Good day, ladies and gentlemen and welcome to the Network Appliance first quarter 2008 conference call. My name is Cammie and it will be my pleasure to be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to Mr. Ingemar Lanevi, Treasurer. Please proceed, sir.

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 release, the financial tables and the reconciliation between GAAP and non-GAAP numbers. In the course of today’s conference call, we will make forward-looking statements and projections that involve risks and uncertainties, including statements regarding our expectations with respect to our Q2 pipeline and bookings distribution, our operating results for fiscal Q2 2008, our expectations regarding our financial performance for fiscal quarters after Q2 2008, including cash generation, bookings, and revenue growth, and our future operating income, our future stock repurchases, customer demand for our products and service offerings, our hiring plans, our intention to pay down remaining debt associated with our last year’s foreign cash repatriation, and the benefits of the investments that we have made in emerging products. Actual results may differ materially from our statements or projections. Factors that could cause actual results to differ from our projections include but are not limited to: customer demand for products and services, increased competition, and any decline in general economic conditions. Other equally important factors are detailed in the company’s 10-K and 10-Q reports on file with the SEC and available through our website, all of which factors are incorporated by reference into today’s discussion. With me on today’s call are: Dan Warmenhoven, CEO; our President, Tom Mendoza; Steve Gomo, CFO; and Tom Georgens, EVP of Product Operations; and Rob Salmon, EVP Field Operations. Steve will review this quarter’s financials and discuss our revised financial outlook for the second quarter, and then Dan will share his thoughts before we wind up with everyone here for Q&A. Steve.

Thanks, Ingemar. Good afternoon, everyone. As we discussed in our preliminary earnings call on August 2nd, NetApp experienced a revenue and earnings shortfall relative to the expectations we had set at the end of last quarter. However, we still believe our business fundamentals remain intact. Let me walk you through some commentary about our final results to illustrate. Please note that all numbers are GAAP unless stated otherwise. Please refer to the table provided in our press release and on our website to see the reconciling items between non-GAAP and GAAP. Total revenue for the first quarter was $689.2 million, up 11% compared to Q1 last year and down 14% sequentially. Foreign currency effects had an immaterial impact on this quarter’s sequential results but added about 1.9 percentage points on a year-over-year basis. The combination of product revenue and software entitlements and maintenance revenue, which we had formerly referred to as software subscription, was $571.3 million, up 6% year over year but down 17% sequentially. Add-on software and software entitlements and maintenance accounted for 41% of total revenue this quarter. This compares to 40% last quarter and 42% in Q1 of last year. Our add-on software was about 25% of total revenue and software entitlements and maintenance were about 16% total revenue. Revenue from services, which includes hardware support, professional services and educational services, was 17% of total revenue, up 4% sequentially and up 46% over Q1 of last year. Service maintenance contract increased 10% sequentially and 45% year on year. Professional services declined 6% sequentially and grew 49% year over year. Non-GAAP gross margins were 61.8% of revenue this quarter, same as last quarter. The combined non-GAAP gross margin for products and software entitlements and maintenance was at the highest level in the past five years. At 68.0% of…

Thanks, Steve. Since our last call on August 2nd, we have conducted significant analyses to better understand the dynamics of what happened in our first quarter. As a result of that analysis, I am even more convinced that we misread the strength we experienced in April as a recovery in demand, and as a result we overestimated the bookings outlook in Q1. The revenue data for Q1 supports our earlier assertion that a number of our top enterprise accounts and many of our enterprise accounts paused a meaningful portion of their spending in our first quarter. The number of deals over $1 million dropped 27% sequentially from the record high in Q4, attributable to many of those large accounts. We expect them to resume their spending on NetApp in the future. One highlight of Q1 which we mentioned on the earlier call was the 27% year-over-year increase in bookings, which demonstrates the underlying health of the business. However, bookings during Q1 were quite back-end loaded, resulting in many orders being received too late to be converted to revenue and ending up in backlog as we exited the quarter. Consequently, we are entering our second quarter with a substantial backlog position that is much better than we had going into Q2 of last year and significantly better than we had going into Q1. Additionally, we’ve scrubbed the pipelined for Q2 from both a bottoms-up and tops-down perspective and believe the integrity of our pipeline will be much higher and healthier going into this quarter. This gives us a high degree of confidence that the forecast we provided for Q2 can be achieved. I and the executive team remain certain that the underlying market forces driving demand for our solutions are intact, that the solutions we offer provide the best value to…

(Operator Instructions) Your first question comes from the line of Richard Farmer with Merrill Lynch. Please proceed, sir.

Thanks. Dan and Steve, I just wonder if you could talk about any sort of time series of the backlog as a percentage of the forward quarter revenue for the last several quarters and this one, including if you can the percentage of that that is non-deferred versus deferred. Thanks.

That is very complex. No, we can’t. Backlog is scheduled over many quarters. There’s a lot of components to it. There’s professional services, there’s product, there’s all kinds of stuff on the balance sheet that comes off and flows into revenues. Backlog I think is not a quantifiable term that’s easily understood. I think you have to look at it as a relative, not as an absolute, much like bookings. Bookings go into all kinds of different components of what happens in the business. The absolute number is not the key. The relative number is the key. Are bookings trending up or down and how they relate to overall revenues and backlog is the same kind of thing. We are in a pretty good position relative to the backlog going in. We think we’ve got a pretty good start on the quarter but that’s about as specific as we are going to get.

Your next question comes from the line of Ben Reitzes with UBS. Please proceed.

Good afternoon. Thanks. Dan, could you just talk a little bit more about the economy, anything that came out more over the last few weeks about why the customers pause and then why you think things will accelerate throughout the year, given some of the volatility in the financial markets and what not and your exposure to financial markets. If you could just provide more specificity, maybe just a little more detail about your conversations and what the sales over the past couple of weeks has been able to come back to you and tell you in more specificity. Thank you.

Let me start and I’ve got both Tom Mendoza and Rob here so I’ll invite them to chime in. You know, one of the things that we have in our top enterprise account is executive sponsors, and we asked each executive sponsor to go back and speak to their principals in the accounts and find out what their intentions were, find out if this was company-specific, what’s their intentions going forward. Some of the things that we picked up are that a lot of the projects we are involved in, you would have to consider from their perspective to be somewhat discretionary, things like archival. They don’t have the sense of urgency around those projects in a production sense that you might get if you are deploying a brand new application on a fixed schedule. A lot of them are infrastructure related and infrastructure can be metered out over time as kind of the economic conditions would warrant. They did say that they slowed down in the first half of the year and I think most of the enterprise accounts are feeling pretty bullish on the second half but as long as the macro economic conditions don’t absolutely implode, I think most of them are expecting to be pretty solid at this point, that they are going to continue to move forward with their project plans and they expect to use a fair amount of network appliance technology in those solutions. I should point out to you they expect us to compete aggressively for it and that’s exactly what we intend to do.

As Dan said, we chatted with each of our top accounts. We split it up among the executive team. They were very happy to talk to us about it. They made it very clear there was not a NetApp specific issue on their hold on spending. I think the macro economic condition has people just wondering how fast they want to unleash their budgets. We’re in the midst of many, many projects that I believe we have a very good shape on and I didn’t see a big change in their attitude other than their own internal thoughts on how they are going spend their money, or when they spend it, I should say.

Thanks a lot.

Your next question comes from the line of Shelby Seyrafi with Caris. Please proceed.

Yes, thank you very much. So it’s encouraging that you are providing optimistic guidance right now. If we take the high-end of guidance for the October quarter of $768 million, to get to $1 billion in fiscal Q4, which you said was your goal, would require greater than historical patterns for sequential growth in fiscal Q3 and fiscal Q4. I’m wondering why perhaps you are putting out such aggressive targets. And what is your visibility right now as well? Thank you.

I’ll start. We built a model at the beginning of the year that had us on a higher number, so our sales capacity and the amount of hiring we’ve done, et cetera, should be more than adequate to deliver that kind of number. We’ve gone through territories and plans and enterprise level account plans and all the rest, so we’re feeling pretty confident that as the year progresses, we can see that kind of return to growth. I know you are looking at it sequentially. We look at it more on a year-over-year basis and that still puts us in a low to mid-20s.

But just to be clear, this $1 billion target in fiscal Q4, is that a stretch goal or is that a realistic target that you believe you will get?

I think we’ll be in the low to mid-20s, and I would say it’s a stretch goal from the perspective we put it out there for the company as something to go shoot for. But if it’s achieved, it’s only 25. It’s the high-end of the range I just gave you of low to mid-20s.

Remember that the order growth rate over the past couple of quarters has been fairly strong, and certainly stronger than first quarter revenue growth. We are starting from a very low point and even the strong sequential growth that we are projecting for next quarter does not take us to a very high level of revenues type of thing, relative to order potential. I think that the sequentials on revenue, given the low starting point, are very reasonable.

Thanks.

Your next question comes from the line of Laura Conigliaro with Goldman Sachs.

Just a different way of asking, following up on the things that have already been asked about -- since a portion of your Q2 revenues, Dan, are coming from better backlog, as you said, and since you don’t seem to be indicating that you are already seeing a recovery from some of your largest customers, where does the confidence come for going from the second quarter into the third quarter?

One of the things we laid out for you at the analyst day in New York was our strategy on go-to-market, where we were going to broaden our coverage and our pathways to market and win more new accounts. We believe through our channels, and I just got back from a trip this week down in Southern California meeting with a partner for a couple of days, we believe that strategy is paying off for network appliance. We’ve told you for a while now that we need to broaden the customer base we go after. We think that broadening is having an impact and we certainly believe it is going to have an impact this quarter as well throughout the second half of the year. As Dan and Steve both alluded to earlier, macro economic conditions aside, if we continue to execute on the strategy that we’ve embarked on this year, yes, we were too aggressive in Q1 in terms of what we thought we would do but we believe we will be right back on track with our strategy going forward and a big part of that has to do with new account acquisitions, working through our partners, as well as going deeper into big enterprises, as Dan’s already talked about.

Thank you.

Your next question comes from the line of Aaron Rakers with A.G. Edwards. Please proceed.

Thanks, guys. I guess first of all, congratulations or good job on the share repurchase. I guess I want to ask about cash flow generation here going forward. Maybe we could start by talking a little bit how we should expect to see deferred revenue growth continue. It looks like you had pretty good numbers here in the July quarter, despite the shortfall. How should we be thinking about that? And then tailing into that, how do we think about the cash flow or free cash flow generation for the year, following up on your guidance given at the analyst day in mid March?

I would expect to see our -- as the revenue growth rate accelerates, I would expect to see the deferred revenue growth rate also accelerate. That’s going to contribute to cash. In addition, as our profitability increases throughout these coming quarters, that will also contribute to our ability to generate cash. Finally, I don’t know that we are going to be able to hold receivables where they are but hopefully they won’t deteriorate back to where they were last fourth quarter type of thing. All of that put together I would expect to see a fairly high generation of cash relative to revenue as we move forward in the next few [quarters].

Thank you.

Your next question comes from the line of Bill Shope with J.P. Morgan. Please proceed.

Okay, great, thanks. Dan, there’s been a lot of debate over whether SAN or NAS is preferable for virtualized server environments, as you know. Knowing that you participate in both market segments, can you give us your view on this issue?

I’ll turn that over to Tom Georgens. He’s spent a great deal of time with the team at VMware and dug really deeply into the question of virtualization. Tom.

Well, clearly -- well, step number one is we can participate either way. We’ve got SAN offerings, we’ve got NAS offerings. We see them both out there in the market and we see customers being successful with both of them. I think from an NAS perspective, I think that that has not gotten a lot of emphasis but we are actually seeing some momentum. In fact, on our own webcast, we’ve done webcasts around VMware, which in fact have been our largest attended webcasts, the interest in VMware with NAS has been very, very high, for a lot of reasons you would expect, in terms of ease of management, ease of migration and the ability to support the mobility model that VMware wants to put out there. Clearly I think that we are going to be positioning not only NAS but also iSCSI as a very, very key technology as customers re-architect and move towards a VMware virtualization model. There are those customers that do have a preference for SAN and certainly we’re not afraid to support that and we’ll continue to support that, but whether it be iSCSI for SAN and then the same ethernet connection for NAS, it’s a much more simple environment, much lower cost and a lot more flexible. So certainly we see more momentum in NAS than probably the rest of the industry and that’s clearly a solution that we are going to continue to promote. But the bottom line is we’ll go with the customer preference but we do have a recommendation and we do have a preference for both iSCSI for SAN, and ethernet for NAS.

The SAN attachment scheme was the one that VMware first emphasized and that’s got probably the widest installed base. But we are seeing, as Tom said, a lot of that interest going forward rolling over to ethernet as opposed to fiber channel. Ether supports both NAS and iSCSI, and that seems to be the convergence point, converging the wire first and then they can figure out what access type you want.

Okay, great. Thanks.

Your next question comes from the line of Kevin Hunt with Thomas Weisel Partners. Please proceed.

Thanks, guys. I wanted to ask another technology question that you didn’t mention, and that’s the GX operating system. Can you give some kind of an update on what you are seeing there in terms of adoption?

Well, as far as GX is concerned, we talked about our initial release of GX. Dan gave some color about the momentum. I won’t dwell on that but the original target markets for GX were high-performance computing to basically leverage the scalability of the offering and go from there. We see an expansion of that away from pure technical computing into some of the animation houses and the movie houses and the people that are doing high-performance computing around entertainment. And then the other thing that we see is deep archiving, the ability to have an infinitely large main space that we can continue to dump more and more data into without having the capacity limitations from different types of file systems. So for us, I think there is an ease of use component and ease of management on deep storage, and we are seeing more and more of that for GX. But still the primary target market for that today is high performance computing. I should also make it clear that GX is not an end-game product. GX ultimately will be converged with everything else that we do, and we are going to bring clustering to our broader product offering and that remains our objective with that product. So today it’s about high-performance computing, media and entertainment, deep storage, but ultimately we’re going to combine that with the rest of our value proposition around replication and data management and basically bring clustering to our entire installed base and entire customer target market.

I would agree with what Tom just said. I spent some time this week talking to a customer about their recent acquisition of our GX technology and what they liked is the entire NetApp value proposition, the roadmap we allow them to buy into as they build up the solution they need for today but also want to build on it tomorrow. I think also this is an area where an awful lot of prospects and customers kick the tires on some of the other technologies and solutions in the marketplace and wind up looking an awful lot but coming back to Network Appliance because they do believe in the roadmap that we have and the total value proposition with the roadmap that Tom talked about.

Thanks, guys.

Your next question comes from the line of Harry Blount with Lehman Brothers. Please proceed.

Dan, you mentioned the strength in federal. I know that seems to be a little bit ahead of their normal fiscal year-end. I guess the question really is as you guys went back through and scrubbed the backlog and looked at this vertical by vertical, could you maybe give us a sense of what your current mix is by vertical and any particular areas where you might have seen strength or weakness in those verticals? Thanks.

In the past quarter, certainly the strongest vertical was in federal, like you said, and it’s largely the result of really programs we started to get involved in two or three years ago. It’s been a long gestation period kind of thing that finally culminated, so it wasn’t around an end-of-year buy; it was really new wins in very long-term sales engagements. In terms of the vertical mix, Steve, do you happen to have it there? I know the financial and the technology sector were pretty soft. Let’s see, the vertical mix running kind of from top to bottom: tech was still about 20%, but was down on a dollar sense; financial services was around 18%, a little up in the mix but -- I’m sorry, excuse me, pardon me, I’m reading the wrong column -- 16% for high tech; about 12% or 13% for the financial services; telco at about 7%; and then it kind of drops off from there to a mixed bag. But if you notice, those numbers are significantly down from where they were in some prior quarters.

Great. Thanks.

Your next question comes from the line of Clay Sumner with FBR Investments. Please proceed.

Thanks very much. Dan, as you said, you had strong bookings growth in the July quarter and you built substantial factory backlog heading into the October quarter. It seems that either your October quarter revenue guidance is actually still pretty conservative or that you are expecting bookings to slow in October way down from the strong 27% growth that we had in July. Given the commentary on the year, it sounds like strong bookings growth is coming later in the year, so is there something about the October quarter that you are expecting bookings to slow or are you just being very conservative on the forecast?

You’ll have to make your own interpretations. We just picked ourselves up off the mat. Let me tell you, this is one we’re going to make, so you’ll have to make your own interpretations. The guidance is what the guidance is. That’s what we put in black and white out there. You’ll have to put the color on it yourself.

Understood. Thanks.

Your next question comes from the line of Paul Mansky with Citigroup. Please proceed.

I wanted to follow up a little bit on that last question. Dan, you provided us some comments around pipeline, pipeline scrub, it sounds like revenue could be considered a bit of a base case here, at least over the near term. However, given that reduced headcount growth, I wanted to get a better grasp on the op margin line. It seems like three quarters is a fairly long time to get back to 16% versus your historical MO. Is that a function of quota resets, maybe some expected softening in gross margin, conservatism, a combination of all three? Any other color around that would be most helpful.

The question is could we get back faster, all things being equal? The answer is yes, if we froze hiring and we could certainly manage expenses in a way that would get us back faster. Let me be very clear -- that is not our intent here. Our intent here is to make smart and prudent trade-offs so that we make sure that we can grow in the future, and so we are investing as we go. So what you see here is a plan that balances future growth with current profitability and that’s why it takes us the time it does to get back to the operating margin in the fourth quarter. Be very clear -- we are still investing, we are still hiring people, albeit not at the rates we did last year but we are still investing for the future as we go.

You mentioned our past track record and one of the things about NetApp is that we’ve always focused on what are we going to do to grow? And anytime we have an issue like we did last quarter, we take a step back and say okay, are we -- since we just went through extraordinary growth for three years, are we invested in all the areas that are the right areas? Because you invest in a lot of things rapidly and we are more tuning our investment strategy and figuring out where we are going to make our big bet. But the one thing that we did right the first time we had an issue back in early 2000, we said we are going to grow our way out of this. We are not going to cut our way out of it, and I think that’s what Steve’s talking about. We are very, very focused on how we are going to grow our way back to where we want to be.

Let me just add on, you asked about a re-plan for sales, in some cases we will absolutely give new targets out and that’s not across the globe but in areas where we just were too aggressive in our thoughts for Q1 and the year, we will go ahead and re-plan for those folks to get their objectives far more in line with what we want to do, within the guidance of our business model and where we are going to invest. So we are clearly working on that right now.

Great. Thank you all for that color.

Your next question comes from the line of Kathy Huberty with Morgan Stanley. Please proceed.

Thanks. Good afternoon. Steve, what are the drivers behind lower inventory turns this quarter? And is it just a matter of shipping what you have in backlog in order to get back to normalized levels in October?

Well, where I came from, 18 times was pretty good turn but the reason why it declined from previous quarters and why we expect it to go forward, at the end of this quarter, this past quarter, as Dan mentioned we received a lot of orders very late. We were actually doing a number of what we call pre-builts in advance of those orders, so this is where we know the configuration is coming in, we built it in advance. The problem is that the order got here too late to get through the test chamber, whatever the case, and get out the door. So we were left with a number of pre-builts that didn’t get out the door. The good news is as we speak today, those are all shipped.

Great, thanks.

Your next question comes from the line of Dan Renouard with Robert W. Baird. Please proceed.

Thanks. My question is I think a quick one, but Steve, your product revenue is down slightly, software maintenance and service was up pretty sharply year on year. Is that purely a function of the shipping product versus what is coming in off deferred? Or is there anything else going on?

You hit it on the head, Dan. That is the issue. Remember what we used to call the subscriptions, the software entitlements and maintenance basically is coming off the balance sheet, so that’s pretty automatic every quarter. We know that’s going to grow. The problem was the non-deferred piece, which is a lot of the product hardware that ended up in backlog and as we built that substantial backlog, we didn’t ship so that’s the force at work.

Got it. Thanks.

Your next question comes from the line of Tom Curlin with Royal Bank of Canada. Please proceed.

Can you guys hear me?

Yes, we can hear you fine.

If you look at your comments on bookings growth from last quarter, or I guess from the pre-announced call, and talking about getting back to 30% plus year over year, I mean, there were some comments about the sequential trend being aggressive but when I look at the guidance of the discussion about mid-20% by Q4, it seems to me you are assuming you operate at a higher level of backlog relative to revenue and you have been and do that all fiscal year. Is that the approach you are taking, just to be sure that you are covered in terms of the macro issues out there?

I wouldn’t say based on macro issues. I would say it is having to do with operational efficiencies. We can’t run a company efficiently when we are trying to ship everything that comes in at the end of the quarter. We were always in a pattern where that last few days of shipments didn’t have to be rushed through the factory and converted to revenue, and in fact it is inappropriate to do so and very difficult to do so in many cases, and in Europe in particular. Our customers traditionally require delivering for recognition of revenue as opposed to shipment. It’s not a very good way to run a company, right? So we’d rather see this thing kind of smooth out a little bit. Is it a higher level of backlog? It’s actually lower in a percentage sense of the quarter’s revenues than it was a couple of years ago.

Okay, but higher than this past fiscal year?

Yes, I think so. Yes, that’s fair.

Okay, and then also on the FAS2000, maybe you provided an update and I missed it, but what is the status of the new entry level program? Is that ramping or roughly what’s the timing?

Well, in prior calls we indicated that we would be taking revenue on that in Q1 and in fact, that was the case. So we did a launch into our channel partners and we actually shipped units. Dan talked about the combined low-end shipments, and we’ll be doing a formal announce with our partners in this quarter. So the product did come out last quarter, we did take revenue on it, it is in our channel, and then we’ll do a broad release in about a month or so.

So you’ll essentially be -- we’ll call it fully released by the end of this quarter?

Absolutely.

Okay, great. Thank you.

Your next question comes from the line of Bill Fearnley with FTN Midwest. Please proceed.

Good afternoon. Dan, you guys have mentioned your competitive win rates are about the same but you’ve also mentioned decision cycles being stretched out by a month and talked about clients being more conservative. Is there anything you see different in the decision cycle trend for the balance of the year after you did your survey of the top 40 accounts you mentioned in the last call? And how much of the stretch of the sales cycle is due to the number of new players and at least their success potentially getting into the consideration cycle here in the enterprise storage space?

I’ll start and I’ll turn it over to Tom and Rob. We have spent a lot time with the customer community, that’s for sure, to understand what is going on. My sense is that it is not a function of more players; it’s a function of a reduced sense of urgency. A lot of our business has been in the secondary storage space and a lot of that has to do with finding efficiencies in their infrastructure, more investment in things like archival, business continuity, et cetera. Those are not production oriented deployments and I think a lot of the customer community has just decided look, if they have to slow down something, that’s the piece they’ll slow down. They don’t affect, if you will, their customers in an obvious way and that’s the easiest place to kind of stretch things out. And they were very clear, they were stretching out spending. I want you to understand -- we were in the situation where in many cases, we were told we had one deal but could not secure the order and that’s when you kind of go what the hell’s going on, and it’s not a competitive situation. It really is a spend rate.

Just to follow up on your question about the newcomers, frankly we don’t see the newcomers quite so much in the big enterprise accounts. They are specifically in verticals and I’m not going to say to minimize them but in terms of the specific dialog here on top enterprise accounts, traditionally the competition is the big competitors we see every day, we’ve been seeing for the last couple of years.

Any change in sentiment in the range then with the smaller players?

Let me just add on to what Tom said on the big accounts. I would agree with Tom. We’re not really seeing a change in the landscape with the big accounts. But there’s one area that we are very focus on and that does take a while and that’s new account acquisition. New account acquisition typically takes a little bit longer than selling to the same sales because they have to understand your value proposition, you have to find an area where you can provide a solution to a problem they have at that time, and then you have to prove yourself. We’ve been very clear to all of you that we are going to broaden our install base and that was by new account acquisition. Those sales cycles take a little longer and we are in a lot of those sales cycles. We are winning new accounts, winning an awful lot of new accounts but as we embark on that, one of the things that we are trying to help us build with is greater awareness of the success we are already having. It is really a two-pronged strategy. Still more new accounts but also get far greater awareness of Network Appliance in the marketplace and how we are already providing solutions to many big enterprise customers. So no real change in dynamics with big enterprises we already call on. We’ve already talked about some of the delays that we’ve had in terms of sales cycles there. It’s really a lot of new account acquisitions where we are spending emphasis with our partners and our enterprise sales force going after those, it takes a little bit longer.

Your next question comes from the line of Chris Whitmore with Deutsche Bank. Please proceed.

Thanks. Just to follow up on that last question, I was hoping to get some color as to where you expect the growth to come from, what’s your outlook for the large enterprise versus the channel versus the new accounts, particularly in terms of accelerating the growth rate back to 25%. Thanks.

I don’t think we want to get that specific about where we see it come from. That just tells our competition where they should focus to try to slow us down.

Are you anticipating any recovery at all in your large enterprise accounts? Have you seen any indication that spending there will pick up?

Yes, absolutely. In fact, of the ones we had communications with, virtually every one indicated that they expect to see the second half spending to be pretty strong. They really expect to spend through the rest of their budgets for the year. You know, there’s a lot of different factors that went into the springtime that I think now are largely behind us and I think the level of confidence there is higher.

Have you seen an acceleration in orders over the past three to four weeks from large accounts?

Tell you all about it in the middle of November.

Your next question comes from the line of Kaushik Roy with Pacific Growth Equities. Please proceed.

Thanks. Can you comment on the pricing environment in the mid range and the entry level? And then, this is probably for Tom Georgens, Data Domain now has a market cap of $1.4 billion. Can you comment on the dedupe market and your efforts in that segment? Thanks.

Okay, so I’ll get the second question first. So as far as dedupe goes, there is really a two-pronged strategy. One of them is we are introducing deduplication technology and we are showing that to our customers today in the context of the VTL, which allows us to bring deduplication and VTL technology together and that will position us I think quite well against the deduplication technology for back up that Data Domain has. More broadly, we did a relatively larger announcement about compression technology, deduplication ASIS, that’s why for all of our environments, that’s part of our core products. So rather than specialty products around back-up and archiving, we are actually bringing deduplication to home directories, we’re bringing deduplication to VMware images, we’re bringing deduplication to mainstream applications. I think that’s a more compelling technology and the take-up and interest of customers around that technology has been very, very high. So the bottom line here, I think that deduplication is a feature of a product that will emerge and not necessarily a product or a symbol or a company. I think that you are going to see deduplication in all sorts of products at all sorts of levels and that will be just integrated into the products, just like many other features are today.

Okay, and then pricing?

I thought we were only doing one question each. What was the pricing?

What are you seeing in the pricing environment in the mid-range as well as in the entry level?

Our gross margins haven’t changed, our list prices haven’t changed, our discounts haven’t changed.

So is it fair to assume that pricing is stable, more or less?

You have to reach your own conclusions, but the math would say nothing has changed.

Okay, fair enough. Thanks.

Your next question comes from the line of Brent Bracelin with Pacific Crest Securities. Please proceed.

Thank you. Dan, I don’t want to read too much into Q1 stats here but it does look like the slowdown in FAS6000 and NAS was a little more pronounced than the slowdown in FAS3000 and SAN. Was that solely due to large enterprise and the commercial slowdown? Or as you talk to customers, is there any other factor that we should also consider? And then, as you look at the pre-builds, was there a higher mix of FAS6000 and NAS in the prebuilds that didn’t get shipped out the door?

I’m not going to comment on mix in the prebuilds, but no, your assertion at the beginning is correct. Largely our 6000 series goes through the direct channel to the largest customers, and that’s largely where we saw the slowdown and that’s why the 6000 units were off. The SAN business was very strong. I don’t necessarily have much -- you know, the mass decline wasn’t really a decline. It just didn’t grow as fast. We’re not particularly concerned about it. I don’t read any areas for caution there. Although I will say a lot of the archiving solutions that we are talking about are largely 6000s and they are largely mass deployments. They kind of are a 200 [near store] style having been replaced by the 6000, and those would be mass deployed solutions in general.

Okay, great. That’s helpful. Thank you.

Your next question comes from the line of Glenn Hanus with Needham & Company. Please proceed. Glenn Hanus - Needham & Company: I know you are not going to speculate much on fiscal ’09, but just maybe philosophically your 16% model, is there any change in philosophy that that’s sort of the right place to be for the foreseeable future as an optimal number to continue your growth strategy or might that be under evaluation?

I am clueless about ’09. I will be very candid. I don’t have a clue. Look, our goal is to go find a sustainable growth model that delivers the highest sustainable growth rates with basically a fixed operating income envelope. Over the past few years, that’s been about a 15 to 16.4 operating income enveloped and it yielded roughly a 30% year-over-year growth rate. We are going to try to find that balance point again. I don’t know what the numbers look like. I can’t give you any guidance for ’09. I can’t even really give you any guidance for third quarter this year. Glenn Hanus - Needham & Company: And as you evaluate that, are there a lot of analytics and metrics that you do to come up with that level, or is it more just your management experience over the years and sort of a gut instinct?

Well, it’s done from the top down and bottom up. There’s a ton models to do with sales productivity rates and a variety of other productivity issues and overall employee productivity, as well as what we think market opportunity, win rates, et cetera. I mean, there’s a combination of different things that go into it. Ultimately, you ask the sales team is this a goal you feel you can achieve and they say yes or no, right? And then you know you are kind of in the right zone. Glenn Hanus - Needham & Company: Thank you.

Your next question is a follow-up question from the line of Harry Blount with Lehman Brothers. Please proceed.

I just wanted to come back to, Rob, the account coverage that you guys had laid out. As you look at the opportunity set of your addressable market, where do you feel, both on the direct and indirect side, you guys still have probably the biggest opportunity, if you would, over the next call it 12 months?

Harry, with our market share I think we’ve got a big opportunity across all the markets that we are playing in right now. One of the things we’ve tried to be very clear on is we believe we have an opportunity to go deeper and broader in our existing enterprise accounts. We told you at analyst day in New York that in general, on average we have about less than 20% total TAM in those accounts. We think we can go far deeper. Our enterprise customers tell us that. I also think this notion of going broader in the marketplace, selling to more customers is a real big opportunity for Network Appliance. In the enterprise, as well as the mid-size enterprise market, I think there’s a big opportunity in both of those. So as we look at growth, we believe in all those areas, there’s a big opportunity for us. And to the point that Steve and Dan have both made, we need to prioritize where we think we can get the best return on investment for the business model that we have in place, prioritize those investments to give us the greatest return in terms of getting to the growth that we want to achieve.

Thanks.

At this time, this concludes our Q&A session for today. I would now like to turn the call back over to Mr. Warmenhoven for closing remarks.

I would like to thank you all for joining us today, this afternoon and we look forward to communicating with you again in no less than 13 weeks from now. Thank you all very much. Have a wonderful day.

Thank you for attending today’s conference. This concludes the presentation. You may now all disconnect and have a great day.