that came through..

Yes, I mean, the one thing I'd add on the execution front, this will be a message to employees tomorrow, is the DSO number was one of the best we've ever reported. The inventory turns number was one of the best we've ever reported, certainly the best since the Engenio acquisition. Gross margin is strong. We had the realignment and all of that.

We didn't lose any sales momentum, at least not in the aggregate for the quarter. We also moved a factory in Europe last quarter without disruption to the business. So I think we've clearly upped the intensity around execution. And I think that all in all, we're pretty pleased about how this quarter came down..

Our next question is from Amit Daryanani with RBC Capital Markets..

Just a question on gross margins. Could you maybe talk about why do you guys see gross margins being flat in the October quarter guide, given the fact that sales are actually going to go up sequentially by about 6%? I imagine that mix will actually get more favorable as branded continues to grow for you.

So maybe somewhat, what are the headwinds that I might be missing that are limiting gross margin uptick in the quarter?.

Yes, so Amit, this is Nick. So let me walk through a couple of pieces. So I indicated that we would have -- we talked about the branded growth and that the branded mix will improve a little bit in the second quarter from the first quarter. Obviously, with that, that carries a higher margin base.

The product gross margin, as I indicated to Shebly earlier, I would expect to go up from Q1 to Q2 or a sequential increase there. However, on the service side of the fence, the first quarter of the year is generally a higher or a high-water mark for the service side.

Because a lot of the bookings come through in actual revenue in Q1, yet the costs are linear across the period of time. So in terms of services investments, I think you'll see and we will experience more services investments in the second quarter. That will impact the service gross margin and take that down.

The blend is the approximate 61% we guided you to..

Our next question is from Maynard Um with Wells Fargo..

I just want to touch a little bit more about the competitive landscape. I mean, it clearly sounds like you're still seeing good wins across the board. But I'm wondering if you've seen any changes within the competitive landscape, whether from the traditional vendors, the channel, or whether you're seeing more and more of the new entrants.

Regardless of whether or not they're winning and you're winning the business, I'm just wondering if you've seen any changes in that competitive landscape..

I'd say not a lot. Clearly, if I look at our portfolio with clustered ONTAP being mainstreamed and the flash momentum, I think we're probably better armed than we were a year ago and certainly more confident than we were a year ago.

But I think the dynamics clearly are the independent players continuing to gain share, continuing to be more relevant and the service -- and the servers vendors continuing to decline in relevance.

So I think clearly, whether we're competing though for the footprint of a server vendor or legacy server vendor installed base, we're typically competing with EMC to get that, whether EMC is the incumbent or not. So clearly, that's where the competitive intensity is the greatest and really across the board.

Perhaps a little bit more with EMC, certainly, what we come out then with the value proposition of clustered ONTAP. We typically, EMC, go down the Isilon path or the V-Max path to try and match up a little bit differently rather than try to take us out with some of their traditional offerings.

So I'd say that if there's one dynamic is we're probably seeing a lot more V-Max engagement. And I think that's really the clustered ONTAP lining up against VNX and EMC will go to V-Max instead to compete. That's probably the only thing that I see different. I mean, you certainly see small guys.

But at the end of the day, the competitive intensity with EMC is in a large percentage of the transactions that we see..

Our next question is Ben Reitzes with Barclays..

Tom, when I look at your results -- and I'm hopping between some conference calls tonight, but it looks like the big difference is APAC maybe versus the Street. I was wondering, you might have -- you probably touched on it in your remarks, but if you could just talk a little bit there, if the U.S.

looks actually pretty strong versus expectations, Europe in line and it looked like APAC was light. So obviously, that economy is pretty weak, but how do you see that playing out and when can that rebound? Because we've -- looking at this, it looks like you probably beat everybody's expectations in the U.S..

Yes, I'd say probably one wrinkle in that story a little bit is that the thing that we look for in terms of our measurements, really, is bookings. And here's the case where the bookings performance and the revenue performance are a little bit distorted. So our bookings performance in APAC was actually a bit different.

If I look at APAC, areas where we saw strength this quarter is Japan has been strong for us for several years now. That's really been a very, very strong management leadership story by the NetApp leadership over there. China had a very, very strong booking quarter, in the vicinity of just under 40%.

But we also saw some weakness on the Australia side at the ANZ area. So I'd say it's somewhat uneven. Japan and China and then Korea is much, much smaller but has pretty good growth. But I'd say that ANZ, the Asian [ph] area and India are not as strong. But overall, I'd say from a booking perspective, the numbers are a little bit better than shipments.

That's primarily a timing issue. So clearly, it's not at the growth rate we were probably 6 months ago. That's a fact, but still pretty good. And it's, from a booking perspective, higher than all the other areas..

Our next question is from Rajesh Ghai with Craig-Hallum..

Tom, you mentioned that the Cluster-Mode was getting you into new workloads. And also, you're effectively competing against V-Max more than you had done in the past.

I was wondering if you could talk about what those incremental workloads were and what -- how much of an incremental time are you addressing as a result of the Cluster-Mode now?.

Well, when I look at clustered ONTAP and the ability to take the feature set of Data ONTAP, which is the #1 operating system in the world from a storage perspective, and basically marry that with cluster and we can deliver really unlimited scale, unlimited performance and nondisruptive operation.

So in our core markets, large-scale file services and content, clearly that's been a big market for us and this will allow us to scale even bigger. Virtualization, clearly a big play. We've established a big footprint.

This will allow us more mission-critical nondisruptive operation, allow the virtualization of more applications that I think serves us well in our partnership with VMware and also expands our segment there. And I think that's pretty well understood. That, I think, is competitive as an existing segment.

The other thing is going deeper in the data center, perhaps with some applications that might not have considered NetApp in the past. Database would certainly fall into that. Decision-support applications, things of that nature. And that's a big part of the business.

Deeper in the data center, more mission-critical apps, now with the nondisruptive operation, the scale and the performance, they can offer a solution that can scale and perform better than any individual box from anybody and that's a TAM expansion component for us.

And frankly, it's one of the biggest untapped, proven profit pools in the entire industry. So from our perspective, file services, virtualization, that's stronger where we previously played.

But here's the opportunity to go deeper after more mission-critical applications in the data center, proven profit pool, and I'd say that's a big opportunity for us in terms of TAM expansion. And for clustered ONTAP, it's specific. That's probably the biggest TAM expansion opportunity we have..

Our next question is Jayson Noland with Robert Baird..

Tom, I wanted to ask about pent-up demand for 8.2 and 8.3. We talked about that in the channel.

And then at the same time, if you could address the migration to clustered ONTAP, how difficult is it, what role does the channel play? Do you have services in-house now that are -- that makes that process a little easier?.

Well, we've just introduced 8.2. And one of the things about the clustered ONTAP story for us, one of the things as we compete with this technology and move into the new technology, requires the migration of the data. And that takes time, it requires scheduling and a bunch of other things.

So one of the things that we have with 8.1 is -- and we've talked about it in the past, is it doesn't have 100% feature compatibility with the 7 mode before it. So for some customers, before they migrate, they want to make sure their business processes can transfer seamlessly to the new software.

So interesting is for all the momentum that we've seen up until the release of 8.2, it's primarily not come from merely repositioning our existing product base or existing customer base.

But it's actually come from brand-new accounts and brand-new workloads, which actually have the team pretty excited because that basically says that the value proposition is strong because we can beat the competition with it. But the real migration of our existing footprint, that has really only just begun.

So with 8.2, we closed a substantial amount of the feature gaps where a substantial amount of our installed base can now move seamlessly to the new platform, but they physically have to migrate the data in order to do it. And with 8.2 comes a set of migration tools that will help them with that process.

So -- and kind of my internal joke is that, so far, that it's proven to be easy to compete against the competition with clustered ONTAP than it is to compete against ourselves. But now with the feature parity mostly achieved, the opportunity to move more and more customers. And that's probably going to be a big part of our activity over the 6 months.

But that's not just the pent-up demand. That doesn't happen overnight. It takes finite time to move. It's something that needs to be scheduled. It's something that the customers need to plan. But I expect it to be a relatively significant activity over the rest of this fiscal year now that we've got 8.2 out.

So my summary is that most of what we've done so far, despite all the growth with thousands of machines and everything and all the progress that we've made, that's really been the hard growth of basically new wins and new workloads. And just the conversion of the existing installed base, I'd say that we're in the early days of that..

Our next question is Steve Milunovich with UBS..

You gave some numbers on the series 6000.

Can you give similar numbers on the 2000 and the 3000? And also, do you contemplate much impact from the VNX upgrade that's likely to come in the market over the next 2 quarters?.

Well, while they're looking up the other numbers, I'd say one of the things that was notable is that all platforms, 2000, 3000 and 6000, were all up year-over-year. It's been a long time since I've said that. So that's all pretty good. 6000 is particularly strong.

In terms of VNX, I think at the end of the day, platform refreshes don't fundamentally change the competitive basis. I mean, that's kind of an arms race. Customers see that going on. Unless you're basically creating a new architecture, entering a new space, I'm not quite sure that that's a game changer.

The real decision point to choose NetApp regardless of the platform that they run on is really the software value proposition. And as I see EMC with VNX today faced with the clustered ONTAP value proposition, I see them move a lot more towards Isilon and V-Max and not take those 2 products head-to-head.

So I guess from my take is unless we see a significant expansion of the software portfolio associated with VNX, I really don't expect it to change the competitive landscape that much. Okay. On the units. Okay. I got a -- let me see what I can read off to you. So in terms of units, 6000 was 1,471. 3000 was 4,743. 2000 was 10,040. Revenue for the 6....

That's it..

That's it. I guess that's enough. But basically up on revenue -- I'd say pretty much up on revenue, up on units by roughly the same percentage..

Our next question is Mark Moskowitz with JPMorgan..

I wanted to follow up, if I could, on the total deferred revenue. It's only declined sequentially a couple times in the past 4 years. Just kind of curious if there are any sort of puts and takes we should walk away with related to that quarterly change here.

Was there any change in relation to bookings conversion rates or just in terms of the quality of the revenue mix? Kind of curious what are the dynamics there if there were..

Sure. Mark, it's Nick. So let me walk you through that. So we had a decline in deferred revenue in Q4 of last -- sorry, Q1 of last year as well when we went from Q4 into Q1. So this has happened before.

And I think what you really need to look at is the decline and the sequential decline from Q4 to Q1 in branded business because that's where we have a deferred revenue component, right? So when we look at the OEM, by the way, there's virtually no deferred component, if any.

So this is really all about the sequential reduction in branded revenue from quarter-to-quarter. And when you have a sequential reduction of the sizes we're talking about, there's going to be an impact on deferred revenue as well.

And deferred revenue is simply you can think about it as thousands and thousands of contracts that amortize over periods of time. That's a $3 billion balance on the balance sheet, right? And every quarter, we are adding new contracts to it and subtracting and amortizing off older contracts or recognizing revenue for older contracts.

And it's really just a matter of what goes in versus what goes out. And when you have a sequential decline at the level you did this quarter from Q4 to Q1, which we expected, and you had a sequential decline from Q4 of FY '12 into Q1 of FY '13 like we did, you're going to have that reduction..

But it was still up year-over-year?.

Yes, still up year-over-year. So I wouldn't get beyond -- too much beyond this is a timing thing and this is really what happens with that sequential type of decline in branded revenue..

Next question is from Louis Miscioscia with CLSA..

Tom, you mentioned that things don't really change unless there's a big architectural shift on the normal refresh.

So with a lot coming out in the flash area, what's your view about whether you think flash is going to change the industry, maybe not over the next couple of months, but maybe over the next couple of years? Obviously, main cost might be more.

But then again, when we take space, power cooling efficiency and it does get pretty attractive and for you all to really have to wait until your flash raise [ph] out before you could start pushing harder?.

Frankly, we're pushing hard pretty now -- pretty hard now. And I think the EF540 story is we're quite pleased with that. With 300 machines in a relatively short period of time, I don't know how many people have shipped more than that, but it can't be many, if any. So I think we've been quite pleased with that momentum.

I think that, certainly, the market will evolve over time. Where we are today, I think the unquestioned prove and use case is basically raw performance married with high availability. And I think that's really the strength of the EF540.

It's got a long history of performance-based architecture and it's got a long history of proven high availability and I think that's really what's driving it. I think the use case for more rich functionality and persistent stores, I think that use case is still evolving.

And I think that part of it is the maturity of the technology; part of it is, is the economics. When I take flash and kind of distill it down to its core premise is flash, on a capacity basis, is more expensive than disk. But from an I/O per second, it's actually a lot less expensive than disk.

So the task at hand abstracting any individual technology is how do you get the random I/O workload on flash and how do you get everything else on raw drives. And that's really the essence of the problem here. So the data placement component of this matters a lot.

So the argument -- and what that also means is that you can't afford to have idle data on flash. And frankly, I think the argument that flash is cheaper on the total cost of ownership basis than disk, particularly SATA disk, that argument doesn't wash. I don't see customers buying that. I don't see the trend favorable in that dimension either.

So I think it's still going to be the case where flash is more expensive and, therefore, data placement is going to be critical. So as we think about the functionality of individual flash arrays and all the stuff that we're working on in FlashRay, I think that matters.

But I also believe that managing the data placement across a multimedia storage hierarchy, some flash, some disk, some tape or some cloud, that, that problem has to get solved and that is just as important. And I think that's really where ONTAP gives us a key long-term advantage.

So in addition to the FlashRay technology, being able to integrate that into a unified enterprise-wide data management framework like ONTAP, I think it's a really, really key advantage for us in the long run. So how do I see flash? I see flash as part of a data storage hierarchy.

And the data placement, how the data resides on the most cost-effective, performance optimized component at any point in time, that is ultimately going to be the intellectual property that's going to drive this to be a mainstream technology..

Our next question is Brian Alexander with Raymond James..

Tom, back to the strength in clustered ONTAP, if you can give us an update on the installed base penetration that you have there in both the mid range and the high end? I think last quarter was around 18%.

And where do you think that penetration can be in a year with 8.2 introduced out in the marketplace given the opportunity you mentioned before with your existing base?.

Well, I think overall, what we saw in the quarter, obviously, with the Q4 to Q1 seasonality, we didn't see a sequential increase like we saw in the past. But as a percentage of total revenue, it's the highest it's ever been. We saw with the 6000s, it was probably roughly comparable to last quarter, a bit less than 30%.

And what we did see this quarter is actually a pickup in connect rates with the 3000s. So that's probably saying that's a little bit different now. 2000 connect rates are a bit lower. Although with 8.2, there's some functionality that makes that more cost-effective and we expect to see some activity there.

In terms of where does it want to go, that's kind of a tough call overall. Obviously, it will be a function of the rate at which customers in their own operations want to do the migration. Clearly, we see internally, at least in the 3000s and the 6000s, we want to see the tipping point of 50%. That's kind of the number that we're driving for.

So I'm not going to disclose a time frame on that. But as far as we're concerned, that's the metric that we're driving is where do we get -- when do we get those to 50%. So that's clearly within our planning horizon and that's what we're driving for..

Our next question is Bill Shope with Goldman Sachs..

Looking at the savings you've captured from the restructuring so far, can you remind us what portion of that's going to be reinvested in the business versus falling to the bottom line and the timing of that reinvestment throughout the fiscal year? And I guess if you could also remind us how -- where you're focusing that..

Yes, Bill, it's Nick. So we realized in the quarter a little over $20 million of savings from the realignment action that we did.

And recall that, that realignment action was really about making sure that our investments were pointed at the biggest return, right? And what we indicated at the time that built into our approximate 17% operating margin and operating profit margin guidance for the year was not only the takeout of the set of costs, but the reinvestment of the set of costs across a number of initiatives, clustered Data ONTAP being one of them, flash being another.

Those are the types of things that we're pointing those investments to. And we talked about the fact that, that would happen over the course of the year. In Q1, you're not going to see a lot of that. It's going to be slower in Q1 because you're still, in part, this process took most of the quarter to execute.

A lot of it in the U.S., done pretty much immediately. Some of it, places around the world, it takes longer. So we are in the reinvestment mode. I'm going to ask if you all can still hear as well..

Yes, I can still hear you..

Okay. I'm getting feedback here on the phone. So we are in the reinvestment mode. That reinvestment is planned over the remaining quarters of the year. It's built into our guidance as we give guidance each quarter and it's built into our guidance for the full year of approximately 17% operating margin. Frankly, it is also a lever.

And if we, over the course of the year, determine that for macro reasons or other reasons we're not going to see the type of profitability we expect, we'll pull that lever. But at this point in time, our view on the year is absolutely intact, our view on the quarter is intact and our view on the reinvestment is intact..

Yes, the one thing I'd -- just to reiterate a little bit is on the last call, we talked about shareholder return and our commitment to driving high single digits EPS -- actually, mid single digits EPS growth over the course of the year and the fact that we now have multiple avenues to get there, right? We certainly got the -- we can basically have the reinvestment lever to get there.

We can slow that down if revenue doesn't materialize. We can also -- we actually have the capital reallocation plan. So there's a bunch in play and then, obviously, the [indiscernible] growth of the business. So I want to be clear. We said we'd be at kind of mid-teens and we're committed to that.

And I think that even in an uncertain environment, between the recap, the reinvestment and the operation in the business, I see the multiple avenues of getting there. And that's why we're in a position to reiterate that number for the year..

Our next question is from Ananda Baruah with Brean Capital..

Maybe Tom and Nick, could you just give us, I guess, some sense of what goes into your buyback decisions, the pace of your buyback in the mosaic that you look at when you're kind of deciding? I guess going forward from this point, that you'll be looking at to balance out the pace of buyback decisions..

Yes, so Ananda, this is Nick. Let me start off with that one and, certainly, Tom will add his point of view as well. So when we talked about this 90 -- 120 days ago and change, we talked about what we're planning for a 3-year period of time and then what we're planning for the first 12 months of that and the first 90 days -- actually, 120 days.

So we indicated in the first 4 months, we buy $1 billion back, right? That first 4 months is basically through September. What you see is that in our first quarter, we bought $850 million of stock back. We did an ASR of $750 million, that's behind us. We did $50 million otherwise, that's behind us.

So we've done absolutely what we've said, actually probably a little faster than linear, in this first quarter. I would expect that over the remainder of Q2 and probably pushed towards the front end of Q2, we will finish that $1 billion of repurchase. You also see on the dividend side, we did the $51 million in dividend in Q1.

We'll do the same towards the end of Q2. To your point on the rest [ph], right, we indicated that in a 12-month period of time, so basically up until May of next calendar year, we will purchase another $1 billion. We will absolutely do that and we'll -- we have at our disposal, really, the timing of that.

But we're going to be aware of all of those pieces and look at the timing. I think for Q2, I would say that we're going to first be focused on this first $1 billion of the $3 billion program. We're going to be focused on getting the warrants behind us. That's a September, October maturity on the warrants.

And then we're going to be absolutely looking at the second $1 billion of the $3 billion program which we talked about for a 12-month period of time. And that 12 months really runs through May of next calendar year..

Yes, I think that's fair. And we'll give you visibility into what we're thinking there on the next call once we get through the September and October period..

Our next question is Glenn Hanus with Needham & Company..

So back on the E-Series and maybe you could give us some more color there. You're looking for that to stabilize or even grow in fiscal 2015, some color on application. You talked about a little bit, Tom, application, use cases there on the branded side.

And then on the OEM side, will that stabilize somewhat? Or should that just continue to be a declining business for the foreseeable future?.

Well, on the OEM side, I think we got 1 more quarter at least of decline. And that's what we're expecting, just 1 more quarter of decline and then I think we'll start to see it stabilize from there. And we'll also see, hopefully, some of the new wins in that space start to contribute or at least offset the decline.

So I think clearly, at the end of the day, we're kind of where we thought we would be when we bought this business in the first place. We kind of took a circuitous route to get here. But clearly, we've seen 20% declines the last couple of quarters. And eventually, when we come one full circle, that will start to normalize.

And in fact this quarter, from a booking perspective, absent one OEM, the rest of the business was actually up slightly for the first time in quite a while. So that was positive for us. The thing that probably took a little bit longer to come to fruition, really, is the momentum around the branded side.

We expected that to offset the decline of the -- the expected decline of the OEM by now and that was a little slow in developing. But we've really seen some good momentum. In fact, the branded side was actually up sequentially from Q4 slightly. And unlike the rest of the branded business, kind of flip that off. So we're quite pleased with that.

The EF family is -- it's clearly an important part of that, the all-flash array. We talked about the units that we shipped. But I should add that, that is less than half of the total E-Series bookings. So we're seeing E-Series go out in many of the areas that we thought.

We're seeing in large storage repositories in media, in health care, oil and gas, high-performance computing-type applications. So we're starting to see the aperture open wider on that and we're starting to see a much, much broader acceptance of the technology. Early on, a lot of that business was centralized in a couple of geos, particularly U.S.

public sector and to some extent, in the media space. But now we're starting to see it more broadly across the entire footprint of our installed base. We actually see a fair amount of momentum in Europe this past quarter. We had a relatively large program underway.

So I think, overall, I'd say we're probably behind where we expected to be at this point on the branded side. But the ramp has actually been pretty strong and we feel pretty good about it.

And that's why I made the comment earlier that in the aggregate, I expect the combined branded plus OEM business, that should be a growth business for NetApp in fiscal year '15..

Our next question is Keith Bachman with Bank of Montréal..

Tom, I wanted to follow up from something earlier. You mentioned 8.2 might get into existing workloads. It's certainly consistent with what we've heard. It's been more about new workloads.

Does that change your -- how should we be thinking about the mix impact from a customer perspective? Might customers migrate up, so to speak, in terms of their mix profile if 8.2 does get some adoption with existing workloads?.

Migrate up....

Maybe move from the high end -- or excuse me, high end of 2000 series to the low end of 3000 series. In other words, the requirements of 8.2 suggest that customers might need a bit more horsepower, so to speak..

There's certainly conflicting points of view on that. I think there's one conventional wisdom that says the high-end platforms are optimized for performance and the low-end platforms are optimized for cost and the mid range are optimized for price performance, so a balance.

And therefore, with clustering technology, the best price performance alternative would be to actually cluster the mid-range products. And you have a debate as to whether we'll ever need another high-end platform again. And in my experience, not only here on this product but in other situations I've been, is that it doesn't always play out that way.

It's that the early adopters are the ones that are most performance constraint and they're going to go to the biggest platforms and they're going to cluster those. And we've certainly seen that, at least in the early days.

Perhaps now, with a little bit of tick up of clustered ONTAP connect rate on the 3000s, maybe we're starting to see that, that pieces play out a little bit. So I actually don't think that it will migrate to the larger platform.

If anything, it might actually go the other way because you can build very, very, very large systems incrementally using more cost-effective building blocks. So and the net of it is, it's margin neutral to us. So in terms of modeling the business, I don't think it fundamentally changes anything.

And that's part of the reason why we're somewhat -- we're not very, very emphatic about going one way or the other way. Whatever's best for the customer, I think serves our purpose, as well, and we're more than happy to accommodate that..

At this point, we will turn the call back to NetApp for final remark..

Okay. Well, thank you, all, for joining us. We appreciate your interest in NetApp. And see you all in 90 days. Take care..