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NETAPP : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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12/02/2016 | 10:11pm CET
This section and other parts of this Form 10-Q contain forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve risks and uncertainties. Forward-looking statements
provide current expectations of future events based on certain assumptions and
include any statement that does not directly relate to any historical or current
fact. Forward-looking statements also can be identified by words such as
"future," "anticipates," "believes," "estimates," "expects," "intends," "will,"
"would," "could," "can," "may," and similar terms. Forward-looking statements
are not guarantees of future performance and the actual results of NetApp, Inc.
("we," "us," or the "Company") may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such
differences include, but are not limited to, those discussed in Part II, Item 1A
of this Form 10-Q under the heading "Risk Factors," which are incorporated
herein by reference. The following discussion should be read in conjunction with
our 2016 Form 10-K and the condensed consolidated financial statements and notes
thereto included elsewhere in this Form 10-Q. We assume no obligation to revise
or update any forward-looking statements for any reason, except as required by
law.









                                       22
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Overview



Our Company

We are a leading global provider of software, systems and services to manage and
store customer data. We enable enterprises, service providers, governmental
organizations, and partners to envision, deploy and evolve their information
technology environments and to reduce costs and risk while driving growth and
success for their organizations through our portfolio of products and services
that satisfy a broad range of customer workloads across different data types and
deployment models.

In order to provide better visibility into our transition from older products to
our newer, higher growth products and greater clarity into the dynamics of our
product revenue, rather than grouping our product revenues by hardware platform,
we are now grouping them by "Strategic" and "Mature" solutions. Strategic
solutions include Clustered ONTAP (formerly named clustered Data OnTap or cDOT),
branded E-Series, SolidFire, AltaVault and optional add-on software products.
Mature solutions include 7-mode OnTap, add-on hardware and related operating
system (OS) software and original equipment manufacturers (OEM) products. Both
our Mature and Strategic product lines include a mix of disk, hybrid and all
flash storage media.

We continue to report services as software maintenance services and hardware maintenance and other services.

Financial Results and Key Performance Metrics Overview

The following table provides an overview of some of our key financial metrics (in millions, except per share amounts, percentages and days sales outstanding):




                                                   Three Months Ended                     Six Months Ended
                                             October 28,         October 30,       October 28,        October 30,
                                                 2016               2015               2016              2015
Net revenues                                $        1,340      $       1,445     $        2,634     $       2,780
Gross profit                                $          829      $         884     $        1,626     $       1,700
Gross profit margin percentage                          62 %               61 %               62 %              61 %
Income from operations                      $          142      $         145     $          235     $         119
Income from operations as a percentage of
net revenues                                            11 %               10 %                9 %               4 %
Net income                                  $          109      $         114     $          173     $          84
Diluted net income per share                $         0.38      $        0.39     $         0.61     $        0.28
Operating cash flows                        $          158      $         145     $          386     $         274




                                                           October 28,        April 29,
                                                              2016              2016

Deferred revenue and financed unearned services revenue $ 3,201 $ 3,385 Days sales outstanding (DSO)

                                         37                54




Subsequent Event

Restructuring Event

On November 3, 2016, we announced a restructuring and reduction in workforce to
streamline our business and reduce operating expenses. In connection with these
actions, we expect to reduce our worldwide headcount by approximately 6%. The
reduction in workforce will be implemented through the end of the fourth quarter
of this fiscal year. We expect to incur aggregate charges of approximately $50
to $60 million for employee terminations and other costs associated with the
restructuring, consisting primarily of cash expenditures. The majority of these
charges will be recognized in the third quarter of fiscal 2017.

Critical Accounting Policies and Estimates


Our condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which require management to make judgments, estimates and assumptions that
affect the reported amounts of assets, liabilities, net revenues and expenses,
and the disclosure of contingent assets and liabilities. Our estimates are based
on historical experience and various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. We believe
that the accounting estimates employed and the resulting balances are
reasonable; however, actual results may differ from these estimates and such
differences may be material.

                                       23
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The summary of our significant accounting policies is included under Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations of our 2016 Form 10-K. An accounting policy is deemed to be critical
if it requires an accounting estimate to be made based on assumptions about
matters that are highly uncertain at the time the estimate is made, if different
estimates reasonably could have been used, or if changes in the estimate that
are reasonably possible could materially impact the financial statements. There
have been no material changes to the critical accounting policies and estimates
as filed in such report.

New Accounting Standards

See Note 2 - Recent Accounting Standards Not Yet Effective of the Notes to Condensed Consolidated Financial Statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on our financial statements.

Results of Operations


Our fiscal year is reported as a 52- or 53-week year that ends on the last
Friday in April. Fiscal year 2017, ending April 28, 2017, is a 52-week year,
with 13 weeks in each of its quarters. Fiscal year 2016, which ended on April
29, 2016, was a 53-week year, with its first quarter spanning 14 weeks and each
subsequent quarter spanning 13 weeks. Unless otherwise stated, references to
particular years, quarters, months and periods refer to the Company's fiscal
years ended in April and the associated quarters, months and periods of those
fiscal years.

The following table sets forth certain Condensed Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:




                                                 Three Months Ended                        Six Months Ended
                                           October 28,         October 30,       October 28,          October 30,
                                              2016                2015               2016                2015
Revenues:
Product                                              53    %             56   %             52    %             53   %
Software maintenance                                 18                  16                 18                  17
Hardware maintenance and other services              29                  27                 30                  29
Net revenues                                        100                 100                100                 100
Cost of revenues:
Cost of product                                      28                  28                 28                  27
Cost of software maintenance                          1                   1                  1                   1
Cost of hardware maintenance and other
services                                             10                  10                 10                  11
Gross profit                                         62                  61                 62                  61
Operating expenses:
Sales and marketing                                  31                  31                 32                  34
Research and development                             15                  15                 15                  17
General and administrative                            5                   5                  5                   6
Restructuring and other charges                       -                   -                  -                   1
Total operating expenses                             51                  51                 53                  57
Income from operations                               11                  10                  9                   4
Other income (expense), net                           -                   -                  -                   -
Income before income taxes                           11                  10                  9                   4
Provision for income taxes                            2                   2                  2                   1
Net income                                            8    %              8   %              7    %              3   %



Percentages may not add due to rounding

Discussion and Analysis of Results of Operations

Overview


Net revenues for the second quarter and first six months of fiscal 2017 were
$1,340 million and $2,364 million, respectively, reflecting a decrease of $105
million, or 7%, and $146 million, or 5%, respectively, compared to the
corresponding periods of the prior year. The primary reason for the decreases in
the second quarter and the first six months of fiscal 2017 compared to the
corresponding periods in the prior year was lower product revenue, largely due
to higher discounting in the current periods on both strategic and mature
products. Additionally, software and hardware maintenance and other services
revenues were lower in the first six months of fiscal 2017 compared to the
corresponding period in the prior year due to the impact of having one more week
of maintenance revenue amortization in the first quarter of fiscal 2016 compared
to fiscal 2017.

                                       24
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Gross profit as a percentage of net revenues increased one percentage point for
each of the second quarter and first six months of fiscal 2017 compared to the
corresponding periods of the prior year, primarily due to higher gross margins
on software and hardware maintenance and other services revenues, partially
offset by lower gross margins on product revenues.

Sales and marketing, research and development, and general and administrative
expenses for the second quarter and first six months of fiscal 2017 totaled $687
million, or 51% of net revenues and $1,391 million, or 53% of net revenues,
respectively, compared to $738 million, or 51% of net revenues, and $1,553
million, or 56% of net revenues, respectively, for the corresponding periods of
the prior year. The decreases in expenses in dollars were primarily due to a
decrease in average headcount as a result of restructuring plans, as well as
other cost reduction initiatives, partially offset by additional operating
expenses related to the February 2016 acquisition of SolidFire, Inc.

Net Revenues (in millions, except percentages):




                                                  Three Months Ended                                   Six Months Ended
                                     October 28,       October 30,                       October 28,       October 30,
                                        2016              2015           % Change           2016              2015           % Change
Net revenues                        $       1,340     $       1,445             (7 )%   $       2,634     $       2,780             (5 )%




Product revenues decreased in the second quarter of fiscal 2017 compared to the
corresponding period in the prior year, while, revenues from software and
hardware maintenance and other services were flat. Product revenues represented
53% of net revenues for the second quarter of fiscal 2017 compared to 56% for
the corresponding period of the prior year.

Product revenues decreased in the first six months of fiscal 2017 compared to
the corresponding period in the prior year. Revenues from software and hardware
maintenance and other services of $1,264 million in aggregate for the first six
months of fiscal 2017 decreased $37 million, reflecting one more week of
maintenance revenue amortization in the first quarter of fiscal 2016. Product
revenues represented 52% of net revenues for the first six months of fiscal 2017
compared to 53% for the corresponding periods of the prior year.

The following customers, each of which is a distributor, accounted for 10% or
more of net revenues:



                                                      Three Months Ended                        Six Months Ended
                                             October 28,             October 30,         October 28,         October 30,
                                                 2016                    2015               2016                2015
Arrow Electronics, Inc.                                 23 %                     22 %              21 %                22 %
Avnet, Inc.                                             20 %                     19 %              20 %                18 %



Product Revenues (in millions, except percentages):



                                                   Three Months Ended                                   Six Months Ended
                                      October 28,        October 30,                      October 28,       October 30,
                                          2016              2015          % Change           2016              2015           % Change
Product revenues                     $          710     $         815           (13 )%   $       1,370     $       1,479             (7 )%



Product revenues are derived through the sale of our strategic and mature solutions, and consist of sales of configured systems, which are bundled hardware and software products, as well as add-on flash, disk and/or hybrid storage and related OS, original equipment manufacturer (OEM) products and add-on hardware and software.


Product revenues from strategic solutions represented 62% and 61% of product
revenues in the second quarter and first six months of fiscal 2017,
respectively, compared to 53% and 51% in the second quarter and first six months
of the prior year. Product revenues from mature solutions represented 38% and
39% of product revenues, in the second quarter and first six months of fiscal
2017, respectively, compared to 47% and 49% in the second quarter and first six
months of the prior year.

Total product revenues from strategic solutions totaled $439 million in the
second quarter of fiscal 2017, reflecting a 1% increase from $434 million in the
second quarter of fiscal 2016. This increase was primarily due to a 14% increase
in unit volume of Clustered ONTAP systems, partially offset by a decrease in
Average Selling Price (ASP) primarily due to shift in mix from high end to
mid-range and entry level platforms, as well as higher discounting. Total
product revenue from mature solutions totaled $270 million in the second quarter
of fiscal 2017, reflecting a 29% decrease from $381 million in the second
quarter of fiscal 2016. This decrease was primarily due to a 57% decrease in
unit volume of 7-mode systems, as well as a decrease in ASP. In addition, add-on
storage and related OS revenues decreased 23%. These fluctuations reflect the
on-going trend of movement of customer demand from our older products to our
newer products. However, OEM revenue increased 3% due to seasonal demand, which
is not expected to be an on-going trend.

                                       25

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Total product revenues from strategic solutions totaled $839 million in the
first six months of fiscal 2017, reflecting an 11% increase from $757 million in
the first six months of fiscal 2016. This increase was primarily due to a 23%
increase in unit volume of Clustered ONTAP systems, partially offset by a
decrease in ASP reflecting higher discounting. Total product revenue from mature
solutions totaled $531 million in the first six months of fiscal 2017,
reflecting a 26% decrease from $722 million in the first six months of fiscal
2016. This decrease was primarily due to a 51% decrease in unit volume of 7-mode
systems, as well as a decrease in ASP. In addition, add-on storage and related
OS revenues decreased 18% and OEM revenue decreased 5%. These fluctuations are
primarily due to the factors discussed above.

Software Maintenance Revenues (in millions, except percentages):



                                                    Three Months Ended                                    Six Months Ended
                                      October 28,          October 30,                      October 28,        October 30,
                                          2016                2015           % Change           2016              2015           % Change

Software maintenance revenues $ 242 $ 233

         4 %   $          483     $         481              - %



Software maintenance revenues are associated with contracts which entitle customers to receive unspecified product upgrades and enhancements on a when-and-if-available basis, bug fixes and patch releases, as well as internet and telephone access to technical support personnel located in our global support centers.

The fluctuations in software maintenance revenues reflect fluctuations in the aggregate contract value of the installed base under software maintenance contracts, which is recognized as revenue ratably over the terms of the underlying contracts.


Hardware Maintenance and Other Services Revenues (in millions, except
percentages):



                                                     Three Months Ended                                     Six Months Ended
                                       October 28,         October 30,                        October 28,        October 30,
                                           2016               2015           % Change            2016               2015           % Change
Hardware maintenance and other
services revenues                     $          388      $         397             (2 )%   $           781     $         820             (5 )%



Hardware maintenance and other services revenues include hardware maintenance, professional services, and educational and training services revenues.


Hardware maintenance contract revenues were $316 million for the second quarter
of fiscal 2017 compared to $326 million for the second quarter of fiscal 2016.
Professional services and educational and training services revenues were $72
million for the second quarter of fiscal 2017 compared to $71 million in the
second quarter of fiscal 2016.

Hardware maintenance contract revenues were $639 million for the first six
months of fiscal 2017 compared to $672 million for the first six months of
fiscal 2016. The decrease in hardware maintenance contract revenues reflects one
more week of maintenance revenue amortization in the first quarter of fiscal
2016 compared to fiscal 2017. Professional services and educational and training
services revenues were $142 million for the first six months of fiscal 2017
compared to $148 million in the first six months of fiscal 2016.

Revenues by Geographic Area:



                                                      Three Months Ended                        Six Months Ended
                                             October 28,             October 30,         October 28,         October 30,
                                                 2016                    2015               2016                2015
United States, Canada and Latin America
(Americas)                                              57 %                     57 %              57 %                56 %
Europe, Middle East and Africa (EMEA)                   30 %                     30 %              30 %                30 %
Asia Pacific (APAC)                                     13 %                     14 %              13 %                13 %



Percentages may not add due to rounding


Americas revenues consist of sales to Americas commercial and United States
public sector (USPS) markets. Our geographic distribution of revenues as a
percentage of net revenues was relatively consistent in the second quarter and
first six months of fiscal 2017 compared to the second quarter and first six
months of fiscal 2016.

Cost of Revenues

Our cost of revenues consists of three elements: (1) cost of product revenues,
which includes the costs of manufacturing and shipping our storage products,
amortization of purchased intangible assets, inventory write-downs, and warranty
costs, (2) cost of software maintenance, which includes the costs of providing
software maintenance and third-party royalty costs and (3) cost of hardware
maintenance and other services revenues, which includes costs associated with
providing support activities for hardware maintenance, global support
partnership programs, professional services and educational and training
services.

                                       26

--------------------------------------------------------------------------------

Cost of Product Revenues (in millions, except percentages):



                                                   Three Months Ended                                     Six Months Ended
                                     October 28,         October 30,                        October 28,        October 30,
                                         2016               2015           % Change            2016               2015           % Change
Cost of product revenues            $          376      $         408             (8 )%   $           735     $         753             (2 )%



The changes in cost of product revenues consisted of the following (in percentage points of the total change):



                                                     Three Months Ended          Six Months Ended
                                                   Fiscal 2017 to Fiscal      Fiscal 2017 to Fiscal
                                                            2016                       2016
                                                     Percentage Change          Percentage Change
                                                           Points                     Points
Materials costs                                                        (1 )                        6
Warranty                                                               (3 )                       (2 )
Amortization of purchased intangible assets                            (2 )                       (2 )
Other                                                                  (2 )                       (4 )
Total change                                                           (8 )                       (2 )


Cost of product revenues represented 53% and 54% of product revenues for the
second quarter and first six months of fiscal 2017, respectively, compared to
50% and 51% in the second quarter and first six months of fiscal 2016,
respectively.

Materials costs represented 92% of product costs for the second quarter of
fiscal 2017 compared to 86% in the second quarter of fiscal 2016, and decreased
$6 million from the second quarter of fiscal 2016. Materials costs were impacted
by a 21% increase in materials costs related to strategic products, primarily
due to higher unit volume for configured Clustered ONTAP systems, partially
offset by a 26% decrease in materials costs for mature products reflecting lower
volume in 7-Mode systems. Average unit materials costs for Clustered ONTAP
increased due to changes in platform and configuration mix, while average unit
materials costs for 7-mode systems were relatively flat in the second quarter of
fiscal 2017 compared to the corresponding period in the prior year.

Materials costs represented 91% of product costs for the first six months of
fiscal 2017 compared to 83% in the first six months of fiscal 2016, and
increased $46 million from the first six months of fiscal 2016. Materials costs
were impacted by a 34% increase in materials costs related to strategic
products, primarily due to an increase in volume for configured Clustered ONTAP
systems, partially offset by a 20% decrease in materials costs for mature
products reflecting a decrease in volume in 7-Mode systems. Average unit
materials costs for both Clustered ONTAP and 7-mode systems increased in the
first six months of fiscal 2017 compared to the corresponding period in the
prior year, due to a combination of changes in platform and configuration mix.

The combination of changes in ASP, unit materials costs and volumes resulted in
lower standard margins for both strategic and mature products in each of the
first quarter and first six months of fiscal 2017 compared to the corresponding
periods in the prior year.

Cost of product revenues in the second quarter and first six months of fiscal
2017 was also favorably impacted by decreases in warranty expense of $12 million
and $17 million, respectively, compared to the corresponding periods in the
prior year. The amortization of acquired intangibles in the second quarter and
first six months of fiscal 2017 decreased $7 million and $14 million,
respectively, compared to the corresponding periods in the prior year due to the
impact of certain acquired developed technology being fully amortized by the end
of fiscal 2016, partially offset by the amortization of developed technology
related to the SolidFire acquisition.

Cost of Software Maintenance Revenues (in millions, except percentages):



                                                      Three Months Ended                                    Six Months Ended
                                         October 28,         October 30,                      October 28,        October 30,
                                            2016                2015          % Change            2016              2015          % Change
Cost of software maintenance revenues   $           7       $           9           (22 )%   $           15     $          19           (21 )%




Cost of software maintenance revenues decreased in the second quarter and first
six months of fiscal 2017 compared to the second quarter and first six months of
fiscal 2016. Cost of software maintenance revenues represented 3% of software
maintenance revenues for each of the second quarter and first six months of
fiscal 2017 compared to 4% of software maintenance revenues for each of the
second quarter and first six months of 2016.

                                       27

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Cost of Hardware Maintenance and Other Services Revenues (in millions, except
percentages):



                                                    Three Months Ended                                  Six Months Ended
                                       October 28,        October 30,                      October 28,       October 30,
                                           2016              2015          % Change           2016              2015          % Change
Cost of hardware maintenance and
other services revenues               $          128     $         144           (11 )%   $         258     $         308           (16 )%




Cost of hardware maintenance and other services revenues decreased $16 million
and $50 million for the second quarter and first six months of fiscal 2017,
respectively, compared to the corresponding periods of the prior year, primarily
due to the benefits of our cost reduction initiatives. Costs represented 33% of
hardware and maintenance and other services revenues in each of the second
quarter and first six months of fiscal 2017 compared to 36% and 38% in the
second quarter and first six months of fiscal 2016, respectively.



Operating Expenses

Sales and Marketing, Research and Development and General and Administrative Expenses

Compensation costs represent the largest component of operating expenses. Included in compensation costs are salaries, benefits, other compensation-related costs, stock-based compensation expense and employee incentive compensation plan costs.


Total compensation costs included in operating expenses decreased $10 million,
or 3%, in the second quarter of fiscal 2017 compared to the second quarter of
fiscal 2016 primarily due to lower salary and stock-based compensation expenses
reflecting a 13% decrease in average headcount as a result of restructuring
plans, partially offset by higher incentive compensation expense, reflecting
stronger operating performance against goals, and the impact of the SolidFire
acquisition.

Total compensation costs included in operating expenses decreased $89 million,
or 10%, in the first six months of fiscal 2017 compared to the first six months
of fiscal 2016 primarily due to lower salary and stock-based compensation
expenses reflecting a 14% decrease in average headcount as a result of
restructuring plans and the impact of one more week in the first quarter of
fiscal 2016 compared to fiscal 2017, partially offset by higher incentive
compensation expense, reflecting stronger operating performance against goals,
and increased operating expenses related to the SolidFire acquisition.

Sales and Marketing (in millions, except percentages):




                                                    Three Months Ended                                   Six Months Ended
                                      October 28,         October 30,                       October 28,       October 30,
                                          2016               2015           % Change           2016              2015          % Change
Sales and marketing expenses         $          418      $         448             (7 )%   $         847     $         940           (10 )%


Sales and marketing expenses consist primarily of compensation costs,
commissions, outside services, allocated facilities and information technology
(IT) costs, advertising and marketing promotional expense and travel and
entertainment expense. The changes in sales and marketing expenses consisted of
the following:



                                                     Three Months Ended         Six Months Ended
                                                   Fiscal 2017 to Fiscal         Fiscal 2017 to
                                                            2016                  Fiscal 2016
                                                     Percentage Change         Percentage Change
                                                           Points                    Points
Compensation costs                                                     (2 )                     (5 )
Facilities and IT support costs                                        (3 )                     (3 )
Other                                                                  (2 )                     (2 )
Total change                                                           (7 )                    (10 )


Compensation costs for the second quarter and the first six months of fiscal
2017 compared to the corresponding periods in the prior year were favorably
impacted by lower salary and stock-based compensation expenses due to an 11%
decrease in average headcount, but were unfavorably impacted by higher incentive
compensation expense. Facilities and IT support costs for the second quarter and
first six months of 2017 compared to the corresponding periods of the prior year
were favorably impacted by cost containment efforts. In addition, sales and
marketing expenses were favorably impacted in the first six months of fiscal
2017 due to the first quarter of fiscal 2016 having one more week than the first
quarter of fiscal 2017.

                                       28
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Research and Development (in millions, except percentages):



                                                     Three Months Ended                                   Six Months Ended
                                       October 28,         October 30,                       October 28,       October 30,
                                           2016               2015           % Change           2016              2015          % Change

Research and development expenses $ 200 $ 216

         (7 )%   $         407     $         460           (12 )%


Research and development expenses consist primarily of compensation costs,
allocated facilities and IT costs, depreciation, equipment and software-related
costs, prototypes, non-recurring engineering charges and other outside services
costs. Changes in research and development expense consisted of the following:



                                                     Three Months Ended         Six Months Ended
                                                   Fiscal 2017 to Fiscal         Fiscal 2017 to
                                                            2016                  Fiscal 2016
                                                     Percentage Change         Percentage Change
                                                           Points                    Points
Compensation costs                                                     (2 )                     (8 )
Development projects and outside services                              (2 )                     (1 )
Facilities and IT support costs                                        (1 )                     (1 )
Other                                                                  (2 )                     (2 )
Total change                                                           (7 )                    (12 )


Compensation costs for the second quarter and first six months of fiscal 2017
compared to the corresponding periods of the prior year primarily were favorably
impacted by lower salary and stock-based compensation expenses due to a 17% and
19% decrease in average headcount, respectively but were unfavorably impacted by
higher incentive compensation expense. Development projects and outside services
for the second quarter and first six months of fiscal 2017 compared to the
corresponding periods of the prior year were favorably impacted by lower
spending on materials and services associated with engineering activities to
develop new product lines and enhancements to existing products due to the
completion of certain key development projects. Facilities and IT support costs
for the second quarter and first six months of 2017 compared to the
corresponding periods of the prior year were favorably impacted by cost
containment efforts. In addition, research and development expenses were
favorably impacted in the first six months of fiscal 2017 due to the first
quarter of fiscal 2016 having one more week than the first quarter of fiscal
2017.

General and Administrative (in millions, except percentages):



                                                       Three Months Ended                                     Six Months Ended
                                        October 28,           October 30,                        October 28,       October 30,
                                            2016                 2015            % Change           2016              2015          % Change
General and administrative expenses    $           69       $            74             (7 )%   $         137     $         153           (10 )%


General and administrative expenses consist primarily of compensation costs,
professional and corporate legal fees, outside services and allocated facilities
and IT support costs. Changes in general and administrative expense consisted of
the following:



                                                     Three Months Ended         Six Months Ended
                                                   Fiscal 2017 to Fiscal         Fiscal 2017 to
                                                            2016                  Fiscal 2016
                                                     Percentage Change         Percentage Change
                                                           Points                    Points
Compensation costs                                                      2                       (6 )
Professional and legal fees and outside services                       (6 )                     (2 )
Other                                                                  (3 )                     (2 )
Total change                                                           (7 )                    (10 )


Compensation costs for the second quarter and the first six months of fiscal
2017 compared to the second quarter of fiscal 2016 were favorably impacted by
lower salary and stock-based compensation expenses due to an 8% decrease in
average headcount, but were unfavorably impacted by higher incentive
compensation expense. Professional and legal fees and outside services expense
for the second quarter and first six months of fiscal 2017 compared to the
corresponding periods of the prior year were favorably impacted by lower
spending levels on consulting fees and projects. In addition, general and
administrative expenses were favorably impacted in the first six months of
fiscal 2017 due to the first quarter of fiscal 2016 having one more week than
the first quarter of fiscal 2017.

                                       29

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Restructuring and other charges (in millions, except percentages):



                                                  Three Months Ended                                 Six Months Ended
                                       October 28,      October 30,                    October 28,       October 30,
                                          2016             2015        % Change           2016              2015           % Change
Restructuring and other charges       $           -               1         (100 )%   $           -                28           (100 )%


During fiscal 2016, management approved two restructuring actions to streamline
our business, eliminate costs and redirect resources to our highest return
activities, which included a restructuring plan announced in May 2015 under
which we reduced our global workforce by approximately 3%. Restructuring and
other charges related to this plan consisted primarily of employee
severance-related costs. See Note 11 - Restructuring and Other Charges of the
Notes to Condensed Consolidated Financial Statements for more details regarding
our restructuring plans.

Other Income (Expense), Net (in millions, except percentages)

The components of other income (expense), net were as follows:




                                                    Three Months Ended                                   Six Months Ended
                                       October 28,        October 30,                       October 28,       October 30,
                                          2016               2015           % Change           2016              2015          % Change
Interest income                      $            10     $          11             (9 )%   $          21     $          24           (13 )%
Interest expense                                 (12 )             (12 )            - %              (27 )             (23 )          17 %
Other income, net                                  2                 -             NM                  5                 2           150 %
Total                                $             -     $          (1 )         (100 )%   $          (1 )   $           3            NM




NM - Not Meaningful

The decreases in interest income in the second quarter and first six months of fiscal 2017 compared to the corresponding periods of the prior year were primarily due to a decrease in the size of our investment portfolio.

Interest expense is primarily related to our Senior Notes.

Provision for Income Taxes (in millions, except percentages):



                                                    Three Months Ended                                      Six Months Ended
                                     October 28,           October 30,                       October 28,         October 30,
                                         2016                 2015            % Change           2016               2015           % Change
Provision for income taxes          $           33       $            30             10 %   $           61      $          38             61 %


Our effective tax rate for the second quarter of fiscal 2017 was 23.2% compared
to an effective tax rate of 20.8% for the second quarter of fiscal 2016. Our
effective tax rate for the first six months of fiscal 2017 was 26.1% compared to
an effective tax rate of 31.1% for the first six months of fiscal 2016. Our
effective tax rates reflect our corporate legal entity structure and the global
nature of our business, with a significant amount of our profits generated and
taxed in foreign jurisdictions at rates below the U.S. statutory tax rate. The
effective tax rates for all periods presented were favorably impacted by the
geographic mix of profits. Our effective tax rates decreased for the first six
months of fiscal 2017, compared to the corresponding period in the prior year
primarily as a result of differences in the respective periods' income before
taxes, as well as the impacts of discrete events described below.

In the first quarter of fiscal 2017, we adopted a new accounting standard that
simplifies stock-based compensation income tax accounting and presentation
within the financial statements. During the first six months of fiscal 2017, we
recorded a discrete charge of $17 million following the post-adoption rules
which require that all excess tax benefits and deficiencies from stock-based
compensation be recognized as a component of income tax expense.

In June 2015, the IRS signed a closing agreement on our fiscal 2008 to 2010
transfer pricing arrangements and in October 2015 completed the examination of
our fiscal 2008 to 2010 income tax returns. During the first six months of
fiscal 2016, we recorded discrete charges totaling $23 million attributable to
the audit settlements and related re-measurement of uncertain tax positions for
tax years subject to future audits.

As of October 28, 2016, we had $212 million of gross unrecognized tax benefits,
of which $154 million has been recorded in other long-term liabilities.
Unrecognized tax benefits of $156 million, including penalties, interest and
indirect benefits, would affect our provision for income taxes if recognized.

We continue to monitor the progress of ongoing discussions with tax authorities
and the impact, if any, of the expected expiration of the statute of limitations
in various taxing jurisdictions.



                                       30

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Liquidity, Capital Resources and Cash Requirements




                                                       October 28,       

April 29,

  (In millions, except percentages)                       2016             

2016

  Cash, cash equivalents and short-term investments   $       4,357     $     5,303
  Principal amount of debt                            $       1,500     $     2,350
  Debt as a percentage of stockholders' equity                   54 %            82 %



The following is a summary of our cash flows:



                                                                 Six Months Ended
                                                          October 28,        October 30,
(In millions)                                                 2016              2015
Net cash provided by operating activities                $          386     $         274
Net cash provided by investing activities                            97     

704

Net cash used in financing activities                            (1,225 )            (694 )
Effect of exchange rate changes on cash and cash
equivalents                                                         (13 )              (8 )

Net increase (decrease) in cash and cash equivalents $ (755 ) $ 276



Cash Flows

As of October 28, 2016, our cash, cash equivalents and short-term investments
were $4.4 billion, a decrease of $0.9 billion from April 29, 2016. The decrease
was primarily due to $850 million used to repay our short-term loan, $292
million paid for the repurchase of our common stock and $105 million used for
the payment of dividends, partially offset by $386 million of cash provided by
operating activities. Accounts receivable DSO was 37 days for the second quarter
of fiscal 2017 compared to 54 days for the fourth quarter of fiscal 2016 and 37
days for the second quarter of fiscal 2016, reflecting seasonal patterns of
shipment linearity. Working capital decreased by $94 million to $2.7 billion as
of October 28, 2016 primarily due to a decrease in cash, cash equivalents and
short-term investments and accounts receivable, partially offset by the
repayment of our short-term loan and a decrease in accrued expenses.

Cash Flows from Operating Activities


During the first six months of fiscal 2017, we generated cash from operating
activities of $386 million, reflecting net income of $173 million, adjusted by
non-cash depreciation and amortization of $117 million and stock-based
compensation of $103 million, compared to $274 million of cash generated from
operating activities during the first six months of 2016.

Changes in assets and liabilities in the first six months of fiscal 2017 included the following:

• Accounts receivable decreased $264 million, primarily due to lower seasonal

invoicing levels in the second quarter of fiscal 2017 compared to the fourth

    quarter of fiscal 2016.


  • Accrued compensation decreased $83 million, primarily due to employee

compensation payouts related to fiscal year 2016 commissions and incentive

compensation plans, as well as payments of restructuring obligations.

• Deferred revenue and financed unearned services revenue decreased $179

    million, primarily due to a decrease in deferred software and hardware
    maintenance contract revenues reflecting the seasonality of maintenance
    contract renewal activities.


We expect that cash provided by operating activities may materially fluctuate in
future periods due to a number of factors, including fluctuations in our
operating results, shipment linearity, accounts receivable collections
performance, inventory and supply chain management, vendor payment initiatives,
tax benefits or charges from stock-based compensation, and the timing and amount
of compensation and other payments.

Cash Flows from Investing Activities


During the first six months of fiscal 2017, we generated $190 million from
maturities and sales of investments, net of purchases, and paid $92 million for
capital expenditures compared to $788 million and $84 million, respectively,
during the first six months of fiscal 2016.

Cash Flows from Financing Activities


During the first six months of fiscal 2017, we used $850 million to repay our
short-term loan, $292 million for the repurchase of 11 million shares of our
common stock and $105 million for the payment of dividends, compared to $613
million used for the repurchase of common stock and $107 million for the payment
of dividends during the first six months of fiscal 2016.

                                       31

--------------------------------------------------------------------------------


Key factors that could affect our cash flows include changes in our revenue mix
and profitability, our ability to effectively manage our working capital, in
particular, accounts receivable, accounts payable and inventories, the timing
and amount of stock repurchases and payment of cash dividends, the impact of
foreign exchange rate changes, our ability to effectively integrate acquired
products, businesses and technologies and the timing of repayments of our debt.
Based on past performance and our current business outlook, we believe that our
sources of liquidity, including potential future issuances of debt, equity or
other securities, will satisfy our working capital needs, capital expenditures,
investment requirements, stock repurchases, cash dividends, contractual
obligations, commitments, principal and interest payments on our debt and other
liquidity requirements associated with operations and meet our cash requirements
for at least the next 12 months. However, in the event our liquidity is
insufficient, we may be required to curtail spending and implement additional
cost saving measures and restructuring actions or enter into new financing
arrangements. We cannot be certain that we will continue to generate cash flows
at or above current levels or that we will be able to obtain additional
financing, if necessary, on satisfactory terms, if at all.

Liquidity

Our principal sources of liquidity as of October 28, 2016 consisted of cash, cash equivalents and short-term investments, as well as cash we expect to generate from operations.


Cash, cash equivalents and short-term investments consisted of the following (in
millions):



                                           October 28,       April 29,
                                              2016             2016
              Cash and cash equivalents   $       2,113     $     2,868
              Short-term investments              2,244           2,435
              Total                       $       4,357     $     5,303


As of October 28, 2016 and April 29, 2016, $3.9 billion and $4.8 billion,
respectively, of cash, cash equivalents and short-term investments were held by
various foreign subsidiaries and were generally based in U.S. dollar-denominated
holdings, while $0.5 billion was available in the U.S.as of each of those dates.
Most of the amounts held outside the U.S. can be repatriated to the U.S. but,
under current law, would be subject to U.S. federal, state income and foreign
withholding taxes. If we were to repatriate foreign earnings to fund cash
requirements in the U.S., we would incur U.S. federal and state income taxes
reduced by the current amount of our U.S. federal and state tax credit
carryforwards. However, our intent is to keep these funds permanently reinvested
outside of the U.S., and our current plans do not contemplate a need to
repatriate them to fund our U.S. operations. Our principal liquidity
requirements are primarily to meet our working capital needs, support ongoing
business activities, fund research and development, meet capital expenditure
needs, and invest in critical or complementary technologies, and service
interest and principal payments on our debt.

The principal objectives of our investment policy are the preservation of
principal and maintenance of liquidity. We attempt to mitigate default risk by
investing in high-quality investment grade securities, limiting the time to
maturity and monitoring the counter-parties and underlying obligors closely. We
believe our cash equivalents and short-term investments are liquid and
accessible. We are not aware of any significant deterioration in the fair value
of our cash equivalents or investments from the values reported as of October
28, 2016.

Our investment portfolio has been and will continue to be exposed to market risk
due to trends in the credit and capital markets. We continue to closely monitor
current economic and market events to minimize the market risk of our investment
portfolio. We utilize a variety of planning and financing strategies in an
effort to ensure our worldwide cash is available when and where it is needed.
Based on past performance and current expectations, we believe our cash and cash
equivalents, investments, cash generated from operations, and ability to access
capital markets and committed credit lines will satisfy, through at least the
next 12 months, our liquidity requirements, both in total and domestically,
including the following: working capital needs, capital expenditures, stock
repurchases, cash dividends, contractual obligations, commitments, principal and
interest payments on debt, and other liquidity requirements associated with our
operations. We routinely monitor our financial exposure to both sovereign and
non-sovereign borrowers and counterparties.

Senior Notes

The following table summarizes the principal amount of our Senior Notes as of October 28, 2016 (in millions):



                  2.00% Senior Notes Due December 2017   $   750
                  3.375% Senior Notes Due June 2021          500
                  3.25% Senior Notes Due December 2022       250
                  Total                                  $ 1,500


                                       32
--------------------------------------------------------------------------------


Interest on the Senior Notes is payable semi-annually. For further information
on the underlying terms, see Note 8 - Financing Arrangements of the Notes to
Condensed Consolidated Financial Statements.

We also have an automatic shelf registration statement on file with the Securities and Exchange Commission. We may in the future offer an additional unspecified amount of debt, equity and other securities.

Credit Facility


Our credit facility, under which we may borrow up to $300 million, provides
another potential source of liquidity. The credit facility is an unsecured
five-year revolving credit facility that terminates on December 21, 2017 if no
extensions have been requested at that time, and contains financial covenants
requiring us to maintain a maximum leverage ratio and a minimum interest
coverage ratio. We may also, subject to certain requirements, request an
increase in the facility up to an additional $50 million and request two
additional one-year extensions, subject to certain conditions. As of October 28,
2016, no borrowings were outstanding under the facility and we were in
compliance with all covenants associated with the facility.

Restructuring Activities


On November 3, 2016, we announced a restructuring and reduction in workforce to
streamline our business and reduce operating expenses. In connection with these
actions, we expect to reduce our worldwide headcount by approximately 6%. The
reduction in workforce will be implemented through the end of the fourth quarter
of this fiscal year. We expect to incur aggregate charges of approximately $50
to $60 million for employee terminations and other costs associated with the
restructuring, consisting primarily of cash expenditures. The majority of these
charges will be recognized in the third quarter of fiscal 2017.

Capital Expenditure Requirements


We expect to fund our capital expenditures, including our commitments related to
facilities, equipment, operating leases and internal-use software development
projects over the next few years through existing cash, cash equivalents,
investments and cash generated from operations. The timing and amount of our
capital requirements cannot be precisely determined and will depend on a number
of factors, including future demand for products, changes in the network storage
industry, hiring plans and our decisions related to the financing of our
facilities and equipment requirements. We anticipate capital expenditures for
the remainder of fiscal 2017 to be between $75 and $100 million.

Dividends and Stock Repurchase Program

On November 16, 2016, we declared a cash dividend of $0.19 per share of common stock, payable on January 25, 2017 to holders of record as of the close of business on January 6, 2017.


As of October 28, 2016, our Board of Directors had authorized the repurchase of
up to $9.6 billion of our common stock under our stock repurchase program. Under
this program, we can purchase shares of our outstanding common stock through
open market and privately negotiated transactions at prices deemed appropriate
by our management. The stock repurchase program may be suspended or discontinued
at any time. Since the May 13, 2003 inception of this program through October
28, 2016, we repurchased a total of 258 million shares of our common stock at an
average price of $32.64 per share, for an aggregate purchase price of $8.4
billion. As of October 28, 2016, the remaining authorized amount for stock
repurchases under this program was $1.2 billion, with no termination date, which
we plan to complete by May 2018.

The timing and amount of stock repurchase transactions and future dividends will
depend on market conditions, corporate business and financial considerations and
regulatory requirements.

Contractual Obligations

Operating Lease Commitments

As of October 28, 2016, future annual minimum lease payments under non-cancelable operating leases with an initial term in excess of one year totaled $238 million.

                                       33

--------------------------------------------------------------------------------

Purchase Orders and Other Commitments


In the ordinary course of business, we make commitments to our third-party
contract manufacturers to manage manufacturer lead times and meet product
forecasts, and to other parties to purchase various key components used in the
manufacture of our products. A significant portion of our reported purchase
commitments arising from these agreements consist of firm, non-cancelable, and
unconditional commitments. As of October 28, 2016, we had $291 million in
non-cancelable purchase commitments for inventory. We record a liability for
firm, non-cancelable and unconditional purchase commitments for quantities in
excess of our future demand forecasts consistent with the valuation of our
excess and obsolete inventory. To the extent that such forecasts are not
achieved, our commitments and associated accruals may change.

In addition to inventory commitments with contract manufacturers and component
suppliers, we have open purchase orders and construction related obligations
associated with our ordinary course of business for which we have not received
goods or services. As of October 28, 2016, we had $15 million in
construction-related obligations and $231 million in other purchase obligations.

Unrecognized Tax Benefits


As of October 28, 2016, our liability for uncertain tax positions was
$144 million, including interest, penalties and offsetting indirect benefits.
Due to the uncertainty of the timing of future cash payments, we cannot make
reasonably reliable estimates of the period of cash settlement with the taxing
authorities.

Sale-leaseback Transaction

In fiscal 2016, we entered into sale-leaseback arrangements of certain of our
land and buildings, under which we leased back certain of our properties rent
free over lease terms ending at various dates ranging from March 31, 2017 to
December 31, 2017, unless terminated early by us. Due to the existence of a
prohibited form of continuing involvement, these properties did not qualify for
sale-leaseback accounting and as a result they have been accounted for as
financing transactions under lease accounting standards. Under the financing
method, the assets will remain on our condensed consolidated balance sheets and
proceeds received by us from these transactions are reported as financing
obligations. As of October 28, 2016, the balance of these financing obligations
was $149 million. At the end of each respective leaseback period, or when our
continuing involvement under the leaseback agreements ends, each transaction
will be reported as a non-cash sale of land and buildings and extinguishment of
financing obligations, and the difference between the then net book value of the
properties and the unamortized balance of the financing obligations will be
recognized as a gain on sale of properties.

Financing Guarantees


While most of our arrangements for sales include short-term payment terms, from
time to time we provide long-term financing to creditworthy customers. We have
generally sold receivables financed through these arrangements on a non-recourse
basis to third party financing institutions within 10 days of the contracts'
dates of execution, and we classify the proceeds from these sales as cash flows
from operating activities in our condensed consolidated statements of cash
flows. We account for the sales of these receivables as "true sales" as defined
in the accounting standards on transfers of financial assets, as we are
considered to have surrendered control of these financing receivables. Provided
all other revenue recognition criteria have been met, we recognize product
revenues for these arrangements, net of any payment discounts from financing
transactions, upon product acceptance. We sold $108 million and $72 million of
receivables during the first six months of fiscal 2017 and fiscal 2016,
respectively.

In addition, we enter into arrangements with leasing companies for the sale of
our hardware systems products. These leasing companies, in turn, lease our
products to end-users. The leasing companies generally have no recourse to us in
the event of default by the end-user and we recognize revenue upon delivery to
the end-user customer, if all other revenue recognition criteria have been met.

Some of the leasing arrangements described above have been financed on a
recourse basis through third-party financing institutions. Under the terms of
recourse leases, which are generally three years or less, we remain liable for
the aggregate unpaid remaining lease payments to the third-party leasing
companies in the event of end-user customer default. These arrangements are
generally collateralized by a security interest in the underlying assets. Where
we provide a guarantee for recourse leases, we defer revenues subject to the
industry-specific software revenue recognition guidance and recognize revenues
for non-software deliverables in accordance with our multiple deliverable
revenue arrangement policy. In connection with certain recourse financing
arrangements, we receive advance payments associated with undelivered elements
that are subject to customer refund rights. As of October 28, 2016 and April 29,
2016, the aggregate amount by which such contingencies exceeded the associated
liabilities was not significant. To date, we have not experienced significant
losses under our lease financing programs or other financing arrangements.

We have entered into service contracts with certain of our end-user customers
that are supported by third-party financing arrangements. If a service contract
is terminated as a result of our non-performance under the contract or our
failure to comply with the terms of the financing arrangement, we could, under
certain circumstances, be required to acquire certain assets related to the
service contract or to pay the aggregate unpaid payments under such
arrangements. As of October 28, 2016, we have not been required

                                       34

--------------------------------------------------------------------------------


to make any significant payments under these arrangements, and we believe the
likelihood of having to acquire a material amount of assets or make payments
under these arrangements is remote. The portion of the financial arrangement
that represents unearned services revenue is included in deferred revenue and
financed unearned services revenue in our condensed consolidated balance sheets.

Indemnification Agreements


We enter into indemnification agreements with third parties in the ordinary
course of business. Generally, these indemnification agreements require us to
reimburse losses suffered by the third-parties due to various events, such as
lawsuits arising from patent or copyright infringement. These indemnification
obligations are considered off-balance sheet arrangements under accounting
guidance.

Legal Contingencies


We are subject to various legal proceedings and claims which arise in the normal
course of business. See further details on such matters in Note 15 - Commitments
and Contingencies of the Notes to Condensed Consolidated Financial Statements.

                                       35

--------------------------------------------------------------------------------

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Financials ($)
Sales 2017 5 431 M
EBIT 2017 866 M
Net income 2017 465 M
Finance 2017 2 364 M
Yield 2017 2,12%
P/E ratio 2017 21,79
P/E ratio 2018 17,03
EV / Sales 2017 1,41x
EV / Sales 2018 1,40x
Capitalization 10 021 M
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Mean consensus HOLD
Number of Analysts 34
Average target price 36,7 $
Spread / Average Target 2,0%
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NameTitle
George Kurian President, Chief Executive Officer & Director
Thomas Michael Nevens Chairman
Bill Berg Senior Vice President-Operations
Ronald J. Pasek Chief Financial Officer & Executive Vice President
Mark F. Bregman Chief Technology Officer
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