Good day and welcome to the NetApp Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kris Newton, Vice President of Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining us. With me today are our CEO, George Kurian, and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at netapp.com. During today's call, we will make a number of forward-looking statements and projections with respect to our financial outlook and future prospects, including, without limitation, our guidance for the first quarter and fiscal year 2024; our expectations regarding future revenue, profitability and shareholder returns; and other growth initiatives and strategies. These statements are subject to various risks and uncertainties, which may cause our actual results to differ materially. For more information, please refer to the documents we file from time to time with the SEC and on our website, including our most recent Form 10-K and Form 10-Q. We disclaim any obligation to update our forward-looking statements and projections. During the call, all financial measures presented will be non-GAAP, unless otherwise indicated. Reconciliations of GAAP to non-GAAP estimates are available on our website. I’ll now turn the call over to George.

Thanks Kris. Welcome, everyone, to our fourth quarter FY 23 call. Our Q4 results reflect solid execution in the face of ongoing macroeconomic challenges. We delivered revenue above the midpoint of our guidance, with disciplined operational management yielding all-time high quarterly operating margin and EPS above expectations. For FY 23, we delivered record high annual operating margin and EPS, despite the slow demand environment and relatively flat revenue from FY 22. Even as customers are tightening their budgets in response to the macro, they are not stopping investments in applications and technologies that drive business productivity and growth. Digital transformation projects involving business analytics, AI, data security, and application modernization, both on premises and in the cloud remain top priorities for IT organizations. This drives our confidence in the health of our markets and future growth opportunity, despite the temporary macro headwinds. We are participating in the areas of priority spending with a modern approach to hybrid, multi-cloud infrastructure and data management. By providing customers with the ability to leverage data across their entire estate with simplicity, security, and sustainability, we increase our relevance and value. And we continue to introduce new innovations to deliver greater customer value, further strengthening our position. On our last call, I outlined our three areas of focus to sharpen our execution to better deliver results, while at the same time, positioning ourselves for long-term success. As a reminder, the focus areas are: remain prudent stewards of the business, tightly managing the elements within our control, reinvigorate efforts across the company in support of our storage systems business, and build a more focused approach to our Public Cloud business. As you can see from our Q4 and FY 2023 results, we have demonstrated success in managing the elements within our control and staying flexible to…

Thank you, George and good afternoon everyone. As George noted, we are laser focused on managing the elements within our control. Our focus enabled us to deliver strong P&L performance for the full year and Q4. Before getting into the details, let me quickly highlight the key themes of our results and expectations for fiscal year 2024. As a reminder, all numbers discussed are non-GAAP unless otherwise noted. We delivered record setting operating margin and EPS above our guidance range in both Q4 and fiscal year 2023. We will continue to prudently manage the business to position ourselves for long-term success while driving further operating margin expansion and EPS growth in fiscal year 2024. We are confident in the strength of our position and alignment to areas of priority spend. However, macro uncertainties and FX headwinds have pressured IT budgets and lowered spending. We believe these headwinds are temporary and that the spending environment will rebound in time. We reached our product gross margin target of mid-50s ahead of expectations. In fiscal year 2024, we expect to maintain product gross margin at this level and drive improvement to Public Cloud gross margin. In fiscal year 2023, we returned 148% of free cash flow to shareholders and reduced full year share count by 4% from the prior year. We plan to continue a strong policy of shareholder returns in fiscal year 2024. Now to the details. Fiscal year 2023 billings of $6.41 billion were down 4% from fiscal year 2022. Revenue of $6.36 billion was up 1% year-over-year. Adjusting for the headwind from FX, billings would have been down 1%, and revenue would have been up 4% year-over-year. Disciplined operational management yielded all-time fiscal year highs for operating margin and EPS. Operating margin was 24.2%, including a 150-basis point headwind from…

Thanks Mike. Operator, let’s begin the Q&A.

We will now begin the question-and-answer session. And our first question will come from Aaron Rakers of Wells Fargo. Please go ahead.

Hi, guys. Thank you. This is Mike on behalf of Aaron. I just wanted to ask, you mentioned some customers have kicked off new projects following a period of digestion or optimization. I'm just curious, can you give us a sense of how many customers you put in this bucket versus ones that continue to be cautious or maybe are becoming incrementally more cautious, just trying to get a sense of how the demand environment has changed? Thanks.

Broadly speaking, the Q4 demand environment was not substantially different from what we saw in Q3, and our plans for next year contemplate continuation of the same environment. We talked about in the cloud segment, some of the larger customers who had significantly optimized their landscape through the course of the prior quarters began to take on the projects that we anticipated them taking on. These projects take some time to ramp. We also saw strength in new customer additions and the number of customers that were using multiple products from NetApp, so all good signs for future revenue growth. That being said, customers on a broad basis, still cautious about spending and particularly in the large enterprise segment.

Got it. Thank you.

The next question comes from Samik Chatterjee of JPMorgan. Please go ahead.

Thanks for taking my question. I guess for the first one. If I sort of -- you reiterated a few times you're really not baking in any macro improvement to the guide, but you did highlight the opportunity to get back to revenue growth in the second half. Just wondering if you can help us think through both of those pieces, particularly when I sort of put them against each other, it does look like you're calling for more of a share gain than revenue rebound in the second half of the year, what sort of drives confidence in this sort of a sequential ramp in revenue through the year? And is there more to it than sort of share gain? And I have a quick follow-up. Thank you.

I think broadly speaking, we are super excited about the recent portfolio introductions we've made. We've seen the benefits of improved focus in our field organization. It takes a few quarters to build. And I think if you look at the pattern of sequential linearity through next fiscal year, it is similar to what we have seen in more traditional years. I think FY 2023 was a bit anomalous. And so we feel good about the progress through the year. I think with regard to the macro, we are not -- we've built our plan assuming the macro stays the same. Clearly, if there's upside to the macro, that should be a benefit to us over the course of the year.

Hey, Samik, it's Mike. If I could just add on to that and want to underline the one point George made. When we talk about our guide for 2024, when we talk about linearity, that's -- and we define that as total revenue we expect in the first half versus the second half. That's much more at where we've been historically, which is about 48% and 52% in those halves. So, when you take a look at the year-over-year growth rates in 2024, just keep in mind that those were heavily influenced by the backlog last year. So when you normalize for that, it looks like a much more normal linearity in 2024.

Okay, got it. On the cloud business, the growth expectations that you have for fiscal 2024. Can you just outline how you're thinking about sort of retention business versus new business wins? And also curious if you obviously highlighted the AI opportunity, but do you see that opportunity on the cloud revenue side as well? Thank you.

Listen, I think, first of all, we are very pleased with new customer acquisition, the broadening of our workloads, clearly the performance, and the efficiency and multiprotocol capability of our storage is an advantage whether for AI workloads, whether they are on-premises or in Public Cloud. What we've seen in Public Cloud for AI is a lot of data science teams using the prebuilt tools that are available on the Public Cloud to calibrate and get their learning models of the curve quickly. And that's uniquely available with NetApp. I think with regard to our perspective for the full year, listen, cloud storage, especially the storage that's sold alongside the hyperscalers will be the primary driver of our business next year. I think if you look at the total dollars in any given year, the opportunity to expand existing customers is substantially larger than the amount that new customers contribute because they are just small, but we feel good about the pace of new customer acquisition. And now our installed base of cloud customers is very substantial. So, there's a good opportunity to cross-sell and upsell them more capabilities.

Got it. Great. Thank you. Thanks for the color.

The next question comes from Meta Marshall of Morgan Stanley. Please go ahead.

Great. Thanks. Maybe first question, you noted starting to kind of -- noted seeing customers coming out of optimization periods and starting to add workloads. Just wanted to gain a sense of, are you seeing that more with larger or smaller customers or any particular types of workloads that they're starting to kind of add back? And then maybe second question, the Series-C customer that you noted winning in the quarter. Just any commentary on whether that was an existing customer? And just you noted efficiency and kind of energy efficiency being the reason for the sale, but just kind of how long that sales cycle was just any details there would be helpful. Thanks.

Yes. So, let me get the two questions. The first one is what we've seen in the cloud environment is that customers are still progressing new workload deployment, meaning new applications, analytics environment, AIML environment and so on, right, and that has not slowed down. I think there was a period of time where customers were monitoring their environments and optimizing the infrastructure, but the new deployments continue. I think where we have seen people being more cautious is about migration of on-premises environments, for example, to Public Cloud, where they are benchmarking the total cost of each of those landscapes. We have a large and growing opportunity in public cloud on new workloads because of the capabilities and the certifications that we continue to bring. And so we're excited about that opportunity. I think with regard to the customer we mentioned, they were not using NetApp for the landscape that we won. We won -- we replaced a competitive environment, and we did so based on the new C-Series products that had a significant advantage over all the competitive products, both in terms of our traditional advantages around multiprotocol and all of the data management features, but we're also substantially more efficient from a power consumption and density standpoint.

Great. Thanks so much.

The next question comes from Steven Fox of Fox Advisors. Please go ahead.

Hi, good afternoon. Just one question for me. I don't think I'm alone in this, but the product gross margin surprised substantially the upside of seven, eight points of upside by my account. Can you just break down how that happened? And whether any of that is transitional? How much carries through the rest of the year in your full fiscal year plan? Thanks.

Sure. Hey, Steven, it's Mike. So, let's do the walk from Q3 to Q4, what we guided and where we ended up. So, Q3 product margins were about 46%. We guided approximately 50% largely with the full expectation that we would continue to get relief from premiums that we've talked a lot about. And my goal is to never mention the work premium is on another call going forward. That was about 500 basis point benefit to the quarter, and we expected that to be. The two things that were incremental is mix came in better than we expected. And by that, we mean the capacity per system came in a little bit better. If you remember, in Q3, we talked about that, that caused a little bit of a reduction in gross margins as well as a little bit better all-flash margin. And then FX helped a little bit quarter-on-quarter as well. So, that's the walk from 46% to 55%. As we look into next year, we're assuming that we can retain that 55%. There's a little bit of premium benefit left, but we're also going to make sure that we are flexible as the component pricing rolls through that we can be competitive in the market. And then in addition, we also talked about, hey, we've done some strategic purchase commitments to lock in a large portion of the NAND supply for fiscal 2024 at today's prices. So, we're excited about that, being able to not have to deal with that when in the likely event it starts to go up. As we all know, NAND pricing is at an all-time fall. So, that's the walk from Q3 to Q4, how we did a little bit better and our outlook into fiscal 2024.

Great, that’s super helpful. Thank you.

Thank you.

The next question comes from Amit Daryanani of Evercore ISI. Please go ahead.

Hi. Thank you. This is Irvin Liu on for Amit. I wanted to double-click on the drivers of a public cloud ARR outperformance during the quarter. I think you referenced cloud storage services strength. But can you talk about what you saw in data management and cloud optimization. Is there anything to call out for Spot just given the increased focus on optimizing cloud spend? And I also have a follow-up.

The CloudOps business was relatively flat sequentially. There were new customer additions and some optimizations within existing customers. The majority of the growth rate sequentially from Q3 to Q4 was driven by cloud storage, especially the consumption business with our cloud provider partners.

Got it. Thank you. And then about 11% of your revenue is public sector. From a debt ceiling perspective, I wanted to ask, are there direct impacts we should be thinking about as it relates to your federal government exposure. Is there a potential for a delay in your accounts payable, or any potential changes in how you view the budget environment looking through the back half of calendar 2023?

Yes. So, thanks for the question. At this point, we don't expect any meaningful change in that business from an AR perspective or from a bookings perspective. We'll certainly watch it. We would expect this thing to have to resolve itself in the relatively near-term. At this point, we don't expect any material impact from all those discussions.

Got it. Thank you.

The next question comes from Shannon Cross of Credit Suisse. Please go ahead.

Thank you very much. George, can you take a step back and maybe talk a bit from a higher level on how conversations with customers are going with regard to AI. And I'm thinking not just like near-term, but I'm trying to understand or figure out because I think we all are, what the various roles IT hardware will play in the AI proliferation that we're seeing? So, I'm wondering, well, you've got training, so do you need fast storage, and then you move to inferencing, so it could be more traditional storage or -- is that not correct? I'm just -- I'm wondering, I know you're having probably a lot of conversations with customers that could be beneficial to us. Thank you.

Yes. We have done exceptionally well in the analytics, AI, deep learning environments. We have both technology leadership across multi-protocol, high-performance, scale-out storage and multi-cloud, which are super important buckets of what customers need to drive these analytic applications. And we have done -- we've doubled our business this past year to a very significant amount. I think the key use cases are business problems around, for example, in financial services, sentiment analysis, recommendation engines, advanced recommendations engines and e-commerce, precision medicine, cross-department clinical AI solutions. And then even last quarter, we had a substantial win in a new form of metaverse around autonomous driving, right? So, these are advanced analytics engines that are being deployed on very large-scale data sets. They typically require file and object and cloud integration. And today's environments are not the advanced LLM model, the majority of the business we see today are really around re-platforming from Hadoop to more modern environments as well as the use of advanced neural networks. We see the impending onslaught of ChatGPT and tools like that, where customers will take the OpenAI or open source generative AI model, but then build it on top of their own data sets, which require the storage that we have. So, we're excited about the future, and we have real strong performance in our AI and analytics business today.

Thank you. That was helpful. Mike, can you talk a bit about -- I know OpEx is supposed to be flatter -- you're planning on it being flat this year. But I'm wondering, you delayed some investments and you've had some cost cutting in that. I'm wondering, given the gross margin outperformance in the relative strength you're seeing or improvement you're seeing, is there room to maybe reaccelerate some of those investments? Or is it just too early to make that call?

Yes, Shannon. So, I'd say we actually have accelerated some of those investments. We've talked about doing CONVERGE, which is our sales conference in person as well as INSIGHT. That's the first time in three years. We do a very good job. I give the team a lot of credit for reallocating dollars internally to really -- to reallocate to growth initiatives. You've seen us react very quickly from a product perspective in the last couple of months, C-Series and other things. So, I think at this point, we feel good about where we are from an OpEx perspective. We'll see how we get through the year. And when we talk about prudently managing the business for us, it is make sure we spend the money in the right areas, but we always want to make sure we're investing in growth. And that's what you have, and that's what we put in the guide for the year.

Great. Thank you very much.

Thank you.

The next question comes from Ananda Baruah of Loop Capital. Please go ahead.

Hey, good afternoon guys. Thanks for taking the question. Just picking up on Shannon's AI question, George, do you see an opportunity over time to have the product growth rate altered by AI on-prem. And actually, we just love maybe even a similar question for cloud software as well as this time? T hanks.

I think the AI applications that drive business productivity are a topic of discussion in every CEO room around the globe because it is a key way to bring speed and operating efficiency to companies. And so many of the applications that we talked about help transform a company's business model. And so they will get prioritized in spending envelopes and we are really excited about our opportunity to capitalize on that. We have done the work not only to build high-performance storage, but in addition, build the integrations into all of the AI and data science tool chains that are common in the world and to enable a really flexible data pipeline that can start in the cloud where the tools are available, but then can be operated at a scale on the data in your data center. So, we're really excited about what the future holds and we're going to keep pushing forward. I see cloud and I see AI as two big opportunities for NetApp. We are super well positioned in both, and we look to take advantage of both of them going forward.

That's great. And I guess as a follow-up, can you just talk a little bit about the ability -- and I guess maybe even over what timeframe that the newer NAND technologies could have on share gains on-premise relative to HDD? Just how should we think about that dynamic and over what period of time? Thanks so much.

I think the lower cost NAND technology that we've introduced in our products will become a bigger part of our business through the course of fiscal year 2024 and will be the biggest part of the flash storage growth rate in the industry over the next two or three years. These HDD replacement cycles are multiyear, right? I think if you saw the high-performance 15,000 HDD segment, it took multiple years to transition that footprint. And so 10,000, which is an even bigger part of the market will take many years to transition. But we're excited about our offerings, the start that we've had and the opportunity over the next many years.

Thanks a lot. Really appreciate it.

The next question comes from Krish Sankar of Cowen. Please go ahead.

Hello. This is Robert Mertens on for Krish. Thank you for taking my question. Congrats on the strong execution and guide with a targeted 2024 product margins of around 55%. Could you give a little bit more color on how the strategic purchases of SSDs plays into the target? And on the flip side, if there's any risk to competitors doing the same or headwinds if pricing declines, if there's any elasticity there? And then I have one follow-up.

Sure. It's Mike. So, let's take both of those. So, the guide of 55% assumes that's what we came out of Q4 with. There are some nice continued tailwinds going into next year. One is, of course, the continued shift to all-flash, which has higher margins. In addition to that, we do have a little bit of benefit from premium. So, we feel good about the 55% number. The strategic purchases really help, I'll call it hedge that number to lock the prices in that we have today. I would certainly assume given the lower price of NAND that other folks are doing similar exercises. And why we're at 55%, probably we want to make sure that we have some flexibility around pricing to your very point. So, to the extent that there are changes in the market pricing, we feel like we have that flexibility to stay within 55%, but still be able to get to our product revenue goals for the year.

Got it. Thank you. That's helpful. And then just one more on the public cloud. Do you think the negative impact from cloud optimization efforts is behind us for the year? And would you mind sharing, just sort of which areas within your cloud portfolio are seeing the strongest growth? Thank you.

I think it's premature to signal that cloud optimization is behind us. As we commented in our prepared remarks, I think that this customers will continue to manage their spend where that is on data center infrastructure or on public cloud. I think what we continue to see is the projects and applications that drive business performance especially core business growth are getting prioritized and invested. Those could be analytics, those could be AI, those could be digital manufacturing projects and on and on, right? I think where we have seen optimization and some amount of caution is in migration of enterprise workloads from data centers, the old lift and shift, I think people are taking a hard look at benchmarking both environments, whether it's public cloud or on-premises. So I think that's where we continue to see some optimization. In the plan for 2024, the real focus is on accelerating our hyperscaler storage. The storage that is sold alongside our cloud providers, it had a good quarter this quarter. We are uniquely positioned in the market, and we are serving a wider and wider range of applications with the strength of our technology. So, we're excited about that.

Got it. Thank you for letting me ask the question.

The next question comes from Tim Long of Barclays. Please go ahead.

Thank you. Two, if I could as well, first, I was hoping you could talk a little bit, I think, last quarter, you talked about kind of increased focus given the large enterprises were a little bit more macro impacted, a little bit more focused on small and midsized businesses. Can you give us an update there on how that push into that customer class is going? And then second, if I could just come back to the QLC-based products. George, talking about it taking more share. I'm just curious how you think it's going to further proliferate your portfolio. So, are you going to start moving into different workloads, different use cases? How should we think about kind of progression of new products to help gain more share of all-flash and grow as a percent of your business? Thank you.

Yes. So, maybe I can start with the portfolio. We've introduced three major expansions of our portfolio in the all-flash segment over the last four months to five months. We have capacity flash, the broadest, most feature-rich, most competitive capacity flash products in the industry. We've announced a set of entry flash products that are shipping, which brings our industry-leading software in an all-flash configuration at a price point that is perfect for midsized enterprises. And we introduced early this quarter and All SAN Array, which is a block-only storage configuration for customers that have large block storage environment and don't want to use unified storage for those offerings. So, major expansion to our product portfolio, the most significant expansion since we introduced our flash portfolio many years ago. So, I'm excited about that. That gives us opportunity to both expand wallet share in enterprise customers going after parts of the wallet that we used to not serve, but importantly, address the expanding opportunity within commercial customers. Our commercial segment has outperformed the enterprise segment throughout this fiscal year and again did so in Q4, representing the resilience of those customers to the macro spending environment. So, we feel good about that. We moved some resources within our spending envelope. We reprioritized some more resources to cover the commercial market for fiscal year 2024.

Okay. Thank you very much.

The next question comes from Nehal Chokshi of Northland Capital Markets. Please go ahead.

Yes, thank you. Congrats on nice results. Your billings did decelerate quite a bit, the 15% year-over-year decline versus 7% year-over-year into Q3. So, given your guidance for analysts, it sounds like you do expect this billings to represent a low point in terms of the billings trends. Is that correct? And if so, why is that?

Yes. Hey, Nehal, it's Mike. So, if you take a look at Q4, so total revenue was down year-over-year by about 6%. Total billings were down by about 17%. When you take a look at the difference between billings and revenue, product revenue and product billings are basically the same because there is no change in deferred. What we saw in the second half, especially in Q4, is lower product bookings than correlated with less support bookings, specifically multiyear bookings that come with new sales. So, we do expect to see that come back as we go through next year. That's going to be the difference that you see in billings and revenue. So based on the guidance for the year, which is revenue down low to mid-single-digit percent, we do expect billings to be more flat to somewhere around plus or minus a couple of percentage points to do a little bit better than revenue, again, because of the contribution from support.

Okay. Thank you very much.

Thank you.

The next question comes from Simon Leopold of Raymond James. Please go ahead.

Thanks for taking the question. I wanted to see if we could maybe unpack the public cloud business a little bit. In that last quarter, it seemed apparent that some of it was very much a recurring revenue stream and some of it was more sensitive and consumption-based. And I'd just like to get level set as to how to think of the composition of PCS as to what you would consider consumption-based and what you would consider truly recurring? Thank you.

Hey Simon, it's Mike. So, we'll do those two ways. We've given this detail in the past. So, cloud storage represents approximately 60% of the total cloud ARR. CloudOps represents about 40%. It stayed amazingly consistent through fiscal 2023. If you then look at what is consumption versus subscription, consumption is going to more than half of the business, and it's growing faster than subscription because the two products that are growing the fastest that George referenced, ANf and FSx, which are our first-party cloud storage products are consumption-based. So, you should expect to see that percentage of consumption continue to climb as we go through 2024. And then it doesn't mean that subscription is declining. It means that the consulting business is growing faster. And by consumption, we meant, hey, there is no starter end date. It's not an a or a multiyear subscription. It is a pay-go relationship.

Thank you very much for that.

Thank you.

The next question comes from David Vogt of UBS. Please go ahead.

Great. Thanks guys for squeezing me in. So, maybe this is a question for both George and Mike. When you think about sort of the product innovation engine and the new all-flash offerings versus sort of keeping your OpEx flat going forward, how should we think about sort of what you need to invest in the business as theoretically, there should be sort of a pretty steep growth rate in storage demand by some of your customers over the next couple of years? And then maybe as a quick follow-up. When you think about AI and what it means maybe for your business, how do you think about productivity gains and the uses of those productivity gains within NetApp. So does that flow through? Or is that reinvested into the business, whether it's go-to-market channels? I'm just trying to get a sense for how you think about what the benefit for AI would look like for you over the next couple of years as well? Thanks.

Okay. Let me hit the sort of the broad picture, right, which is, listen, I think that we are disciplined managers of the business. We are balancing an uncertain macro with the strength of our product portfolio and the long-term opportunity. And I think what you'll see us is we continue to invest in the areas where we see the best returns so that we don't forgo the long-term health of the business. If we see the year outperform, we will certainly look at investing to further accelerate the business. But I think at this point in time, we want to be prudent in terms of managing the business just given the macro landscape. I think the second is, with regard to AI uses at NetApp, we have a broad range of users. We already use AI in our customer support and our product portfolio to help customers be able to have much reduced management requirements, right? So, we automate how data is managed in the system and automate self-healing of a system, as well as give customers intelligent chat bots, for example, so that they don't have to wait in queue for all of their basic questions. I think with regard to the big areas that we see opportunity is, is really in software development productivity. We have some exciting work already underway using some of these large language models and this profound opportunity for innovation there that we are leaning into. And you'll see the benefit of that in the ability to deliver more software to customers in a faster period of time. And I think those are some of the key areas of focus for us.

And David, it's Mike. If I could add one more from a go-to-market. We've talked a lot about building the customer success team, which adds productivity because we're able to shift renewals and cross-sells and upsells and then create capacity for our core sellers. So that's another initiative over the next couple of years.

Great. Thanks George. Thanks Mike.

The next question comes from Sidney Ho of Deutsche Bank. Please go ahead.

Great. Thank you. I have a cash flow question. So, I know Q1 is going to be impacted by all these strategic buys. But Mike, how are you thinking about free cash flow for the fiscal year, maybe the linearity of that? It sounds like you're expecting to return 100% of free cash flow to shareholders this year. At what point, do you think M&A will come back to be a priority? Thanks.

Yes. Hey, thanks Sidney, so let's start at the top. So, we ended the year fiscal 2023 with $1.1 billion of operating cash flow. We talked about the one-time items, which was the restructuring and the Danish tax case. So, we paid out about $85 million for those two items in the quarter. So, if you add those back, you had about $1.2 billion. We would expect going into next year, I would call that kind of the floor for cash flow going into next year. Working capital then will drive whether we can do a little bit better or not. We will have some lower cash outflow in Q1 because of the incentive compensation payments. So that will help Q1. The strategic buys will start a little bit in Q1 and then they'll build in Q2 and Q3. And that largely by the end of the year, it's not a big number. So, it's more of an intra-year impact. So, -- and again, we do expect cash flow plus or minus a couple of percent, Sidney to be pretty close to non-GAAP net income than it has been historically. As it relates to our capital allocation policy, hey, it's the continuation of what we talked about last March, two March's ago, with a little bit of a tweak, going into the year, we've always said that we've spent about 70% of our free cash flow on return to shareholders and reserve, call it, 30% for acquisitions. Going into fiscal 2024, we'll over-index on share buybacks, especially in the first half. It doesn't mean that we won't do any acquisitions. There's still a pipeline, we're still looking at them. But given where we are from an execution perspective and our focus on the business, we would rather reallocate that to share purchases -- repurchases, especially in the first half, and we'll see where it goes in the second half of the year.

Okay, great. Thanks.

Thank you.

Our last question will come from Louis Miscioscia of Daiwa Capital Markets. Please go ahead.

Okay. Thank you, George. I think you had said earlier in your script that you're going to regain some all-flash array share. Maybe you could go into that in any more detail. Do you think that you did lose some share, but obviously, now with the new products coming out now in the second half that you're going to start to regain maybe if you could mention how much you think you might have lost and what you think you might be able to gain back? And then just a quick follow-up after that.

Louis, first of all, if you look at the recent print from our competitors, I think we took share already in the current quarter. So, that's a good start to that dynamic. I think with regard to our overall kind of focus areas, we talked about expanding innovation to support our storage business. And so we've done a lot of product-led innovation into the market as well as broad innovation in storage life cycle management programs, the simplified licensing, the industry's most advanced and complete ransomware protection and recovery guarantees of lots of service innovations as well for our customers. We have aligned our go-to-market teams starting fiscal year 2024 to be laser focused on our flash portfolio. We think we've got a strong opportunity there. Last year, as I mentioned in our Q3 call, we had a compensation plan that was complex, having our frontline sales team sell a broad array of products, and that impacted execution. We have sharpened that starting FY 2024 per our commitment, and we have brought a much more focused approach to our cloud portfolio. So, I expect us to -- we have the strongest hybrid flash portfolio in the industry. We now have the broadest capacity flash portfolio in the industry and truly the only unified storage portfolio in the industry. Unified now includes block, file, object and cloud. And so we've redefined the landscape for unified to take it to the next level. So we're excited about the portfolio. We've got to execute, and we're focused on it.

Okay. Then a very quick follow-up. On the guidance of down mid- to low single, what is the FX expectation for next year? I assume that you're giving guidance and actual -- what you expect revenues to perform, but I didn't know if you had an FX expectation in there.

Yes. Hey, Louis, it's Mike. Our expectation is it's not going to be a big impact at all, less than 1% based on where we sit today from a revenue perspective. So, we don't think FX is going to be a big hit. And that's a small benefit where we are. Who knows where FX rates go after all of the fund that we've had with the debt ceiling and other things. So, we don't think it's going to be a big driver next year.

Okay. Best of luck on the new year.

Thank you.

Thank you, Louis. I'm going to pass it over to George for some closing remarks.

Thanks Kris. Our focused execution yielded solid Q4 results, capping off fiscal year 2023 with record high annual operating margin and EPS, despite the slow demand environment. The fundamentals of our business model are sound and our confidence in our strategy and the health of long-term opportunity is unchanged. We will continue to prudently manage the elements within our control to drive margin expansion and improve profitability. I'm excited to enter FY 2024 with substantial new innovations and a more focused operating model to better address areas of priority spending within our customers. I look forward to updating you on our progress on next quarter's call.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.