Good day ladies and gentlemen and thank you for standing by, and welcome to the Network Appliance Fourth Quarter and Fiscal Year 2006 Earnings Conference Call. My name is Carlo and I will be your coordinator for today’s presentation. At this time all of our participants are in listen-only mode. There will be facilitation of question-and-answer session towards the end of today’s prepared remarks. At that time if you would like to ask a question, feel free to press “*” and “1” on your touchtone telephone. If at any time during this call you require audio assistance, please press “*” and “0” to reach a conference coordinator. I would now like to the turn the presentation over to your host for today’s conference, Ms. Tara Calhoun, Director of Investor Relations, Network Appliance. Please proceed mam.

Good afternoon everyone, thank you for joining us today. Our conference call is being webcast live and will be available for replay on our website at www.netapp.com, along with the earnings releases, the financial tablets, and the reconciliation between GAAP and non-GAAP numbers. In the course of today’s call, we will make forward-looking statements and projections that involve risk and uncertainties, including statements regarding our expectations for operating results for the first quarter and FY’07, stock repurchases, hiring goals, paid debt, timing of and advancements to be derived from product introduction and technology investment, including our VTL, Decru, products, FlexVol, ONTAP GX technologies, and benefits from our relationships with channel and technology partners. Actual results may differ materially from our statements or projections. Important factors that could cause actual results to differ include but are not limited to customer demand for products and services, increased competition, a decline in general economic conditions, and foreign currency exchange rate fluctuation. Other equally important factors that could cause actual result to differ from those in the forward-looking statements are detailed in the risk factor section of our 10-K and 10-Q reports on file with the SEC and accessible through our website, all of which are incorporated by references in today’s discussion. We disclaim any obligations to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. With me on today’s call are Dan Warmenhoven, CEO; our President Tom Mendoza; Steve Gomo, CFO; and Tom Georgens, EVP of our Enterprise Storage Systems Group. Steve will review this quarter’s financials and discuss our financial outlook for the first quarter, and then Dan will share his thoughts before we windup with everyone here for Q&A. Steve…

Thanks, Tara. Good afternoon everyone. NetApp posted very strong results this quarter executing well in all major areas. We’re very pleased with these results. Now, let’s walk through some of the details. Please note that all numbers comply with GAAP unless stated otherwise. For the fourth quarter, total revenue came in at $598 million, up over 32% compared to the fourth quarter last year and an increase of over 11% sequentially. This was the third consecutive quarter of accelerating growth for both sequential and year-over-year comparisons. The form currency effect added about 0.5 percentage point to this quarter’s result on a sequential basis and subtracted over 2 percentage points year-over-year. For full year FY’06, revenue totaled $2.07 billion, up 29% over FY’05. The FX impact for the full fiscal year reduced the FY’06 growth rate by 1%. Product revenues of $522.9 million grew over 30% year-over-year and over 10% sequentially. Add-on software and software subscriptions accounted for about 35% of total revenue this quarter. This figure is a combination of software subscriptions, which were 11% of total revenue and add-on software products that were approximately 24% of total revenue. Product revenue for the full year was over $1.8 billion, up 27% from 2005. Revenue from IBM and Decru both increased with IBM just over 2% of total revenue this quarter, and Decru about 1.5% of total revenue. For the full year, IBM contributed slightly more than 1% of revenue and Decru just over 0.5 percentage point. Revenue from services, which includes hardware support, professional services, and educational services was 12.5% of revenue, up 19% sequentially and up 48% over the fourth quarter of last year. Service maintenance contracts increased 17% sequentially and total professional services grew 25% sequentially. We continue to see increasing traction from the investments we’re making in…

Thank you, Steve. The fourth quarters wraps up another terrific year of growth for Network Appliance. Despite a rocky start in the first quarter, our growth rates accelerated every quarter and we ended the year with 29% increase in annual revenues and 33% increase in non-GAAP net income. Over the course of this year, we’ve built additional infrastructure to manage our growth and broaden our total addressable market. We’re moving upwards, outward, and downward to bring a more comprehension set of products to the market place. With the new ultra high end offering, the recently launched disc-to-disc backup solution on the VTL space, the Decru storage, security, and encryption solutions, and soon at the very low end our entry into the small-to-medium business space. All of these expansion areas embody the fundamental differentiating principles of NetApp -- reduce complexity, minimize management overhead, improve utilization, reduce cost, and preserve flexibility for our customers. These benefits clearly resonate with corporations around the world driving our continued growth in our core enterprise storage business this quarter, which excludes the products from Jay Kidd’s Emerging Products Group, namely Decru, VTL, V-Series, and NetCache. Total units shipped increased 6% sequentially. Average capacity of system increased almost across the board, in some cases dramatically. Our low end FAS250 and FAS270 products were both up modestly. The 3000 series had an 11% sequential increase in total units shipped and accounted for over 40% of all systems sold again this quarter. The average capacity on the FAS3000 increased 16% sequentially. The FAS960 continued to decline as it is subsumed by the 3000, but the FAS980 had another strong quarter with a very strong 19% sequential increase in units and a whopping 50% increase in storage capacity. Our ultra new high-end FAS6000 series accounted for about 1% of units…

Thank you sir. Ladies and gentlemen, at this time if you wish to ask a question, again please press key “*”and “1” on your touchtone telephone. If that question has been answered or you wish to remove yourself from the queue, you may then press “*” and “2”. Again “*” and “1” for any questions; one moment please. And sir our first question is from the line of Keith Bachman with Banc of America.

Hi, I had a couple, if I could, I’ll just try one, Steve, with you to start out with. You indicated that the revenues, you kept your percentage change in terms of the guidance and the EPS was consistent, which suggests that the back half of the year…in fact if we kept the same number on the EPS side, the numbers would be coming down a little bit. Are you guys just being conservative there on the EPS side or is there something on the margins that we should think about?

Keith, I presume you are talking about the guidance of the full year?

Correct Steve.

We are keeping our percentage growth rates consistent with what we told you at analyst day, as Dan just mentioned, and then the rates we gave you before was the same, $0.99 to a $1.04, and if you do the math we’re still inside the range there given our operating margin target for 15.8% to 16.4%.

Right, I would have thought, Steve, those might come up a little short, just think about being conservative or just some movement within the range?

You should think of it as movement within the range. I guess, one could make an argument that we’re going to be a little higher in the range that we would have otherwise thought so.

Could I speak one more in, Steve?

Go ahead…

In terms of the IBM numbers, terrific results I think out of the gate there. IBM was reselling products before, so in terms of the 2% how do you think about that, because they were actually reselling NetApp products? Is that continuing to sell the NetApp products, re-branded products, but how do you account for the kind of ins and outs so to speak there on IBM?

This is Dan. This was the first quarter that IBM had most of our software suite, and I think that helped accelerate a number of their transactions. This I think is also the first quarter we had the FAS3000 in the product for the full quarter. So the combination of the two and the FAS3000 on the evaluated software I think allows them to be much more effective.

The other business with IBM would out on top of that in the rest of our business.

And sir, our next question is from the line of Andrew Ness with Bear Stearns.

Sure…but you had a chance to look through your policies and procedures on options and are there any concerns about postdating of options or anything like that?

Andy, this is Dan. I guess I’m not surprised at the question given all the press activity in the Wall Street Journal. First, I’d like to make it very clear that we have no received any enquiry from any regulatory body. But more importantly, as part of our Sarbanes-Oxley certification process last year, an independent review of our options grant process was conducted from fiscal 1994 through fiscal year 2005. That review was initiated by our audit committee and conducted by our internal audit team with assistance from an outside audit firm. As part of the review, all options issued to Senior Vice Presidents and above were specifically reviewed, and the review confirmed that we have been 100% compliant with GAAP and SEC requirements concerning the granting of options.

And sir, our next question is from the line of Rebecca Runkle with Morgan Stanley.

Good afternoon…I’ll keep it to one question, but within the context of the enquiry that you just referred and then the guidance, if we think about EMC where it’s been with the Clarion franchise last quarter and then having a new product in the market this quarter, how are you incorporating that into your thought process and what are you seeing on the margin within the competitive environment, both pre and post the product launch? These are Clarion specific.

This is Tom. As far as the Clarion launch goes, we do the Clarion launch as primarily a hardware refresh. So, in terms of the impact of the business, there really isn’t anything new there from the point of view of software and reducing complexity and dramatically entering new markets. So, I think the Clarion refresh was very much expected form a hardware perspective and clearly it had been in our plans all year. So, I would say there’s nothing new in that release that would change our plans from our previous guidance.

I think your second half of that was around margins and we think our win rates against the Clarion series are going to stay very strong and we don’t expect to see any change in discounting the margin results.

And sir, our next question is from the line of Ben Reitzes with UBS.

Hi, could you just talk a little bit more about Excelsior, how you think that product will do and impact your margins, and then as well the other product I think you’re excited about that’s incremental is your new low end product, when should we see that and what does that add, maybe if you can talk about what both mean to margins and topline?

This is Tom Mendoza, let me talk about it from a sales perspective. I’ll let the other guys talk about margins, but we pulled over 80 customers in with our high-end systems this quarter, about 50 for revenue I guess and about 80…I’ve been amazed at the consistency of feedback. Most of them are in the high-performance computing as Dan indicated they’d be. We had tremendous results in that environment across a wide range of motion, but we’ve also seen that Amerigroup and that’s putting out an announcement this week in their SAN installation…it’s a combination by the way between that and the other tools. They found that Flex clones and FlexVols have done an amazing job. They said they’re getting 10x reduction in the time required to perform simple SAN provisioning tasks. Their exchange recovery times are dramatic over their previous vendor, so we’re seeing approximately 2x to performance. So, when you first put a product out, more importantly than the revenues initially is what’s the customer experience, what are they saying back to us, and what do they think their expansion plans are, and across the board there are very, very positive recommendations, so I would expect this product launch to be extraordinarily successful. I’ll turn it over to Dan.

On the SMB product, you might have seen the cover of the magazine a prototype of a new product in the small-to-medium business. We do not expect that to contribute significantly to revenues in the next couple of quarters, and I’ll give you some kind of forecast around midyear. This was a channel announcement, is really what it was. The product introduction will clear I think really near the end of the first quarter and would begin shipment in the second quarter. We’re now in the process of recruiting Vars to help sell that product later on.

I’m sorry I threw out the name of Amerigroup. For those of you who aren’t familiar, they’re number 732 in the Fortune 1000 list. They’re a very large healthcare insurer. It’s your basic big time mission critical data center applications and it is all SAN.

And sir, our next question is from the line of Dan Renouard with Robert Baird.

Hi, thanks. I’m just curious, at the end of your early third quarter, you talked about opening a facility in Bangalore, I’m wondering if you could give us a little more detail there in terms of how many people do you have currently, exactly what will they be doing, what are your intentions on headcount, is this partly aimed at alleviating some of the hiring headaches given the current market, and it seems like every quarter you have high intentions of hiring “x” number of people and it seems like it’s just a challenging hiring environment.

This is Dan. I wouldn’t say it’s all that challenging, actually. We’ve been pretty successful even though we’ve always trailed our objectives. The Bangalore facility is actually not a new location for us. It’s really just a new building. We’ve now moved in a much bigger building than what we were in. We have people really kind of doubled up to excess. I believe right now we have in the order about 260 employees in Bangalore and we would expect that number to double during this next year, and the facility we’ve moved in can handle about triple of that capacity. So, we’ve got plenty of expansion space. But, that was just part of plan all along, we finally got the facility online, and now that we’ve got the space we expect to grow that site quite aggressively.

We have a number of projects over there. One that I reviewed yesterday was VTL and I was captured by…they said it is one of the highest quality releases that we’ve done. The team is extraordinarily motivated and doing a good job. So, we’re very proud of it. You know, when we first thought up a facility that we did there maybe a year and a half ago the key was to get the right leadership in and bring the right people. We’ve been very fortunate that we brought a good number of strong leaders in there. We’re getting a very good reputation in the area, which is key over there, and we’re finding that we can give them complex problems and they come back with extraordinary solutions. So, it’s not just some kind of little pieces of a puzzle. We’re giving them specific programs that mean something to us and they’re delivering that quality product.

And sir, we have a question from the line of Laura Conigliaro with Goldman Sachs.

Yes, if you look at the guidance that you gave for the July quarter and then also combine it with the fiscal year guidance, it looks like you’re actually only looking for topline growth of 25% to 28% over the last three quarters. One would presume, given the kind of numbers you’re seeing in deferred rev in your new products and presumably backlogs, that those are extremely conservative numbers, but can you sort of juxtapose that against what it is that you’re seeing in the market at this point that would cause you to have that kind of conservative growth?

Laura, as you recall on our analyst day, we talked a little bit about the seasonality of our revenues and the seasonality of our operating profit. If you recall, the seasonality of our revenue slide that I showed, the first quarter typically shows the lowest sequential growth rate of the fiscal year. And indeed, we’re modeling this coming first quarter based on that past experience. Now having said that, despite the fact that it’s a relatively low sequential growth rate, which will be compared to the fourth quarter obviously, the guidance we gave was for growth, 38% and 39% type of thing. So, I think the year-over-year growth rates are more important here. If you go forward into the fiscal year, again I think you can pick your number between 28% and 30%. I don’t think there are many companies growing at those kinds of rates and certainly not in our industry.

And sir, we have a question from the line of Chris Whitmore with Deutsche Bank.

I believe you talked briefly about some of your tax rates going forward, particularly as the new high-end product ramps?

I’m sorry I didn’t catch all of it. The tax rates going forward…I personally see very little change in the software tax rates. As I have was forecasted for sometime, I think the software tax rates are hitting really kind of the threshold around 35%. You might see some minor oscillation, but I don’t think the high-end products necessarily drive that up or down. As a percent of revenue, I expect it to be pretty consistent with the prior business mix.

And sir, we have a question from the line of Harry Blount with Lehman Brothers.

Hi guys, quick question really on the market place right now. Dan or Tom, I was wondering what you guys are seeing in terms of any changes in the principle application drivers, partner drivers, and win rates on competitive engagements, if you’ve seen any fluctuations?

This is Tom, one of the key drivers I think is SAP is picking up with us in a fairly dramatic fashion. We’ve had very good success with them in Europe, but we’re starting to get infrastructure built around teaming arrangements here in North America. Bill McDermott and I are both working closely together as are the organizations in North America, and I think that that is going to be a big play for us in the future. We’ve done a lot of application optimization actually with a number of our key partners that is starting to pay off. As Dan put it in his comments, he said just those four partnerships -- Microsoft, we’ve had the best relationship and the best meetings and the best strategies we’ve had with them ever over the last two quarters. Oracle remains very, very strong with NetApp, has been very strong with NetApp, both for their internal usage, and I think now I’ve done seven Oracle world keynotes with them over the last 18 months. And I believe also IBM is looking at different public sectors of being key. It’s not just applications, it’s which sectors they want to take this into, retail, public sector places we haven’t been in a big way, healthcare. There was a big rumor that IBM got into a big hospital with which happens to be a big IBM application that we didn’t know about it until we got the purchase order. So, I think we’re going to start going into new markets with different partners but all around those same sets. We don’t need to find new partners. We need to make sure we go deeper with the ones we have.

This is Dan. I want to amplify on Tom’s comments. For those of you that recall several years ago, probably around 2001 or 2002, Microsoft labeled us a competitor as they brought out what is now part of the Windows Storage Server, and recently meetings with some of the senior executives there, they were actually sending out communications to their field that they should view us a partner, and we’ve really come full circle, based on the value add we can offer and the way we’ve been able to architect our technology under the volume shadow services and exchange and so on, and the SAN manager for SQL and a bunch of other examples. So, as Tom said, the Microsoft relationship is very, very positive at this point, and the issues that we faced several years ago are now well behind us. It has to do with Decru. We’re not talking about it as a big volume revenue thing right now, but I can tell you, you read the papers two days about 26 million or so who have got their identity sold and basically the information is on the web. These things are so active everywhere. I’ll give you a couple of thoughts. One, Dan mentioned we had a very good financial services quarter and five major firms committed to them from an architecture point of view long term in the last quarter. So, the traction is fast and where we expect it. Our comments as before on these things…I go to Japan a lot, one of the things that you normally see in Japan is they follow two years behind in technology are not true. This is a topic that’s hot internationally. So, the reason I point that out is that not only are we driving Decru is going to have a very strong role over a period of time, we are having conversations with CEO and CIOs of this institution because of the type of thing we’re having, it’s giving us much greater exposure and branding in these accounts than we’ve ever had before on just the storage place.

If I can add one other point on that, one of the other things that is driving our business is our software portfolio grows, the things like FlexVol and SnapMirror, I think we’re opening up new markets for our products in the areas of business continuance, disc-to-disc backup, archive and compliance, and digital imaging. I think that’s driving part of our growth in serial ATA drives and also driving upon the explanation of why our average capacity is going up. So I think in addition to our traditional primary storage markets, I think our strength of our software is opening up a lot of secondary markets and I think that’s a big part of our growth as well.

Operator, we’d like to backup and add some color to a question I think we misinterpreted for Laura.

This is Steve here. Evidently I was the only one sitting at the table that misinterpreted your question; I’ve been handed about six different notes…

So your question was given our guidance for the full fiscal year, why does the growth rate that we’re projecting in revenue appear to be declining or slowing in the second half of the year? Let me describe. So in the first quarter, as you know, we have to use the compares of the first quarter last year where we had the very difficult product transition with the FAS3000. So that’s why we’re off to a very, very quick start in terms of the growth rates in the first quarter that we just gave you. In the second half or in the next three quarters type of thing, we’re still in the 25% to 28.5% types of growth ranges. We think that’s appropriate at this point in time, until we see how things improve. We have a lot of new products coming out. We have some new technologies in PTO and at the SMB part that Dan was just talking about. We need to see how those products gain traction, etc. So until we do that, we’re kind of keeping up the pulse on our core business, making sure it’s growing at these kinds of rates, and then we’ll keep you updated as we go.

And sir, our next question is from the line of Clay Sumner with FBR.

Thanks very much. With the demonstrable value or TCO value in our operating system for FlexVol and some of the other products you’ve outlined, I assume since TCO is kind of hard to measure upfront in a sales process that you tend to under price it upfront. But, have you been able to come back and recoup some of that later, possibly with higher software maintenance for some other brand?

This is Tom. I don’t think that’s the way we look at it. I remember when we had the first conversation with the executives at Oracle, the guys were really, really who helped us in the thought process, and they said “just accept it, we’ll buy less disc.” And I said “yeah, but everybody else will buy more to gain new customers.” So, I think as we demonstrate the value of…data grows at 60% a year, which means every five years you grow it 10x. As I say to people, let me guess how much of your administrative growth will be, and they always launch into either 0 or down. So there are only axes, you either can manage the data simpler which NetApp has always done or you can store less information. We’re getting that message out effectively now and so our goal is to get people using it, driving their utilization rates up, and telling other people as opposed to thinking how we make more money out of them, is how do we focus this and get into new organizations, new parts of an organization. One thing NetApp is getting better at is wallet share. When we say we win in Citigroup, as an example, that’s great, but what percentage is out wallet share? Our wallet share is growing in these big accounts and this capability is driving more wallet share than any single thing, because if you can prove higher utilization rates to somebody, now other apps within those same companies move your way. That’s what we’re focused on more than monetizing that saving.

This is Dan. The other thing you should look at, I think your premise is largely justifiable based on the IDC data. If you look at cost per gig, IDC produces market share data for both revenue dollars and storage shipped. The cost for gigabyte from NetApp is significant lower than any of the other competitors in the industry, and that is on net purchases, that’s after you’ve taken accounts, FlexVol and all the rest which bring the utilization numbers up. So, they buy less for the same amount of data and they pay less for it.

And sir, our next question is from the line of Shebly Seyrafi with Kaufman Brothers.

Yes, thank you very much. So, maybe you can elaborate on why the product gross margin…well, you said because of mix it declined to 35.1% because of more disc, but maybe you can talk about why you’re guiding for gross margin to be flat in the July quarter in light of the fact that the Excelsior, the 6000 series, is going to start ramping and you normally ship more NAS heads by higher gross margin product at the beginning. I would think you’d have a rebound in the product gross margin, therefore your total gross margin?

Shelby, there’s a big difference here between the FAS6000 and the prior high ends. The 6000 is well above the 980, in fact after we announced the 6000 release of our sales install base, you’ll notice the 980 continued to be extremely strong. The 6000 is well beyond that. So, it’s not an upgrade like you think of the 960 was an upgrade to the 880 or something in that order in our historical past. The 6000 is really positioned up against the big frames and it’s a substantial cost in upgrade, it’s a much bigger system. So, we’re not trying to drive upgrade business in this particular one. We’re going to try to drive in the new applications and very large data center deployments, and I don’t expect to see a lot of upgrades in the next…

Which means the disc mix, the total amount of discs we fill with these systems will also be very high next quarter. So, between the add-on software being roughly flat from this quarter, with the same type of mix of disc and enclosures there could be some minor shift there, and then the IBM business which should, if things go normal hopefully that will improve next quarter or increase in the mix a little bit. All those things being equal, the gross margins should stay roughly where it is.

And sir, our next question is from the line of Bill Shope with JP Morgan.

Great, thanks, just to elaborate on that last question. So, I guess you’re implying that the 6000 series at least initially is going to be one of the lower margin products and the potentially, I guess, hopefully you can expand the overall margin profile with that on software after that?

I don’t think that’s the case. It’s going to be consistent with the 3000 in terms of gross margins.

I mean the wildcard in all this is how much discs we put on there, but I don’t expect to see any significant differences between the gross margins in the 3000 and the gross margins in the 6000.

Yeah, I also read that the product is also module base, so that will also scale with the size of the system to keep the overall gross margin relatively constant.

If you look at ASPs, let’s take some round numbers, it should ASP in the 6000 is three times that of a 3000, you’ll still see the same kind of mix of one-third of the revenue being software related, one-third being basically the core system, and one-third being storage, and certainly this kind of scales up together in that regard.

One of the appeals of the 6000 also with the increased compute power is the ability to run more of the software products simultaneously and derive more services out of a single box. The ability to attach more software to a 6000 is actually higher than some of our other products, so I wouldn’t anticipate much movement on the gross margin of that product.

And sir we have a question from the line of Aaron Rakers with A.G. Edwards.

Thanks for taking the question. In your discussion in regards to the quarter, you had mentioned failed coverage is continuing to be one of the challenges. However, it looks like one area that you continue to invest very aggressively in is the R&D front and I believe at your analyst day you talked about adding still as many as 300 people per quarter going forward, are we starting to see that shift a little bit more focused towards the sales coverage arena and if you could give any color there? And then follow on to that, how long it typically would take until you see the full productivity of those additions going forward?

This is Dan. We were consistent with our historical factors of trying to add sales people especially in the fourth quarter, getting into the training cycles and sales kickoff and get them productive at the start of the fiscal year. So, you see some mix shifts if you will in terms of hiring quarter by quarter. Sale dominates the fourth quarter and first quarter, engineering dominates the rest of the quarters. But if you look across the company for the year, we expect to hire roughly 1200 people and there will be roughly 300 in sales, 300 in service and support, 300 in engineering, and 300 across the other functions in the company. And I think that’s about the same model we had for last year.

This is Tom. One of the things that we have invested aggressively over the last two years is definitely paying off, but this is where the big play will be and with the channel. I think we’re becoming much more savvy about how to leverage a channel, becoming where we add them on top of line as opposed to as a backend function. You’re seeing some of the biggest most successful countries in Europe now be dominated by channel sales even in the enterprise list, some big partners have come over, and we’re able to leverage some of these big, big plays that we’ve invested in over time, and that’s where the focus of our sales leadership is now. We’ve invested in channel marketing, channel people, channel programs, and I think that will provide the leverage much more than thinking about how many just sales people we put out.

And sir, our next question is from the line of Paul Mansky with Citigroup.

Great, thank you. Coming back to the margin discussion at it relates to the 6000. In talking with your customers and others, we’ve been told fairly often that one of the big benefits of the 6000 is that it’s essentially a head swap upgrade to the 900s and yet you’re indicating that you don’t really see that being more of an incremental opportunity for you. You don’t have any specific programs in place to encourage kind of a head swap upgrade to your install base right now?

I think the difference is allow versus encourage, I mean, we’ve already set a practice that customers can upgrade any system they buy throughout our product lines. So, we have customers that have started off in the 700 series, move to the 800s, move to the 900s, and now if they want they can go to the 6000. But I think your question is one of price performance capacity, etc. The 980 is still a very strong contender in the product line. We saw it grow up in units this quarter. We’re not trying to pick out the 980 with the 6000. We’re trying to put the 6000 way above it. If a customer wants to upgrade, he is certainly welcome to do it, but we’re not going to give a lot of incentives and so on for him to do it, and I think that’s where the difference is. We used to move customers from the 880 to the 960 very aggressively. We’re not trying to do that with this product program. It’s on the price list, they can buy it, we’re happy to have them do it if that’s the picture, but it’s not a focused program.

And sir, our next question is from the line of Glen Hanus with Needham & Company. Glenn Hanus, Needham & Company: Can you guys give us any update at a high level kind of by region what you’re seeing in the sort of the spending environment, the selling environment, and I guess it has been slow for some companies, maybe comment on that?

Europe was very, very strong for us, especially in Germany. U.K. had a bad the first quarter and had a spectacular second, third, and fourth quarters, and that’s where they made up their year. Germany has been the engine all year long and we had a big contest of which was the best region in the third quarter, which is always a tricky one for us, and the other parts of Europe. So, we felt all three were very strong. North America continued to excel in all four areas, federal and the other three, and this quarter we saw strength come back in Asia. So, we’ve had very little turn over at the executive levels, executive sales management drops over the last couple of years, and when it did happen was because we were growing out in maturity in different areas. So, I think that’s paid off tremendously well. We don’t have any areas of the world that I’m spending time on thinking we have to fix right now. We are thinking we can accelerate. We have strategies in place so we’re working on some very odd circumstance. I mean, typically if you look at this kind of situation, you got to go fix something. So from a spending point of view, I don’t see…I think Japan is definitely coming back as a country, we hope to take advantage of that. The rest of Asia we’re still emerging, but we’re not seeing any dramatic spending issues in any of the other markets.

I’d like to echo that. I like Tom travel all around the field and I would say the business climate in general right now is as strong as I’ve seen it in a long time, and if you even look back to the bubble period you’ll find that there were certain regions like Asia where the currency crisis turned out, they were very soft in Japan, it was actually seeing deflation. You go around the globe right now, there is not one major economy anywhere that is struggling, and the business environment is very healthy around the globe.

I think Germany has been tough for a lot of countries because their organizations have been screwed up. I mean many of our competitors have sent people to us by their actions in their own companies, but our German operations had no turn over, we’ve had a terrific team running it for a long, long period of time. The execs have been in place eight and nine years, and we’ve taken advantage of it. We have long existing relationships and we’ve conquered some new big accounts in the last year, and that’s what it is all about over in Germany. So that was one that I see other people kind of struggling. That has been a strength for us for a long time.

And sir, we have a question from the line of Andy McCullough with Credit Suisse.

Thanks, Steve, you mentioned IBM had a negative mixed shift on gross margin, how are you thinking about the operating model impact as this business ramps in 2007? And then within IBM, 2% of your business this quarter, why should we think that that 2% to 3% target you guys talked about at analyst day for fiscal 2007 is still appropriate?

You think it got it to be higher…let me answer the first part of that. So, as we talked about before, the gross margin on the IBM business is less than the average of the rest of our business because of the OEM relationship we have, they buy it with discounts on it. However, the expense tax that’s associated with that business is also much thinner than the rest of our regular business. We don’t have obviously nearly the selling cost infrastructure, the marketing infrastructure, and to some extent the admin infrastructure that we have with the rest of our business. If you look at the operating profits, it turns out that the IBM business is absolutely neutral to the company from the operating profit standpoint. It has roughly the same operating profit as the rest of the company, and that’s why it was intended. With respect to how big this business could get, I think certainly everyone in this room hopes it can get a lot better. We’re encouraged by the strength of the business today and the way things are proceeding, but we also recognize that it’s going to be another year before IBM has our entire suite of products and all the software that they’re going to require to compete in all the various markets around the world type of thing and it’s going to happen with different rates and different regions of the world, etc. So, for now I think the range of business we gave you during analyst day is still appropriate.

This is Dan. IBM is currently outperforming both their expectations and ours, and they’re building momentum. Most of it has come out from North America, and that’s actually been the area where we’ve been the strongest. That’s not surprising. So, there maybe faster growth ramps than we had forecasted back on analyst day, but I think it’s too early to actually change the number. We’re tracking ahead of plan and that’s what shows in this quarter’s results, and the questions go, “keep that momentum up and keep it rolling,” and I’m not in a position to change that 3% forecast.

We’re very fortunate to have Tom Georgens join us, of course, who built the business for us a lot, and Tom said to me recently it’s gone better than he expected given that kind of timeframe. He’s been through this before, typically so. I travel around the world and many times I meet with the IBM sales and execs who are extraordinarily excited to hear from me, primarily because it’s the first time they’re hearing about it. It’s just that their communications inside goes slow and so we’re finding in pockets they’re embracing us in a big way. And guess what, pockets of IBM turns into the bigger number than you expect in a hurry. So, what we said to you before is our belief is when you do something like an IBM relationship, the key is in the first six months to a year of people positive because if they’re not, it turns a whole different way. They are definitely positive. We are definitely positive. Now, if we take what we maximize the efficiency and we’re doing a lot of thinking about it and they’re doing a lot of thinking about it, and some of the things that we’ve landed on together are, “let’s go after some certain markets in a deep aggressive way, because get the references accounts and take them up with the software” and that kind of thing. I think we’re approaching it very intelligently, but the message I’d leave you with is I think these relationships work, but both sides feel positive and continue to invest, and as Dan said both sides agree it’s going to better than they thought and they’re going to increase investments that make it go faster. That’s usually good news.

And sir, we have a question from the line of Tom Curlin with RBC Capital Markets.

Hi, with VTL technology, are you already offering or you’re contemplating offering some kind of data de-duplication support or content factoring support with that? That seems an emerging trend in that space.

The answer to that question is yes, although I don’t want to get too specific about forward-looking things, but I think that you’ll see de-duplication not only in the VTL space but also in some of our mainline ONTAP stuff as well.

Do you think that has some significant implications for the tape market?

We hope so.

I personally believe that what’s going on is that customers are trying to reduce their utilization tastes specifically for incrementals and so on, they’re trying to stretch out the intervals between what’s called lower 0 full right of the point, and it’s not trying to eliminate tape but they’re trying to reduce the utilization. That means they’re going to buy less new tape drives going forward. They’re not going to take them out, but I think you will see reduction in revenues in that market segment going forward.

And sir, we have a question from the line of Jim Porter.

Yes gentleman, with regards to your operating expenses, historically when you’ve had the wind of your back on the topline you’ve tended to invest the upside on your revenue, which we’ve seen less operating leverage, incremental earnings on the bottom line as results with that, and it looks like with you sticking with your current range for the year that that continues to be the case, but how much wiggle room do you have on your expense outlook at this point and with regard to the first quarter could you talk a little bit about how those operating expense categories might look relative to the fourth? Thanks.

This is Steve here. I think the key point is that what we’re really, really focused on is delivering an operating profit margin that’s in the range of 15.8% to 16.4%; I keep saying that over and over again. We view the gross margin and the operating expense structure as elements that allow us to achieve that operating margin. So, the first and foremost thing we’re trying to achieve is the operating margin and then grow as fast as we can. Depending on what happens with gross margins, it will dictate how much is left over for use to invest in the expense structure. And right now given the projections we have, our emphasis is on first sales, services, and R&D in terms of where we’re going to be hitting the investments, probably in that order. So, going forward in terms of the expense structures versus the fourth quarter, I don’t expect to see a whole lot of change and if you give me 0.5 percentage point, you won’t see a whole lot of change.

And with that, ladies and gentlemen, it concludes the question and answer portion of today’s presentation. I’d like to turn it back over to the group for any closing remarks.

Yes, this is Dan. First of all, I’d like to recognize the contributions of the team of Network Appliances. This has been a terrific year for performance for both the sales team and services support organization. The engineering organization has just produced an enormous amount of really innovative, distinctive products in the market place this year, and our marketing program has been outstanding. It goes right across the company, I have nothing but thanks and praise for all the people at Network Appliance that has made it such a successful year. Thank you all for joining us today and we’ll be back in touch with at the end of the first quarter. Have a wonderful day.

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes your presentation and you may now disconnect. Good day.