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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)	
    þ	  	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended October 24, 2014
or

    ¨	  	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 	  	 
For the transition period from              to             	
Commission File Number 000-27130
NetApp, Inc.
(Exact name of registrant as specified in its charter)
 	 	 	
Delaware	 	77-0307520	
(State or other jurisdiction of
incorporation or organization)	 	(I.R.S. Employer
Identification No.)	
495 East Java Drive,
Sunnyvale, California 94089
(Address of principal executive offices, including zip code)
(408) 822-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ     No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ     No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ	  	Accelerated filer ¨	  	Non-accelerated filer ¨	  	Smaller reporting company ¨	
 	  	 	  	(Do not check if a smaller reporting company)	  	 	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 12, 2014, there were 311,692,909 shares of the registrant’s common stock, $0.001 par value, outstanding.

 

Table of Contents
TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION	  	
 	 	 	
Item 1	 	Condensed Consolidated Financial Statements (Unaudited)	  	 	3	  	
 	 	Condensed Consolidated Balance Sheets as of October 24, 2014 and April 25, 2014	  	 	3	  	
 	 	Condensed Consolidated Statements of Operations for the Three and Six Months Ended October 24, 2014 and October 25, 2013	  	 	4	  	
 	 	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended October 24, 2014 and October 25, 2013	  	 	5	  	
 	 	Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 24, 2014 and October 25, 2013	  	 	6	  	
 	 	Notes to Condensed Consolidated Financial Statements	  	 	7	  	
Item 2	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	 	23	  	
Item 3	 	Quantitative and Qualitative Disclosures About Market Risk	  	 	38	  	
Item 4	 	Controls and Procedures	  	 	40	  	
 	
PART II — OTHER INFORMATION	  	
 	 	 	
Item 1	 	Legal Proceedings	  	 	41	  	
Item 1A	 	Risk Factors	  	 	41	  	
Item 2	 	Unregistered Sales of Equity Securities and Use of Proceeds	  	 	52	  	
Item 3	 	Defaults upon Senior Securities	  	 	52	  	
Item 4	 	Mine Safety Disclosures	  	 	52	  	
Item 5	 	Other Information	  	 	52	  	
Item 6	 	Exhibits	  	 	52	  	
SIGNATURE	 	 	  	 	53	  	
TRADEMARKS
© 2014 NetApp, Inc. All rights reserved. No portions of this document may be reproduced without prior written consent of NetApp, Inc. Specifications are subject to change without notice. NetApp, the NetApp logo, Go Further, Faster, ASUP, AutoSupport, Campaign Express, Cloud ONTAP, Clustered Data ONTAP, Customer Fitness, Data ONTAP, DataMotion, Fitness, Flash Accel, Flash Cache, Flash Pool, FlashRay, FlexArray, FlexCache, FlexClone, FlexPod, FlexScale, FlexShare, FlexVol, FPolicy, GetSuccessful, LockVault, Manage ONTAP, Mars, MetroCluster, MultiStore, NetApp Insight, OnCommand, ONTAP, ONTAPI, RAID-DP, SANtricity, SecureShare, Simplicity, Simulate ONTAP, Snap Creator, SnapCopy, SnapDrive, SnapIntegrator, SnapLock, SnapManager, SnapMirror, SnapMover, SnapProtect, SnapRestore, Snapshot, SnapValidator, SnapVault, StorageGRID, Tech OnTap, Unbound Cloud, and WAFL are trademarks or registered trademarks of NetApp, Inc. in the United States and/or other countries. All other brands or products are trademarks or registered trademarks of their respective holders and should be treated as such.
 
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PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
NETAPP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value)
(Unaudited)

 	  	October 24,
2014	 	  	April 25,
2014	 	
ASSETS	  	
Current assets:	  	 	 	 	  	 	 	 	
Cash and cash equivalents	  	$	2,905.2	  	  	$	2,291.0	  	
Short-term investments	  	 	2,364.2	  	  	 	2,712.3	  	
Accounts receivable, net of allowances of $1.6 million and $1.7 million as of October 24, 2014 and April 25, 2014, respectively	  	 	632.7	  	  	 	855.9	  	
Inventories	  	 	107.6	  	  	 	122.4	  	
Other current assets	  	 	479.4	  	  	 	489.7	  	
 	  	 	 	 	  	 	 	 	
Total current assets	  	 	6,489.1	  	  	 	6,471.3	  	
Property and equipment, net	  	 	1,081.7	  	  	 	1,108.8	  	
Goodwill	  	 	988.1	  	  	 	988.1	  	
Purchased intangible assets, net	  	 	92.5	  	  	 	121.5	  	
Other non-current assets	  	 	526.1	  	  	 	529.5	  	
 	  	 	 	 	  	 	 	 	
Total assets	  	$	9,177.5	  	  	$	9,219.2	  	

LIABILITIES AND STOCKHOLDERS’ EQUITY	  	
Current liabilities:	  	 	 	 	  	 	 	 	
Accounts payable	  	$	210.3	  	  	$	247.0	  	
Accrued compensation and related benefits	  	 	315.3	  	  	 	407.8	  	
Other current liabilities	  	 	333.3	  	  	 	386.0	  	
Short-term deferred revenue	  	 	1,632.1	  	  	 	1,653.8	  	
 	  	 	 	 	  	 	 	 	
Total current liabilities	  	 	2,491.0	  	  	 	2,694.6	  	
Long-term debt	  	 	1,494.4	  	  	 	995.5	  	
Other long-term liabilities	  	 	315.9	  	  	 	296.2	  	
Long-term deferred revenue	  	 	1,414.9	  	  	 	1,446.4	  	
 	  	 	 	 	  	 	 	 	
Total liabilities	  	 	5,716.2	  	  	 	5,432.7	  	

Commitments and contingencies (Note 14)	  	 	 	 	  	 	 	 	
 	 	 	
Stockholders’ equity:	  	 	 	 	  	 	 	 	
Common stock, $0.001 par value, (313.0 and 324.5 shares issued and outstanding as of October 24, 2014 and April 25, 2014, respectively)	  	 	0.3	  	  	 	0.3	  	
Additional paid-in capital	  	 	3,460.4	  	  	 	3,776.0	  	
Retained earnings	  	 	0.0	  	  	 	1.1	  	
Accumulated other comprehensive income	  	 	0.6	  	  	 	9.1	  	
 	  	 	 	 	  	 	 	 	
Total stockholders’ equity	  	 	3,461.3	  	  	 	3,786.5	  	
 	  	 	 	 	  	 	 	 	
Total liabilities and stockholders’ equity	  	$	9,177.5	  	  	$	9,219.2	  	
 	  	 	 	 	  	 	 	 	
See accompanying notes to condensed consolidated financial statements.
 
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NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
Revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Product	  	$	929.1	  	 	$	955.3	  	 	$	1,811.7	  	 	$	1,886.1	  	
Software entitlements and maintenance	  	 	224.2	  	 	 	231.8	  	 	 	445.5	  	 	 	460.3	  	
Service	  	 	389.2	  	 	 	362.8	  	 	 	774.5	  	 	 	719.7	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenues	  	 	1,542.5	  	 	 	1,549.9	  	 	 	3,031.7	  	 	 	3,066.1	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of product	  	 	401.8	  	 	 	423.3	  	 	 	796.0	  	 	 	873.2	  	
Cost of software entitlements and maintenance	  	 	8.6	  	 	 	7.5	  	 	 	16.8	  	 	 	15.0	  	
Cost of service	  	 	149.6	  	 	 	153.9	  	 	 	298.3	  	 	 	303.1	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total cost of revenues	  	 	560.0	  	 	 	584.7	  	 	 	1,111.1	  	 	 	1,191.3	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	  	 	982.5	  	 	 	965.2	  	 	 	1,920.6	  	 	 	1,874.8	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Sales and marketing	  	 	488.0	  	 	 	479.5	  	 	 	968.2	  	 	 	947.3	  	
Research and development	  	 	229.0	  	 	 	228.2	  	 	 	457.0	  	 	 	456.3	  	
General and administrative	  	 	73.0	  	 	 	69.5	  	 	 	143.0	  	 	 	137.9	  	
Restructuring and other charges	  	 	0.0	  	 	 	1.1	  	 	 	0.0	  	 	 	49.5	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	  	 	790.0	  	 	 	778.3	  	 	 	1,568.2	  	 	 	1,591.0	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	  	 	192.5	  	 	 	186.9	  	 	 	352.4	  	 	 	283.8	  	
Other income (expense), net:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	  	 	8.1	  	 	 	8.5	  	 	 	16.4	  	 	 	18.5	  	
Interest expense	  	 	(10.9	) 	 	 	(6.5	) 	 	 	(19.9	) 	 	 	(23.0	) 	
Other income (expense), net	  	 	(0.8	) 	 	 	3.3	  	 	 	(0.3	) 	 	 	5.2	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total other income (expense), net	  	 	(3.6	) 	 	 	5.3	  	 	 	(3.8	) 	 	 	0.7	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	  	 	188.9	  	 	 	192.2	  	 	 	348.6	  	 	 	284.5	  	
Provision for income taxes	  	 	29.1	  	 	 	25.4	  	 	 	100.4	  	 	 	36.1	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	159.8	  	 	$	166.8	  	 	$	248.2	  	 	$	248.4	  	

Net income per share:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	  	$	0.50	  	 	$	0.49	  	 	$	0.77	  	 	$	0.72	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	  	$	0.49	  	 	$	0.48	  	 	$	0.76	  	 	$	0.70	  	

Shares used in net income per share calculations:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	  	 	318.1	  	 	 	340.7	  	 	 	320.8	  	 	 	345.8	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	  	 	323.5	  	 	 	349.1	  	 	 	326.3	  	 	 	354.5	  	

Cash dividends declared per share	  	$	0.165	  	 	$	0.150	  	 	$	0.330	  	 	$	0.300	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to condensed consolidated financial statements.
 
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NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
Net income	  	$	159.8	  	 	$	166.8	  	 	$	248.2	  	 	$	248.4	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss):	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign currency translation adjustments	  	 	(10.0	) 	 	 	4.8	  	 	 	(10.8	) 	 	 	3.6	  	
Defined benefit obligations:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Defined benefit obligation adjustments	  	 	0.1	  	 	 	0.1	  	 	 	1.6	  	 	 	0.2	  	
Income tax effect on defined benefit obligations	  	 	0.0	  	 	 	0.0	  	 	 	(0.5	) 	 	 	0.0	  	
Reclassification adjustments for actuarial net losses included in net income	  	 	0.1	  	 	 	0.0	  	 	 	0.2	  	 	 	0.0	  	
Unrealized gains (losses) on available-for-sale securities:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized holding gains (losses) arising during the period	  	 	0.5	  	 	 	4.4	  	 	 	(1.3	) 	 	 	(4.0	) 	
Income tax effect on unrealized holding (gains) losses	  	 	0.0	  	 	 	0.0	  	 	 	0.2	  	 	 	1.0	  	
Reclassification adjustments for (gains) losses included in net income	  	 	0.0	  	 	 	(1.0	) 	 	 	0.2	  	 	 	(1.1	) 	
Unrealized losses on cash flow hedges:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized holding losses arising during the period	  	 	(3.7	) 	 	 	(3.1	) 	 	 	(4.3	) 	 	 	(3.5	) 	
Reclassification adjustments for losses included in net income	  	 	4.5	  	 	 	2.4	  	 	 	6.2	  	 	 	1.4	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss)	  	 	(8.5	) 	 	 	7.6	  	 	 	(8.5	) 	 	 	(2.4	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	  	$	151.3	  	 	$	174.4	  	 	$	239.7	  	 	$	246.0	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to condensed consolidated financial statements.
 
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NETAPP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

 	  	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	
Cash flows from operating activities:	  	 	 	 	 	 	 	 	
Net income	  	$	248.2	  	 	$	248.4	  	
Adjustments to reconcile net income to net cash provided by operating activities:	  	 	 	 	 	 	 	 	
Depreciation and amortization	  	 	155.1	  	 	 	168.4	  	
Stock-based compensation	  	 	130.1	  	 	 	133.9	  	
Deferred income taxes	  	 	(1.6	) 	 	 	(8.4	) 	
Excess tax benefit from stock-based compensation	  	 	(49.4	) 	 	 	(9.5	) 	
Other non-cash items, net	  	 	51.5	  	 	 	(7.7	) 	
Changes in assets and liabilities:	  	 	 	 	 	 	 	 	
Accounts receivable	  	 	222.4	  	 	 	209.3	  	
Inventories	  	 	14.9	  	 	 	23.6	  	
Other operating assets	  	 	22.8	  	 	 	92.9	  	
Accounts payable	  	 	(32.1	) 	 	 	(40.8	) 	
Accrued compensation and other current liabilities	  	 	(136.5	) 	 	 	(102.4	) 	
Deferred revenue	  	 	(44.8	) 	 	 	(67.6	) 	
Other operating liabilities	  	 	16.3	  	 	 	8.2	  	
 	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	596.9	  	 	 	648.3	  	
 	  	 	 	 	 	 	 	 	
Cash flows from investing activities:	  	 	 	 	 	 	 	 	
Purchases of investments	  	 	(602.6	) 	 	 	(476.1	) 	
Maturities, sales and collections of investments	  	 	963.7	  	 	 	1,148.2	  	
Purchases of property and equipment	  	 	(109.5	) 	 	 	(107.5	) 	
Other investing activities, net	  	 	(0.9	) 	 	 	3.4	  	
 	  	 	 	 	 	 	 	 	
Net cash provided by investing activities	  	 	250.7	  	 	 	568.0	  	
 	  	 	 	 	 	 	 	 	
Cash flows from financing activities:	  	 	 	 	 	 	 	 	
Issuance of common stock under employee stock plans	  	 	71.2	  	 	 	123.9	  	
Repurchase of common stock and forward contract	  	 	(718.9	) 	 	 	(1,000.0	) 	
Excess tax benefit from stock-based compensation	  	 	49.4	  	 	 	9.5	  	
Repayment of long-term debt	  	 	0.0	  	 	 	(1,264.9	) 	
Issuance of long-term debt, net	  	 	494.7	  	 	 	0.0	  	
Dividends paid	  	 	(105.5	) 	 	 	(102.7	) 	
Other financing activities, net	  	 	(3.5	) 	 	 	(5.7	) 	
 	  	 	 	 	 	 	 	 	
Net cash used in financing activities	  	 	(212.6	) 	 	 	(2,239.9	) 	
 	  	 	 	 	 	 	 	 	
Effect of exchange rate changes on cash and cash equivalents	  	 	(20.8	) 	 	 	7.0	  	
Net increase (decrease) in cash and cash equivalents	  	 	614.2	  	 	 	(1,016.6	) 	
Cash and cash equivalents:	  	 	 	 	 	 	 	 	
Beginning of period	  	 	2,291.0	  	 	 	3,277.1	  	
 	  	 	 	 	 	 	 	 	
End of period	  	$	2,905.2	  	 	$	2,260.5	  	
 	  	 	 	 	 	 	 	 	
See accompanying notes to condensed consolidated financial statements.
 
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NETAPP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.  Description of Business and Significant Accounting Policies
NetApp, Inc. (we, us, or the Company) is a global provider of innovative storage and data management software, systems and services. Our storage solutions help customers create the flexible, efficient and highly available IT infrastructures they need to support their organizations. We are a storage and data management provider to enterprises of all sizes, service providers, governmental organizations and original equipment manufacturers.
Basis of Presentation and Preparation
Our fiscal year is reported on a 52- or 53-week year ending on the last Friday in April. Each quarter of fiscal 2015 and 2014 is a 13-week period.
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, and reflect all adjustments, consisting only of normal recurring adjustments, that are, in the opinion of management, necessary for the fair presentation of our financial position, results of operations, comprehensive income and cash flows for the interim periods presented. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, these statements do not include all information and footnotes required by GAAP for annual consolidated financial statements, and should be read in conjunction with our audited consolidated financial statements as of and for the fiscal year ended April 25, 2014 contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 17, 2014. The results of operations for the three and six months ended October 24, 2014 are not necessarily indicative of the operating results to be expected for the full fiscal year or future operating periods.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such estimates include, but are not limited to, revenue recognition, reserves and allowances; inventory valuation and purchase order accruals; valuation of goodwill and intangibles; restructuring reserves; product warranties; employee benefit accruals; stock-based compensation; loss contingencies; investment impairments; income taxes and fair value measurements. Actual results could differ materially from those estimates.
There have been no significant changes in our significant accounting policies as of and for the six months ended October 24, 2014, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended April 25, 2014.
2.  Recent Accounting Standards Not Yet Effective
In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update that changes the criteria for reporting discontinued operations and expands related disclosure requirements. This accounting standard will be effective for us beginning in our first quarter of fiscal 2016. The effects of this guidance will depend on the nature and significance of discontinued operations occurring after the effective date.
In May 2014, the FASB issued new guidance related to the recognition and reporting of revenue that establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The guidance allows for the use of either the full or modified retrospective transition method, and the standard will be effective for us in the first quarter of our fiscal year 2018; early adoption is not permitted. We are currently evaluating the impact of this new standard on our consolidated financial statements, as well as which transition method we intend to use.
 
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3.  Statements of Cash Flows
Non-cash investing and financing activities and supplemental cash flow information are as follows (in millions):

 	  	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	
Non-cash Investing and Financing Activities:	  	 	 	 	  	 	 	 	
Capital expenditures incurred but not paid	  	$	8.8	  	  	$	27.1	  	
Acquisition of software through long-term financing	  	$	12.3	  	  	$	11.4	  	
Supplemental Cash Flow Information:	  	 	 	 	  	 	 	 	
Income taxes paid, net of refunds	  	$	68.6	  	  	$	26.5	  	
Interest paid	  	$	11.9	  	  	$	23.2	  	
4.  Purchased Intangible Assets, Net
Purchased intangible assets, net are summarized below (in millions):

 	  	October 24, 2014	 	  	April 25, 2014	 	
 	  	Gross
Assets	 	  	Accumulated
Amortization	 	 	Net
Assets	 	  	Gross
Assets	 	  	Accumulated
Amortization	 	 	Net
Assets	 	
Developed technology	  	$	283.0	  	  	$	(191.1	) 	 	$	91.9	  	  	$	283.0	  	  	$	(162.6	) 	 	$	120.4	  	
Customer contracts/relationships	  	 	2.6	  	  	 	(2.2	) 	 	 	0.4	  	  	 	9.6	  	  	 	(9.0	) 	 	 	0.6	  	
Trademarks and trade names	  	 	2.9	  	  	 	(2.7	) 	 	 	0.2	  	  	 	2.9	  	  	 	(2.4	) 	 	 	0.5	  	
Covenants not to compete	  	 	0.0	  	  	 	0.0	  	 	 	0.0	  	  	 	1.6	  	  	 	(1.6	) 	 	 	0.0	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total purchased intangible assets	  	$	288.5	  	  	$	(196.0	) 	 	$	92.5	  	  	$	297.1	  	  	$	(175.6	) 	 	$	121.5	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Amortization expense for purchased intangible assets is summarized below (in millions):

 	  	Three Months Ended	 	  	Six Months Ended	 	  	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	October 24,
2014	 	  	October 25,
2013	 	  	Statements of  Operations
Classifications	
Developed technology	  	$	14.2	  	  	$	14.3	  	  	$	28.5	  	  	$	28.6	  	  	Cost of revenues	
Customer contracts/relationships	  	 	0.1	  	  	 	0.3	  	  	 	0.2	  	  	 	0.7	  	  	Operating expenses	
Trademarks and trade names	  	 	0.2	  	  	 	0.1	  	  	 	0.3	  	  	 	0.2	  	  	Operating expenses	
Covenants not to compete	  	 	0.0	  	  	 	0.2	  	  	 	0.0	  	  	 	0.3	  	  	Operating expenses	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	
 	  	$	14.5	  	  	$	14.9	  	  	$	29.0	  	  	$	29.8	  	  	 	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	
As of October 24, 2014, future amortization expense related to purchased intangible assets is as follows (in millions):

Fiscal Year	  	Amount	 	
Remainder of 2015	  	$	28.9	  	
2016	  	 	53.6	  	
2017	  	 	6.7	  	
2018	  	 	3.3	  	
 	  	 	 	 	
Total	  	$	92.5	  	
 	  	 	 	 	
5.  Balance Sheet Details
Cash and cash equivalents (in millions):

 	  	October 24,
2014	 	  	April 25,
2014	 	
Cash	  	$	2,680.3	  	  	$	2,174.0	  	
Cash equivalents	  	 	224.9	  	  	 	117.0	  	
 	  	 	 	 	  	 	 	 	
Cash and cash equivalents	  	$	2,905.2	  	  	$	2,291.0	  	

Inventories (in millions):	  	 	 	 	  	 	 	 	
 	 	 	
 	  	October 24,
2014	 	  	April 25,
2014	 	
Purchased components	  	$	23.3	  	  	$	17.6	  	
Finished goods	  	 	84.3	  	  	 	104.8	  	
 	  	 	 	 	  	 	 	 	
Inventories	  	$	107.6	  	  	$	122.4	  	

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Other current assets (in millions):

 	  	October 24,
2014	 	 	April 25,
2014	 	
Prepaid expenses and other current assets	  	$	225.2	  	 	$	219.4	  	
Deferred tax assets	  	 	254.2	  	 	 	270.3	  	
 	  	 	 	 	 	 	 	 	
Other current assets	  	$	479.4	  	 	$	489.7	  	

Property and equipment, net (in millions):	  	 	 	 	 	 	 	 	
 	 	 	
 	  	October 24,
2014	 	 	April 25,
2014	 	
Land	  	$	265.7	  	 	$	265.7	  	
Buildings and building improvements	  	 	605.5	  	 	 	541.7	  	
Leasehold improvements	  	 	106.5	  	 	 	102.9	  	
Computer, production, engineering and other equipment	  	 	778.1	  	 	 	753.8	  	
Software	  	 	376.7	  	 	 	369.1	  	
Furniture and fixtures	  	 	85.3	  	 	 	86.4	  	
Construction-in-progress	  	 	20.7	  	 	 	72.9	  	
 	  	 	 	 	 	 	 	 	
 	  	 	2,238.5	  	 	 	2,192.5	  	
Accumulated depreciation and amortization	  	 	(1,156.8	) 	 	 	(1,083.7	) 	
 	  	 	 	 	 	 	 	 	
Property and equipment, net	  	$	1,081.7	  	 	$	1,108.8	  	

The net book value of software, which includes capitalized internal-use software development costs, is summarized below (in millions):	   	
 	 	 	
 	  	October 24,
2014	 	 	April 25,
2014	 	
Computer software	  	$	83.5	  	 	$	103.5	  	

Other non-current assets (in millions):	  	 	 	 	 	 	 	 	
 	 	 	
 	  	October 24,
2014	 	 	April 25,
2014	 	
Auction rate securities	  	$	23.0	  	 	$	36.0	  	
Deferred tax assets	  	 	247.3	  	 	 	245.0	  	
Other assets	  	 	255.8	  	 	 	248.5	  	
 	  	 	 	 	 	 	 	 	
Other non-current assets	  	$	526.1	  	 	$	529.5	  	

Short-term and long-term deferred revenue (in millions):	  	 	 	 	 	 	 	 	
 	 	 	
 	  	October 24,
2014	 	 	April 25,
2014	 	
Product	  	$	25.0	  	 	$	23.4	  	
Software entitlements and maintenance and service	  	 	3,022.0	  	 	 	3,076.8	  	
 	  	 	 	 	 	 	 	 	
Total	  	$	3,047.0	  	 	$	3,100.2	  	

Reported as:	  	 	 	 	 	 	 	 	
Short-term	  	$	1,632.1	  	 	$	1,653.8	  	
Long-term	  	 	1,414.9	  	 	 	1,446.4	  	
 	  	 	 	 	 	 	 	 	
Total	  	$	3,047.0	  	 	$	3,100.2	  	

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6.  Financial Instruments and Fair Value Measurements
The accounting guidance for fair value measurements provides a framework for measuring fair value on either a recurring or nonrecurring basis, whereby the inputs used in valuation techniques are assigned a hierarchical level. The following are the three levels of inputs to measure fair value:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Inputs that reflect quoted prices for identical assets or liabilities in less active markets; quoted prices for similar assets or liabilities in active markets; benchmark yields, reported trades, broker/dealer quotes, inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3: Unobservable inputs that reflect our own assumptions incorporated in valuation techniques used to measure fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
We consider an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis, and consider an inactive market to be one in which there are infrequent or few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, our own or the counterparty’s non-performance risk is considered in measuring the fair values of liabilities and assets, respectively.
 
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Investments
The following is a summary of our investments (in millions):

 	  	October 24, 2014	 	  	April 25, 2014	 	
 	  	 	 	  	Gross Unrealized	 	 	 	 	  	 	 	  	Gross Unrealized	 	 	 	 	
 	  	Cost or
Amortized
Cost	 	  	Gains	 	  	Losses	 	 	Estimated
Fair Value	 	  	Cost or
Amortized
Cost	 	  	Gains	 	  	Losses	 	 	Estimated
Fair Value	 	
Corporate bonds	  	$	1,855.4	  	  	$	8.1	  	  	$	(0.2	) 	 	$	1,863.3	  	  	$	2,142.3	  	  	$	10.5	  	  	$	(0.5	) 	 	$	2,152.3	  	
U.S. Treasury and government debt securities	  	 	157.0	  	  	 	0.6	  	  	 	0.0	  	 	 	157.6	  	  	 	263.4	  	  	 	0.3	  	  	 	(0.1	) 	 	 	263.6	  	
Commercial paper	  	 	222.6	  	  	 	0.0	  	  	 	0.0	  	 	 	222.6	  	  	 	168.4	  	  	 	0.0	  	  	 	0.0	  	 	 	168.4	  	
Certificates of deposit	  	 	345.6	  	  	 	0.0	  	  	 	0.0	  	 	 	345.6	  	  	 	245.0	  	  	 	0.0	  	  	 	0.0	  	 	 	245.0	  	
Auction rate securities	  	 	23.3	  	  	 	0.0	  	  	 	(0.3	) 	 	 	23.0	  	  	 	36.9	  	  	 	0.0	  	  	 	(0.9	) 	 	 	36.0	  	
Equity funds	  	 	33.0	  	  	 	0.0	  	  	 	0.0	  	 	 	33.0	  	  	 	32.7	  	  	 	0.0	  	  	 	0.0	  	 	 	32.7	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
Total debt and equity securities	  	$	2,636.9	  	  	$	8.7	  	  	$	(0.5	) 	 	$	2,645.1	  	  	$	2,888.7	  	  	$	10.8	  	  	$	(1.5	) 	 	$	2,898.0	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	
The unrealized losses on our available-for-sale investments were caused by market value declines as a result of the economic environment, as well as fluctuations in market interest rates. Because the declines in market value are attributable to changes in market conditions and not credit quality, and because we have determined that (i) we do not have the intent to sell any of these investments and (ii) it is not more likely than not that we will be required to sell any of these investments before recovery of the entire amortized cost basis, we have concluded that no other-than-temporary impairments were required to be recognized on these investments as of October 24, 2014.
The following table presents the contractual maturities of our debt investments as of October 24, 2014 (in millions):

 	  	Amortized
Cost	 	  	Fair
Value	 	
Due in one year or less	  	$	1,615.2	  	  	$	1,618.1	  	
Due in two through five years	  	 	965.4	  	  	 	971.0	  	
Due after ten years*	  	 	23.3	  	  	 	23.0	  	
 	  	 	 	 	  	 	 	 	
 	  	$	2,603.9	  	  	$	2,612.1	  	

*	Consists of auction rate securities (ARSs) which have contractual maturities of greater than 10 years.	
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
Fair Value of Financial Instruments
The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis (in millions):

 	  	October 24, 2014	 	
 	  	 	 	 	Fair Value Measurements at Reporting Date Using	 	
 	  	Total	 	 	Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)	 	  	Significant
Other
Observable
Inputs
(Level 2)	 	 	Significant
Unobservable
Inputs
(Level 3)	 	
Assets	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Corporate bonds	  	$	1,863.3	  	 	$	0.0	  	  	$	1,863.3	  	 	$	0.0	  	
U.S. Treasury and government debt securities	  	 	157.6	  	 	 	97.3	  	  	 	60.3	  	 	 	0.0	  	
Commercial paper	  	 	222.6	  	 	 	0.0	  	  	 	222.6	  	 	 	0.0	  	
Certificates of deposit	  	 	345.6	  	 	 	0.0	  	  	 	345.6	  	 	 	0.0	  	
Auction rate securities	  	 	23.0	  	 	 	0.0	  	  	 	0.0	  	 	 	23.0	  	
Equity funds	  	 	33.0	  	 	 	33.0	  	  	 	0.0	  	 	 	0.0	  	
Foreign currency contracts	  	 	4.1	  	 	 	0.0	  	  	 	4.1	  	 	 	0.0	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Total	  	$	2,649.2	  	 	$	130.3	  	  	$	2,495.9	  	 	$	23.0	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Liabilities	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Foreign currency contracts	  	$	(3.2	) 	 	$	0.0	  	  	$	(3.2	) 	 	$	0.0	  	

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The following table summarizes the balance sheet classifications of our financial assets and liabilities measured at fair value on a recurring basis (in millions):

 	  	October 24, 2014	 	
 	  	 	 	 	Fair Value Measurements at Reporting Date Using	 	
 	  	Total	 	 	Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)	 	  	Significant
Other
Observable
Inputs
(Level 2)	 	 	Significant
Unobservable
Inputs
(Level 3)	 	
Assets	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Cash equivalents	  	$	224.9	  	 	$	0.0	  	  	$	224.9	  	 	$	0.0	  	
Short-term investments	  	 	2,364.2	  	 	 	97.3	  	  	 	2,266.9	  	 	 	0.0	  	
Other current assets	  	 	9.7	  	 	 	5.6	  	  	 	4.1	  	 	 	0.0	  	
Other non-current assets	  	 	50.4	  	 	 	27.4	  	  	 	0.0	  	 	 	23.0	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Total	  	$	2,649.2	  	 	$	130.3	  	  	$	2,495.9	  	 	$	23.0	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Liabilities	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Other current liabilities	  	$	(3.2	) 	 	$	0.0	  	  	$	(3.2	) 	 	$	0.0	  	
 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Level 2 investments are held by a custodian who prices some of the investments using standard inputs in various asset price models or obtains investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models. We review Level 2 inputs and fair value for reasonableness and the values may be further validated by comparison to multiple independent pricing sources. In addition, we review third-party pricing provider models, key inputs and assumptions and understand the pricing processes at our third-party providers in determining the overall reasonableness of the fair value of our Level 2 financial instruments. As of October 24, 2014, we have not made any adjustments to the prices obtained from our third-party pricing providers.
Quantitative information about our Level 3 fair value measurements is as follows (fair value in millions):

 	  	Estimated Fair
Value as of
October 24, 2014	 	  	Valuation Techniques	  	Unobservable Inputs	  	Range
(Weighted average)	
 	 	 	 	 	
ARSs	  	$	23.0	  	  	Discounted cash flow	  	Time-to-economic maturity	  	0.5 yrs. –9.3 yrs. (3.4 yrs.)	
 	  	 	 	 	  	 	  	Illiquidity premium	  	1.2% - 1.6% (1.3%)	
 	  	 	 	 	  	 	  	Coupon rate	  	1.2% - 1.8% (1.4%)	

 	  	 	 	 	  	Market comparable securities	  	Discount rate	  	1.1% - 2.3% (1.5%)	
All of our ARSs are classified as other non-current assets and are backed by pools of student loans guaranteed by the U.S. Department of Education. We estimate the fair value of each individual ARS using an income (discounted cash flow) and market approach that incorporate both observable and unobservable inputs. Key inputs into the discounted cash flow analysis include the time-to-economic maturity, illiquidity premium, (which factors in liquidity risk, market credit spread and other factors), and a coupon rate. The key input into the market approach is a discount rate. A significant increase (decrease) in the time-to-economic maturity, illiquidity premium, coupon rate, discount rate or other factors could result in a significantly lower (higher) fair value estimate. We review the fair value of our Level 3 financial instruments for overall reasonableness by reviewing service provider pricing methodologies, key inputs and assumptions and by understanding the processes used by our third-party service provider. We will continue to monitor our ARS investments in light of the asset-backed securities market environment and evaluate these investments for impairment and classification.
 
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The table below provides a reconciliation of the beginning and ending balance of our Level 3 ARSs measured at fair value on a recurring basis using significant unobservable inputs (in millions).

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
Balance at beginning of period	  	$	26.4	  	 	$	42.2	  	 	$	36.0	  	 	$	42.0	  	
Total unrealized gains (losses), net included in other comprehensive income (loss)	  	 	0.2	  	 	 	(0.4	) 	 	 	0.6	  	 	 	(0.2	) 	
Total realized gains included in earnings	  	 	0.0	  	 	 	0.7	  	 	 	0.0	  	 	 	0.7	  	
Sales	  	 	0.0	  	 	 	(3.0	) 	 	 	(10.0	) 	 	 	(3.0	) 	
Settlements	  	 	(3.6	) 	 	 	0.0	  	 	 	(3.6	) 	 	 	0.0	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at end of period	  	$	23.0	  	 	$	39.5	  	 	$	23.0	  	 	$	39.5	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair Value of Debt
As of October 24, 2014, the fair value of our long-term debt was approximately $1,510.3 million. The fair value of our debt was based on observable market prices in a less active market and discounted cash flow models that take into consideration variables such as credit-rating and interest rate changes. All of our debt obligations are categorized as Level 2 instruments.
7.  Financing Arrangements
Long-term Debt
The following table summarizes the carrying value of our long-term debt (in millions):

 	  	October 24, 2014	 	 	April 25, 2014	 	
 	 	 	 	 	
 	  	Amount	 	 	Effective
Interest Rate	 	 	Amount	 	 	Effective
Interest Rate	 	
2.00% Senior Notes due 2017	  	$	750.0	  	 	 	2.25	% 	 	$	750.0	  	 	 	2.25	% 	
3.375% Senior Notes due 2021	  	 	500.0	  	 	 	3.54	% 	 	 	0.0	  	 	 	N/A	  	
3.25% Senior Notes due 2022	  	 	250.0	  	 	 	3.43	% 	 	 	250.0	  	 	 	3.43	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total principal amount	  	 	1,500.0	  	 	 	 	 	 	 	1,000.0	  	 	 	 	 	
Less: Unamortized discount	  	 	(5.6	) 	 	 	 	 	 	 	(4.5	) 	 	 	 	 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total long-term debt	  	$	1,494.4	  	 	 	 	 	 	$	995.5	  	 	 	 	 	

N/A - Not Applicable
Senior Notes
On June 5, 2014 we issued $500.0 million aggregate par value of 3.375% Senior Notes, with a maturity date of June 15, 2021, and received proceeds of approximately $494.7 million, net of discount and issuance costs, which will be used for general corporate purposes, including possible stock repurchases, dividends, capital expenditures, working capital and potential acquisitions and strategic transactions. Our 2.00% Senior Notes and 3.25% Senior Notes, with a par value of $750.0 million and $250.0 million, respectively, were issued in December 2012. We collectively refer to such long-term debt as our Senior Notes. Interest on our Senior Notes is paid semi-annually on June 15 and December 15. Our Senior Notes, which are unsecured, unsubordinated obligations, rank equally in right of payment with any future senior unsecured indebtedness.
We may redeem the Senior Notes in whole or in part at any time at our option at specified redemption prices. In addition, upon the occurrence of certain change of control triggering events, we may be required to repurchase the Senior Notes at 101% of their aggregate principal amount, plus accrued and unpaid interest to the date of repurchase. The Senior Notes also include covenants that limit our ability to incur debt secured by liens on assets or on shares of stock or indebtedness of our subsidiaries; to engage in sale and lease-back transactions; and to consolidate, merge or sell all or substantially all of our assets. As of October 24, 2014, we were in compliance with all covenants associated with the Senior Notes.
 
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As of October 24, 2014, our aggregate future principal debt maturities are as follows (in millions):

Fiscal Year	  	Amount	 	
2018	  	$	750.0	  	
Thereafter	  	 	750.0	  	
 	  	 	 	 	
Total	  	$	1,500.0	  	
 	  	 	 	 	
Credit Facility
In December 2012, we entered into a credit agreement with a syndicated group of lenders that is scheduled to expire on December 21, 2017 and provides for an unsecured $250.0 million revolving credit facility that is comprised of revolving loans, Eurocurrency loans and/or swingline loans. The credit facility includes a $100.0 million foreign currency sub-facility, a $50.0 million letter of credit sub-facility and a $10.0 million swingline sub-facility available on same-day notice. Available borrowings under the credit facility are reduced by the amount of any outstanding borrowings on the sub-facilities. We may also, subject to certain requirements, request an increase in the facility up to an additional $100.0 million and request two additional one-year extensions, subject to certain conditions. The proceeds from the facility may be used by us for general corporate purposes.
Borrowings under the facility, except for swingline loans, accrue interest in arrears at an alternate base rate as defined in the credit agreement or, at our option, an adjusted London Interbank Offered Rate (LIBOR) plus in each case, a spread (based on our public debt ratings and the type of loan) ranging from 0.2% to 1.2%. Swingline borrowings accrue interest at an alternate base rate. In addition, we are required to pay fees to maintain the credit facility, whether or not we have outstanding borrowings. The facility contains financial covenants requiring us to maintain a maximum leverage ratio of not more than 3.0:1.0 and a minimum interest coverage ratio of not less than 3.5:1.0. The facility contains customary affirmative and negative covenants, including covenants that limit our ability to incur debt secured by liens on assets or indebtedness of our subsidiaries and to consolidate, merge or sell all or substantially all of our assets. As of October 24, 2014, no borrowings were outstanding under the facility and we were in compliance with all covenants associated with the facility.
Other Long-Term Financing Arrangements
The following presents the amounts due under other long-term financing arrangements (in millions):

 	  	October 24,
2014	 	 	April 25,
2014	 	
Other long-term financing arrangements	  	$	21.8	  	 	$	13.1	  	
Less: current portion	  	 	(9.5	) 	 	 	(6.6	) 	
 	  	 	 	 	 	 	 	 	
Non-current portion of other long-term financing arrangements	  	$	12.3	  	 	$	6.5	  	
 	  	 	 	 	 	 	 	 	
8.  Stockholders’ Equity
Stock Options
The following table summarizes activity related to our stock options (in millions, except for exercise price and contractual term):

 	  	Number
of Shares	 	 	Weighted-
Average
Exercise
Price	 	  	Weighted-
Average
Remaining
Contractual Term
(Years)	 	  	Aggregate
Intrinsic
Value	 	
Outstanding as of April 25, 2014	  	 	14.5	  	 	$	34.10	  	  	 	 	 	  	 	 	 	
Granted	  	 	2.1	  	 	 	36.53	  	  	 	 	 	  	 	 	 	
Exercised	  	 	(2.5	) 	 	 	25.55	  	  	 	 	 	  	 	 	 	
Forfeited and expired	  	 	(0.4	) 	 	 	43.10	  	  	 	 	 	  	 	 	 	
 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Outstanding as of October 24, 2014	  	 	13.7	  	 	 	35.82	  	  	 	3.79	  	  	$	96.3	  	

Vested and expected to vest as of October 24, 2014	  	 	13.1	  	 	 	35.78	  	  	 	3.68	  	  	 	93.7	  	
 	 	 	 	 	
Exercisable as of October 24, 2014	  	 	9.0	  	 	 	35.25	  	  	 	2.75	  	  	 	75.3	  	
The aggregate intrinsic value represents the pre-tax difference between the exercise price of stock options and the quoted market price of our stock on that day for all in-the-money options.
 
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Additional information related to our stock options is summarized below (in millions):

 	  	Six Months Ended	 	
 	  	October 24, 2014	 	  	October 25, 2013	 	
Intrinsic value of exercises	  	$	37.5	  	  	$	60.4	  	
Proceeds received from exercises	  	$	64.8	  	  	$	113.2	  	
Fair value of options vested	  	$	18.6	  	  	$	25.4	  	
Restricted Stock Units
The following table summarizes activity related to our restricted stock units (RSUs) (in millions, except for fair value):

 	  	Number
of Shares	 	 	Weighted-
Average
Grant Date
Fair Value	 	
Outstanding as of April 25, 2014	  	 	13.2	  	 	$	38.35	  	
Granted	  	 	5.8	  	 	 	35.37	  	
Vested	  	 	(3.6	) 	 	 	38.99	  	
Forfeited	  	 	(1.1	) 	 	 	37.84	  	
 	  	 	 	 	 	 	 	 	
Outstanding as of October 24, 2014	  	 	14.3	  	 	 	37.02	  	
 	  	 	 	 	 	 	 	 	
RSUs are converted into common stock upon vesting. We primarily use the net share settlement approach upon vesting, where a portion of the shares are withheld as settlement of statutory employee withholding taxes, which decreases the shares issued to the employee by a corresponding value. The number and value of the shares netted for employee taxes are summarized in the table below (in millions):

 	  	Six Months Ended	 	
 	  	October 24, 2014	 	  	October 25, 2013	 	
Shares withheld for taxes	  	 	1.1	  	  	 	1.0	  	
Fair value of shares withheld	  	$	42.5	  	  	$	39.3	  	
Employee Stock Purchase Plan
The following table summarizes activity related to the purchase rights issued under the Employee Stock Purchase Plan (ESPP) (in millions):

 	  	Six Months Ended	 	
 	  	October 24, 2014	 	  	October 25, 2013	 	
Shares issued under the ESPP	  	 	1.9	  	  	 	2.0	  	
Proceeds from issuance of shares	  	$	48.9	  	  	$	49.9	  	
Stock-Based Compensation Expense
Stock-based compensation expense is included in the condensed consolidated statements of operations as follows (in millions):

 	  	Three Months Ended	 	  	Six Months Ended	 	
 	  	October 24, 2014	 	  	October 25, 2013	 	  	October 24, 2014	 	  	October 25, 2013	 	
Cost of product revenues	  	$	1.6	  	  	$	1.4	  	  	$	3.1	  	  	$	2.7	  	
Cost of service revenues	  	 	4.0	  	  	 	4.2	  	  	 	8.4	  	  	 	8.2	  	
Sales and marketing	  	 	30.4	  	  	 	31.1	  	  	 	57.4	  	  	 	61.6	  	
Research and development	  	 	21.2	  	  	 	21.6	  	  	 	42.7	  	  	 	43.0	  	
General and administrative	  	 	10.6	  	  	 	9.3	  	  	 	18.5	  	  	 	18.4	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total stock-based compensation expense	  	$	67.8	  	  	$	67.6	  	  	$	130.1	  	  	$	133.9	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
As of October 24, 2014, total unrecognized compensation expense related to our equity awards was $456.0 million, which is expected to be recognized on a straight-line basis over a weighted-average remaining service period of 2.6 years.
 
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Total income tax benefit associated with employee stock transactions and recognized in stockholders’ equity were as follows (in millions):

 	  	Six Months Ended	 	
 	  	October 24, 2014	 	  	October 25, 2013	 	
Income tax benefit associated with employee stock transactions	  	$	58.2	  	  	$	1.8	  	
Stock Repurchase Program
As of October 24, 2014, our Board of Directors has authorized the repurchase of up to $7.1 billion of our common stock. Under this program, which we may suspend or discontinue at any time, we may purchase shares of our outstanding common stock through open market and privately negotiated transactions at prices deemed appropriate by our management.
The following table summarizes activity related to this program for the six months ended October 24, 2014 (in millions, except per share information):

Number of shares repurchased	  	 	18.4	  	
Average price per share	  	$	39.10	  	
Aggregate purchase price	  	$	718.9	  	
Remaining authorization at end of period	  	$	405.9	  	
The aggregate purchase price of our stock repurchases for the six months ended October 24, 2014 consisted of $718.9 million of open market purchases, of which $523.0 million and $195.9 million was allocated to additional paid-in capital and retained earnings, respectively.
Dividends
The following is a summary of our activities related to dividends on our common stock (in millions, except per share amounts):

 	  	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	
Dividends per share declared and paid	  	$	0.330	  	  	$	0.300	  	

Dividend payments allocated to additional paid-in capital	  	$	52.1	  	  	$	0.0	  	
 	  	 	 	 	  	 	 	 	
Dividend payments allocated to retained earnings	  	$	53.4	  	  	$	102.7	  	
 	  	 	 	 	  	 	 	 	
On November 12, 2014, we declared a cash dividend of $0.165 per share of common stock, payable on January 22, 2015 to holders of record as of the close of business on January 9, 2015. The timing and amount of future dividends will depend on market conditions, corporate business and financial considerations and regulatory requirements. All dividends declared have been determined by the Company to be legally authorized under the laws of the state in which we are incorporated.
Retained Earnings
A reconciliation of retained earnings for the six months ended October 24, 2014 is as follows (in millions):

Balance as of April 25, 2014	  	$	1.1	  	
Net income	  	 	248.2	  	
Repurchases of common stock	  	 	(195.9	) 	
Dividends	  	 	(53.4	) 	
 	  	 	 	 	
Balance as of October 24, 2014	  	$	0.0	  	

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Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (AOCI) by component, net of tax, for the six months ended October 24, 2014 are summarized below (in millions):

 	  	Foreign
Currency
Translation
Adjustments	 	 	Defined
Benefit
Obligation
Adjustments	 	 	Unrealized
Gains on
Available-
for-Sale
Securities	 	 	Unrealized
Gains
(Losses) on
Derivative
Instruments	 	 	Total	 	
Balance as of April 25, 2014	  	$	5.5	  	 	$	(4.8	) 	 	$	8.9	  	 	$	(0.5	) 	 	$	9.1	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss) (OCI) before Reclassifications, net of tax	  	 	(10.8	) 	 	 	1.1	  	 	 	(1.1	) 	 	 	(4.3	) 	 	 	(15.1	) 	
Amounts reclassified from AOCI, net of tax	  	 	0.0	  	 	 	0.2	  	 	 	0.2	  	 	 	6.2	  	 	 	6.6	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net OCI	  	 	(10.8	) 	 	 	1.3	  	 	 	(0.9	) 	 	 	1.9	  	 	 	(8.5	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of October 24, 2014	  	$	(5.3	) 	 	$	(3.5	) 	 	$	8.0	  	 	$	1.4	  	 	$	0.6	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The amounts reclassified out of AOCI are as follows (in millions):

 	  	Three Months Ended	 	 	Six Months Ended	 	 	 	 	
 	  	October 24, 2014	 	  	October 25, 2013	 	 	October 24, 2014	 	  	October 25, 2013	 	 	 	 	
OCI Components	  	Amounts Reclassified from AOCI	 	 	Amounts Reclassified from AOCI	 	 	Statements of Operations
Location	 	
Recognized losses on defined benefit obligations	  	$	0.1	  	  	$	0.0	  	 	$	0.2	  	  	$	0.0	  	 	 
 	Operating
expenses	  
  	
Realized (gains) losses on available-for-sale securities	  	 	0.0	  	  	 	(1.0	) 	 	 	0.2	  	  	 	(1.1	) 	 	 
 	Other income
(expense), net	  
  	
Realized losses on cash flow hedges	  	 	4.5	  	  	 	2.4	  	 	 	6.2	  	  	 	1.4	  	 	 	Net revenues	  	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Total reclassifications	  	$	4.6	  	  	$	1.4	  	 	$	6.6	  	  	$	0.3	  	 	 	 	 	
 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
9.  Derivatives and Hedging Activities
We use derivative instruments to manage exposures to foreign currency risk. All contracts have a maturity of less than six months. The notional amount of our outstanding U.S. dollar equivalent foreign currency exchange forward contracts consisted of the following (in millions):

 	  	October 24,
2014	 	  	April 25,
2014	 	
Cash Flow Hedges	  	 	 	 	  	 	 	 	
Forward contracts purchased	  	$	153.0	  	  	$	122.6	  	
Balance Sheet Contracts	  	 	 	 	  	 	 	 	
Forward contracts sold	  	 	187.4	  	  	 	155.5	  	
Forward contracts purchased	  	 	303.4	  	  	 	389.9	  	
We have master netting arrangements in place to mitigate the credit risk of our counterparties and to potentially reduce our losses due to counterparty nonperformance. We present our derivative instruments as net amounts in our condensed consolidated balance sheets. The gross and net fair value amounts of such instruments were not material as of October 24, 2014 and April 25, 2014. We did not recognize any gains and losses in earnings due to hedge ineffectiveness for any period presented.
The effect of derivative instruments designated as cash flow hedges recognized in net revenues on our condensed consolidated statements of operations is presented in the condensed consolidated statements of comprehensive income and Note 8.
 
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The effect of derivative instruments not designated as hedging instruments recognized in other income (expense), net on our condensed consolidated statements of operations was as follows (in millions):

 	  	Three Months Ended	 	  	Six Months Ended	 	
 	  	October 24, 2014	 	 	October 25, 2013	 	  	October 24, 2014	 	 	October 25, 2013	 	
 	  	Gain (Loss) Recognized into Income	 	  	Gain (Loss) Recognized into Income	 	
Foreign exchange forward contracts	  	$	(0.8	) 	 	$	0.6	  	  	$	(1.6	) 	 	$	0.8	  	
10.  Restructuring and Other Charges
In May 2013, we initiated a business restructuring plan under which we realigned internal resources, resulting in a reduction of our global workforce of approximately 7%. Such activities were completed in the year ended April 25, 2014. In March 2014, we initiated a business realignment plan designed to focus our resources on key strategic initiatives and streamline our business in light of the constrained IT spending environment, resulting in a reduction of our global workforce of approximately 4%. Such activities were substantially completed in the three months ended October 24, 2014. Restructuring and other charges consisted primarily of employee severance-related costs.
Activities related to these plans are summarized as follows (in millions):

 	  	Six Months Ended
October 24, 2014	 	 	Six Months Ended
October 25, 2013	 	
 	  	(March 2014 Plan)	 	 	(May 2013 Plan)	 	
Balance at beginning of period	  	$	26.5	  	 	$	0.0	  	
Net charges	  	 	0.0	  	 	 	49.5	  	
Cash payments	  	 	(25.4	) 	 	 	(45.4	) 	
 	  	 	 	 	 	 	 	 	
Balance at end of period	  	$	1.1	  	 	$	4.1	  	
 	  	 	 	 	 	 	 	 	
The liability for our restructuring plans is included in accrued compensation and related benefits in our condensed consolidated balance sheets.
11.  Income Taxes
Our effective tax rates for the periods presented were as follows:

 	  	Six Months Ended	 	
 	  	October 24, 2014	 	 	October 25, 2013	 	
Effective tax rates	  	 	28.8	% 	 	 	12.7	% 	
Our effective tax rates reflect the impact of a significant amount of our earnings being taxed in foreign jurisdictions at rates below the U.S. statutory tax rate. In addition, our effective tax rate for the six months ended October 24, 2014 was impacted by the settlements of income tax audits as discussed below.
In July 2014, the Internal Revenue Service (IRS) completed the examination of our fiscal 2005 to 2007 income tax returns upon approval by the Joint Committee of Taxation. We recorded a $47.4 million income tax provision attributable to the audit settlement and related re-measurement of uncertain tax positions for tax years subject to future audits. The audit adjustments resulted in lower earnings in our foreign subsidiaries which reduced the taxability of dividends that were previously repatriated from such subsidiaries. Due to this reduction in taxable dividends, the conclusion of the fiscal 2005 to 2007 income tax audit resulted in a net refund of $8.0 million, excluding interest.
In October 2014, the United Kingdom’s (UK’s) tax authority concluded the examination of our fiscal 2009 to 2012 UK income tax returns. We recorded a $1.0 million income tax benefit for the net impact of the audit adjustments and related release of unrecognized tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

 	  	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	
Balance at beginning of period	  	$	235.9	  	 	$	189.6	  	
Additions based on tax positions related to the current year	  	 	12.7	  	 	 	13.6	  	
Additions for tax positions of prior years	  	 	98.8	  	 	 	1.0	  	
Decreases for tax positions of prior years	  	 	(18.6	) 	 	 	(4.4	) 	
Settlements	  	 	(54.3	) 	 	 	0.0	  	
 	  	 	 	 	 	 	 	 	
Balance at end of period	  	$	274.5	  	 	$	199.8	  	

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As of October 24, 2014, we had $274.5 million of gross unrecognized tax benefits, of which $220.2 million has been recorded in other long-term liabilities. Unrecognized tax benefits of $168.2 million, including penalties, interest and indirect benefits, would affect our provision for income taxes if recognized.
We are currently undergoing federal income tax audits in the United States and several foreign tax jurisdictions. Transfer pricing calculations are key issues under audits in various jurisdictions, and are often subject to dispute and appeals. The IRS is currently auditing our fiscal 2008 to 2010 income tax returns. We expect the IRS examination team to complete their field audit within the next twelve months. However, the resolution of the fiscal 2008 to 2010 income tax return audits may likely occur beyond the next twelve months should we choose to appeal the IRS examination team’s audit findings.
On September 17, 2010, the Danish Tax Authorities issued a decision concluding that distributions declared in 2005 and 2006 from our Danish subsidiary were subject to Danish at-source dividend withholding tax. We do not believe that our Danish subsidiary is liable for withholding tax and filed an appeal with the Danish Tax Tribunal to that effect. On December 19, 2011, the Danish Tax Tribunal issued a ruling that our Danish subsidiary was not liable for Danish withholding tax. The Danish tax examination agency appealed to the Danish High Court in March 2012.
Our Dutch subsidiaries have concluded an advanced transfer pricing agreement with the Dutch tax authorities that will be effective from May 1, 2015 to April 30, 2020. The advanced transfer pricing agreement has terms similar to our current agreement which is set to expire on April 30, 2015.
12.  Net Income per Share
The following is a calculation of basic and diluted net income per share (in millions, except per share amounts):

 	  	Three Months Ended	 	  	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	October 24,
2014	 	  	October 25,
2013	 	
Numerator:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net income	  	$	159.8	  	  	$	166.8	  	  	$	248.2	  	  	$	248.4	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Denominator:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Shares used in basic computation	  	 	318.1	  	  	 	340.7	  	  	 	320.8	  	  	 	345.8	  	
Dilutive potential shares related to employee equity award plans	  	 	5.4	  	  	 	7.5	  	  	 	5.5	  	  	 	7.2	  	
Dilutive impact of assumed conversion of Convertible Notes	  	 	0.0	  	  	 	0.0	  	  	 	0.0	  	  	 	1.1	  	
Dilutive impact of warrants	  	 	0.0	  	  	 	0.9	  	  	 	0.0	  	  	 	0.4	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Shares used in diluted computation	  	 	323.5	  	  	 	349.1	  	  	 	326.3	  	  	 	354.5	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net Income per Share:	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Basic	  	$	0.50	  	  	$	0.49	  	  	$	0.77	  	  	$	0.72	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Diluted	  	$	0.49	  	  	$	0.48	  	  	$	0.76	  	  	$	0.70	  	

The following potential weighted-average shares of common stock have been excluded from the diluted net income per share calculations, as their effect would have been anti-dilutive (in millions):	   	
 	 	 	
 	  	Three Months Ended	 	  	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	October 24,
2014	 	  	October 25,
2013	 	
Employee equity award plans	  	 	7.3	  	  	 	7.2	  	  	 	7.9	  	  	 	6.9	  	
13.  Segment, Geographic, and Significant Customer Information
We operate in one industry segment: the design, manufacturing, marketing, and technical support of high-performance data management and networked storage solutions. We conduct business globally, and our sales and support activities are managed on a geographic basis. Our management reviews financial information presented on a consolidated basis, accompanied by disaggregated information it receives from its internal management system about revenues by geographic region, based on the location from which the customer relationship is managed, for purposes of allocating resources and evaluating financial performance. We do not allocate costs of revenues, research and development, sales and marketing, or general and administrative expenses to our geographic regions in this internal management reporting because management does not review operations or operating results, or make planning decisions, below the consolidated entity level.
 
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Summarized revenues by geographic region based on information from our internal management system and utilized by our Chief Executive Officer, who is considered our Chief Operating Decision Maker, is as follows (in millions):

 	  	Three Months Ended	 	  	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	October 24,
2014	 	  	October 25,
2013	 	
Americas (United States, Canada and Latin America)	  	$	906.1	  	  	$	899.2	  	  	$	1,737.3	  	  	$	1,757.7	  	
Europe, Middle East and Africa	  	 	437.6	  	  	 	445.0	  	  	 	882.5	  	  	 	893.0	  	
Asia Pacific	  	 	198.8	  	  	 	205.7	  	  	 	411.9	  	  	 	415.4	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Net revenues	  	$	1,542.5	  	  	$	1,549.9	  	  	$	3,031.7	  	  	$	3,066.1	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Americas revenues consist of sales to Americas commercial and U.S. public sector markets. Sales to customers inside the United States were $816.4 million and $800.7 million during the three months ended October 24, 2014 and October 25, 2013, respectively, and were $1,562.6 million and $1,573.5 million during the six months ended October 24, 2014 and October 25, 2013, respectively. No single foreign country accounted for 10% or more of our net revenues for any period presented.
The majority of our assets, excluding cash, cash equivalents, restricted cash, investments and accounts receivable, were attributable to our domestic operations. The following table presents cash, cash equivalents, restricted cash and investments held in the United States and internationally in various foreign subsidiaries (in millions):

 	  	October 24,
2014	 	  	April 25,
2014	 	
United States	  	$	850.8	  	  	$	688.5	  	
International	  	 	4,457.8	  	  	 	4,360.9	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	5,308.6	  	  	$	5,049.4	  	
 	  	 	 	 	  	 	 	 	
With the exception of property and equipment, we do not identify or allocate our long-lived assets by geographic area. The following table presents property and equipment information for geographic areas based on the physical location of the assets (in millions):

 	  	October 24,
2014	 	  	April 25,
2014	 	
United States	  	$	987.0	  	  	$	1,021.4	  	
International	  	 	94.7	  	  	 	87.4	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	1,081.7	  	  	$	1,108.8	  	
 	  	 	 	 	  	 	 	 	
The following customers, each of which is a distributor, accounted for 10% or more of our net revenues:

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
Arrow Electronics, Inc.	  	 	24	% 	 	 	23	% 	 	 	23	% 	 	 	22	% 	
Avnet, Inc.	  	 	17	% 	 	 	16	% 	 	 	17	% 	 	 	16	% 	
The following customers accounted for 10% or more of net accounts receivable:

 	  	October 24,
2014	 	 	    April  25,
2014	 	
Arrow Electronics, Inc.	  	 	12	% 	 	 	14	% 	
Avnet, Inc.	  	 	15	% 	 	 	16	% 	
 
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14.  Commitments and Contingencies
Operating Lease Commitments
We lease various equipment, vehicles and office space in the U.S. and internationally. As of October 24, 2014, future annual minimum lease payments under non-cancelable operating leases with an initial term in excess of one year totaled $206.5 million.
Purchase Orders and Other Commitments
In the ordinary course of business we make commitments to 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. We establish accruals for estimated losses on purchased components to the extent we believe it is probable that such components will not be utilized in future operations. To the extent that product forecasts are not achieved, our commitments and associated accruals may change. As of October 24, 2014, we had $253.2 million in non-cancelable purchase commitments with our contract manufacturers. In addition, we recorded a liability for firm, non-cancelable and unconditional purchase commitments with contract manufacturers for quantities in excess of our future demand forecasts through a charge to cost of product revenues. As of October 24, 2014 and April 25, 2014, such liability amounted to $8.7 million and $11.5 million, respectively, and is included in other current liabilities in our condensed consolidated balance sheets.
In addition to commitments with contract manufacturers and component suppliers, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not received goods or services. As of October 24, 2014, we had $73.3 million in capital purchase commitments and $197.0 million in other purchase commitments.
Product Warranties
We generally provide customers a warranty on software of ninety days and a warranty on hardware of three years. The following tables summarize the activity related to product warranty liabilities and their balances as reported in our condensed consolidated balance sheets (in millions):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
Balance at beginning of period	  	$	104.1	  	 	$	119.8	  	 	$	110.0	  	 	$	117.2	  	
Expense accrued during the period	  	 	8.3	  	 	 	14.3	  	 	 	18.8	  	 	 	38.3	  	
Warranty costs incurred	  	 	(15.8	) 	 	 	(18.1	) 	 	 	(32.2	) 	 	 	(39.5	) 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at end of period	  	$	96.6	  	 	$	116.0	  	 	$	96.6	  	 	$	116.0	  	

 	  	 	 	 	 	 	 	October 24,
2014	 	 	April 25,
2014	 	
Other current liabilities	  	 	 	 	 	 	 	 	 	$	64.2	  	 	$	73.0	  	
Other long-term liabilities	  	 	 	 	 	 	 	 	 	 	32.4	  	 	 	37.0	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	 	 	 	 	 	 	 	 	$	96.6	  	 	$	110.0	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Financing Guarantees
Some of our customers have entered into recourse and non-recourse financing leasing arrangements using third-party financing companies, and in some situations, we enter into customer financing arrangements for our products and services that are contemporaneously sold on a recourse or non-recourse basis to third-party financing companies. 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. Under the terms of the non-recourse leases, we do not have any continuing obligations or liabilities to the third-party financing companies. 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. We defer revenue associated with these advance payments until the related refund rights expire and we perform the services.
 
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The following schedule of financing guarantees represents the total maximum potential future payments under financing arrangements with third parties and the related deferred revenue (in millions):

 	  	October 24,
2014	 	 	April 25,
2014	 	
Maximum guaranteed payment contingencies	  	$	214.1	  	 	$	205.8	  	
Deferred revenue associated with financing guarantees	  	 	(197.4	) 	 	 	(193.1	) 	
 	  	 	 	 	 	 	 	 	
Net amount	  	$	16.7	  	 	$	12.7	  	
 	  	 	 	 	 	 	 	 	
To date, we have not experienced material losses under our lease financing programs or other financing arrangements.
Legal Contingencies
When a loss is considered probable and reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the likelihood of a loss with respect to a particular contingency is often difficult to predict, and determining a meaningful estimate of the loss or a range of loss may not be practicable based on the information available and the potential effect of future events and decisions by third parties that will determine the ultimate resolution of the contingency.
We are subject to various legal proceedings and claims that arise in the normal course of business. No accrual has been recorded as of October 24, 2014 related to such matters as they are not probable and/or reasonably estimable.
15.  Subsequent Event
On October 27, 2014, we completed the acquisition of Riverbed Technology, Inc.’s SteelStore product line for approximately $80.0 million in cash. The SteelStore product line supports leading backup applications and cloud providers so that customers have a choice in how they extend their existing data protection infrastructure into the cloud. We are in the process of completing the purchase price allocation for this acquisition. Pro forma results of operations have not been presented because the acquisition was not material to our results of operations.
 
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements are all statements (and their underlying assumptions) included in this document that refer, directly or indirectly, to future events or outcomes and, as such, are inherently not factual, but rather reflect only our current projections for the future. Consequently, forward-looking statements usually include words such as “estimate,” “intend,” “plan,” “predict,” “seek,” “may,” “will,” “should,” “would,” “could,” “anticipate,” “expect,” “believe,” or similar words, in each case, intended to refer to future events or circumstances. A non-comprehensive list of the topics including forward-looking statements in this document includes:
 
 	•	 	our future financial and operating results;	
 
 	•	 	our strategies;	
 
 	•	 	our beliefs and objectives for future operations, research and development;	
 
 	•	 	political, economic and industry trends;	
 
 	•	 	expected timing of, customer acceptance of and benefits from, product introductions, developments and enhancements;	
 
 	•	 	expected benefits from acquisitions and joint ventures, growth opportunities and investments;	
 
 	•	 	expected outcomes from legal, regulatory and administrative proceedings;	
 
 	•	 	our competitive position;	
 
 	•	 	our short-term and long-term cash requirements, including without limitation, anticipated capital expenditures;	
 
 	•	 	our anticipated tax rate;	
 
 	•	 	the repayment of our 2.00% Senior Notes due on December 15, 2017, 3.375% Senior Notes due on June 15, 2021 and 3.25% Senior Notes due on December 15, 2022 (collectively referred to as the Senior Notes);	
 
 	•	 	future uses of our cash, including, without limitation, the continuation of our stock repurchase and cash dividend programs.	
All forward-looking statements included in this document are inherently uncertain as they are based on management’s current expectations and assumptions concerning future events, and are subject to numerous known and unknown risks and uncertainties. Therefore, actual events and results may differ materially from these forward-looking statements. Factors that could cause actual results to differ materially from those described herein include, but are not limited to:
 
 	•	 	the overall growth and structure of the data storage industry;	
 
 	•	 	our ability to understand, and effectively respond to changes affecting, our market environment, products, technologies and customer requirements;	
 
 	•	 	general global political, macroeconomic and market conditions;	
 
 	•	 	our ability to accurately forecast demand for our products and services, and future financial performance;	
 
 	•	 	our ability to successfully manage our backlog;	
 
 	•	 	our ability to successfully execute on our strategy to generate profitable growth and stockholder return;	
 
 	•	 	disruptions in our supply chain, which could limit our ability to ship products to our customers in the amounts and at the prices forecasted;	
 
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 	•	 	our ability to maintain our customer, partner, supplier and contract manufacturer relationships on favorable terms and conditions;	
 
 	•	 	our ability to maintain our gross profit margins;	
 
 	•	 	our ability to timely and successfully introduce and increase volumes of new products and services and to forecast demand and pricing for the same;	
 
 	•	 	our ability to gain customer acceptance of new products;	
 
 	•	 	the actions of our competitors, most of which are larger and have greater financial and other resources than we have, including, without limitation, their ability to introduce competitive products and to acquire businesses and technologies that negatively impact our strategy, operations or customer demand for our products;	
 
 	•	 	the impact of industry consolidation affecting our suppliers, competitors, partners and customers;	
 
 	•	 	our ability to grow direct and indirect sales and to efficiently provide global service and support;	
 
 	•	 	our ability to design, manufacture and market products meeting global environmental standards;	
 
 	•	 	failure of our products and services to meet our customers’ quality requirements, including, without limitation, any epidemic failure event relating to our systems installed by our customers in their IT infrastructures;	
 
 	•	 	our ability to resolve ongoing litigation, tax audits, government audits, inquiries and investigations in line with our expectations;	
 
 	•	 	the availability of acceptable financing to support our future cash requirements;	
 
 	•	 	our ability to effectively integrate acquired businesses, products and technologies;	
 
 	•	 	valuation and liquidity of our investment portfolio;	
 
 	•	 	our ability to successfully recruit and retain critical employees and to manage our investment in people, process and systems;	
 
 	•	 	our ability to anticipate techniques used to obtain unauthorized access or to sabotage systems and to implement adequate preventative measures against cybersecurity and other security breaches; and	
 
 	•	 	those factors discussed under the heading “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q.	
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based upon information available to us at this time. These statements are not guarantees of future performance. We disclaim any obligation to update information in any forward-looking statement. Actual results could vary from our forward-looking statements due to the foregoing factors as well as other important factors.
 
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Overview
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 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
Net revenues	  	$	1,542.5	  	 	$	1,549.9	  	 	$	3,031.7	  	 	$	3,066.1	  	
Gross profit	  	$	982.5	  	 	$	965.2	  	 	$	1,920.6	  	 	$	1,874.8	  	
Gross profit margin percentage	  	 	63.7	% 	 	 	62.3	% 	 	 	63.4	% 	 	 	61.2	% 	
Income from operations	  	$	192.5	  	 	$	186.9	  	 	$	352.4	  	 	$	283.8	  	
Income from operations as a percentage of net revenues	  	 	12.5	% 	 	 	12.1	% 	 	 	11.6	% 	 	 	9.3	% 	
Net income	  	$	159.8	  	 	$	166.8	  	 	$	248.2	  	 	$	248.4	  	
Diluted net income per share	  	$	0.49	  	 	$	0.48	  	 	$	0.76	  	 	$	0.70	  	
Operating cash flows	  	$	381.4	  	 	$	362.5	  	 	$	596.9	  	 	$	648.3	  	
 	 	 	 	 	
 	  	 	 	 	 	 	 	October 24,
2014	 	 	April 25,
2014	 	
Deferred revenue	  	 	 	 	 	 	 	 	 	$	3,047.0	  	 	$	3,100.2	  	
Days sales outstanding (DSO)	  	 	 	 	 	 	 	 	 	 	37	  	 	 	47	  	
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.
The summary of significant accounting policies is included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended April 25, 2014. 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 of the accompanying condensed consolidated financial statements for a full description of new accounting pronouncements, including the respective expected dates of adoption and effects on results of operations and financial condition.
 
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Results of Operations
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 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
Revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Product	  	 	60.2	% 	 	 	61.6	% 	 	 	59.8	% 	 	 	61.5	% 	
Software entitlements and maintenance	  	 	14.6	  	 	 	15.0	  	 	 	14.7	  	 	 	15.0	  	
Service	  	 	25.2	  	 	 	23.4	  	 	 	25.5	  	 	 	23.5	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenues	  	 	100.0	  	 	 	100.0	  	 	 	100.0	  	 	 	100.0	  	
Cost of revenues:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cost of product	  	 	26.0	  	 	 	27.3	  	 	 	26.3	  	 	 	28.4	  	
Cost of software entitlements and maintenance	  	 	0.6	  	 	 	0.5	  	 	 	0.5	  	 	 	0.5	  	
Cost of service	  	 	9.7	  	 	 	9.9	  	 	 	9.8	  	 	 	9.9	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross profit	  	 	63.7	  	 	 	62.3	  	 	 	63.4	  	 	 	61.2	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Sales and marketing	  	 	31.6	  	 	 	30.9	  	 	 	32.0	  	 	 	30.9	  	
Research and development	  	 	14.9	  	 	 	14.7	  	 	 	15.1	  	 	 	14.9	  	
General and administrative	  	 	4.7	  	 	 	4.5	  	 	 	4.7	  	 	 	4.5	  	
Restructuring and other charges	  	 	—  	  	 	 	0.1	  	 	 	—  	  	 	 	1.6	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	  	 	51.2	  	 	 	50.2	  	 	 	51.8	  	 	 	51.9	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from operations	  	 	12.5	  	 	 	12.1	  	 	 	11.6	  	 	 	9.3	  	
Other income (expense), net	  	 	(0.2	) 	 	 	0.3	  	 	 	(0.1	) 	 	 	—  	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	  	 	12.3	  	 	 	12.4	  	 	 	11.5	  	 	 	9.3	  	
Provision for income taxes	  	 	1.9	  	 	 	1.6	  	 	 	3.3	  	 	 	1.2	  	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	 	10.4	% 	 	 	10.8	% 	 	 	8.2	% 	 	 	8.1	% 	
 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Discussion and Analysis of Results of Operations
Overview
Net revenues for the three and six months ended October 24, 2014 were $1,542.5 million, down $7.4 million, or less than 1%, and $3,031.7 million, down $34.4 million, or 1%, respectively, compared to the corresponding periods in the prior year, reflecting a decrease in product and software entitlements and maintenance (SEM) revenues, partially offset by an increase in hardware maintenance contract revenues.
Gross profit as a percentage of net revenues increased 1% during the three months ended October 24, 2014, compared to the corresponding periods in the prior year, reflecting higher gross margins on product revenues, primarily due to lower OEM revenues and warranty costs, partially offset by lower average selling prices (ASPs) on configured systems. Gross profit as a percentage of net revenues increased 2% during the six months ended October 24, 2014, compared to the corresponding period of the prior year, due to these same factors, as well as lower average unit materials cost on configured systems. In addition, gross margin percentages on service revenues were higher during the three and six months ended October 24, 2014, compared to the corresponding periods in the prior years.
Sales and marketing, research and development, and general and administrative expenses for the three and six months ended October 24, 2014 totaled $790.0 million, up 1% as a percentage of net revenues, and $1,568.2 million, up 2% as a percentage of net revenues, respectively, compared to the corresponding periods of the prior year, primarily due to increases in commissions in each of the three and six months ended October 24, 2014 and an increase in outside services and consulting fees in the six months ended October 24, 2014.
Net Revenues (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	 	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	
Net revenues	  	$	1,542.5	  	  	$	1,549.9	  	  	 	—  	% 	 	$	3,031.7	  	  	$	3,066.1	  	  	 	(1	)% 	
 
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The decrease in net revenues for the three months ended October 24, 2014 was primarily due to a decrease in product and SEM revenues of $26.2 million and $7.6 million, respectively, partially offset by an increase in service revenues of $26.4 million. Product revenues comprised 60% of net revenues for the three months ended October 24, 2014, compared to 62% of net revenues for the three months ended October 25, 2013.
The decrease in net revenues for the six months ended October 24, 2014 was primarily due to a decrease in product and SEM revenues of $74.4 million and $14.8 million, respectively, partially offset by an increase in service revenues of $54.8 million. Product revenues comprised 60% of net revenues for the six months ended October 24, 2014, compared to 62% of net revenues for the six months ended October 25, 2013.
Sales through our indirect channels represented 80% of net revenues for each of the three and six months ended October 24, 2014, compared to 83% and 81% of net revenues for the corresponding periods of the prior year. Included in indirect channel sales were $118.6 million and $247.3 million of OEM revenue during the three and six months ended October 24, 2014, respectively, compared to $151.1 million and $317.6 million during the corresponding periods in 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 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
 	 	 	 	 	
Arrow Electronics, Inc.	  	 	24	% 	 	 	23	% 	 	 	23	% 	 	 	22	% 	
Avnet, Inc.	  	 	17	% 	 	 	16	% 	 	 	17	% 	 	 	16	% 	
Product Revenues (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	 	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	
Product revenues	  	$	929.1	  	  	$	955.3	  	  	 	(3	)% 	 	$	1,811.7	  	  	$	1,886.1	  	  	 	(4	)% 	
Product revenues consist of configured systems, which include bundled hardware and software products, and non-configured products, which consist primarily of add-on storage, OEM products and add-on hardware and software products.
Total configured system revenues of $557.9 million decreased by $8.7 million for the three months ended October 24, 2014, compared to the corresponding period of the prior year. Revenues from FAS mid-range systems and E-Series systems (which includes our all flash EF systems) increased, but were offset by decreases in FAS entry level and high-end systems. Total configured systems unit volume increased 6%, primarily due to a unit volume increase in the FAS mid-range systems and E Series platforms, but was partially offset by a decrease in unit volume of the FAS entry level systems. These changes in unit volume reflect a shift in customer demand to our newer FAS mid-range and higher demand for our E-Series systems, and away from our older FAS entry level systems. ASPs decreased across all FAS system and E Series platforms due to higher demand of newer lower priced products within their respective platform. As a result, overall ASPs of configured systems were lower in the three months ended October 24, 2014, compared to the corresponding period of the prior year.
Non-configured product revenues of $371.2 million decreased $34.8 million, or 9%, during the three months ended October 24, 2014, compared to the corresponding period of the prior year. This decrease was primarily due to lower revenues from non-configured OEM products, which declined 22%, and add-on storage, which declined 28%, but was offset by a 175% increase in revenues from add-on software. The decrease in add-on storage and increase in add-on software are largely due to the change in our pricing strategy that was effective in the fourth quarter of fiscal 2014, whereby we now charge for operating system software for storage capacity but have lowered prices on storage hardware.
Total configured system revenues of $1,084.1 million decreased by $2.0 million for the six months ended October 24, 2014, compared to the corresponding period of the prior year. Revenues from FAS mid-range and E-Series systems increased, but were offset by decreases in FAS entry level systems. Total configured systems unit volume increased 2% primarily due to a unit volume increase in the FAS mid-range and high-end systems and E Series platforms, partially offset by a decrease in unit volume of the FAS entry level systems. These changes in unit volume reflect a shift in customer demand to our newer FAS mid-range and high-end products and higher demand for our E-Series systems, and away from our older FAS entry level systems. ASPs decreased across all FAS system and E Series due to higher demand of newer lower priced products within their respective platform. As a result, overall ASPs of configured systems were lower in the six months ended October 24, 2014, compared to the corresponding period of the prior year.
 
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Non-configured product revenues of $727.6 million decreased $72.3 million, or 9%, during the six months ended October 24, 2014, compared to the corresponding period of the prior year. This decrease was primarily due to lower revenues from non-configured OEM products, which declined 23%, and add-on storage, which declined 21%, but was partially offset by a 129% increase in revenues from add-on software. The decrease in add-on storage and increase in add-on software are largely due to the change in our pricing strategy discussed above.
Our systems are highly configurable to respond to customer requirements in the open systems storage markets that we serve. This can cause a wide variation in product configurations that can significantly impact revenues, cost of revenues and gross profits. Pricing changes, discounting practices, product competition, foreign currency, unit volumes, customer mix, natural disasters and product materials costs can also impact revenues, cost of revenues and/or gross profits. Disks are a significant component of our storage systems. While our sales price per terabyte historically declines over time, improved system performance, increased capacity and software to manage this increased capacity have an offsetting favorable impact on product revenues.
Software Entitlements and Maintenance Revenues (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	 	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	
Software entitlements and maintenance revenues	  	$	224.2	  	  	$	231.8	  	  	 	(3	)% 	 	$	445.5	  	  	$	460.3	  	  	 	(3	)% 	
SEM revenues are associated with contracts which entitle customers to receive unspecified product upgrades and enhancements on a when-and-if-available basis, as well as bug fixes and patch releases.
The decrease in SEM revenues for the three and six months ended October 24, 2014 was due to a decrease in the aggregate contract value of the installed base under SEM contracts.
Service Revenues (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	 	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	
Service revenues	  	$	389.2	  	  	$	362.8	  	  	 	7	% 	 	$	774.5	  	  	$	719.7	  	  	 	8	% 	
Service revenues include hardware maintenance, professional services, and educational and training services.
Hardware maintenance contract revenues comprised 80% and 79% of service revenues for the three and six months ended October 24, 2014, respectively, compared to 76% for each of the three and six months ended October 25, 2013. These revenues increased $34.6 million, or 13%, and $63.8 million, or 12%, during the three and six months ended October 24, 2014, respectively, compared to the corresponding periods in the prior year, as a result of increases in the installed base and aggregate contract values under service contracts. Professional services and educational and training services comprised 20% and 21% of service revenues for the three and six months ended October 24, 2014, respectively, and 24% of service revenues for each of the three and six months ended October 25, 2013, respectively.
Revenues by Geographic Area:

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	 	October 24,
2014	 	 	October 25,
2013	 	
Americas (United States, Canada and Latin America)	  	 	59	% 	 	 	58	% 	 	 	57	% 	 	 	57	% 	
Europe, Middle East and Africa	  	 	28	  	 	 	29	  	 	 	29	  	 	 	29	  	
Asia Pacific	  	 	13	  	 	 	13	  	 	 	14	  	 	 	14	  	
Americas revenues consist of sales to Americas commercial and U.S. public sector markets. Americas revenues were favorably impacted by higher revenues from the U.S. public sector markets in the three months ended October 24, 2014, compared to the corresponding period in the prior year.
 
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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 SEM, which includes the costs of providing SEM and third-party royalty costs and (3) cost of service revenues, which includes costs associated with providing support activities for hardware maintenance, global support partnership programs, professional services and educational and training services.
Our gross profit is impacted by a variety of factors, including pricing changes, discounting practices, foreign currency, product configuration, unit volumes, customer mix, revenue mix, natural disasters and product material costs. Service gross profit is typically impacted by factors such as changes in the size of our installed base of products, as well as the timing of support service initiations and renewals, and incremental investments in our customer support infrastructure. If any of these factors that impact our gross profit are adversely affected, whether by economic uncertainties or for other reasons, our gross profit could decline.
Cost of Product Revenues (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	 	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	
Cost of product revenues	  	$	401.8	  	  	$	423.3	  	  	 	(5	)% 	 	$	796.0	  	  	$	873.2	  	  	 	(9	)% 	
The changes in cost of product revenues consisted of the following (in percentage points of the total change):

 	  	Three Months Ended
Fiscal  2015 to Fiscal 2014
Percentage Change
Points	 	 	Six Months Ended
Fiscal  2015 to Fiscal 2014
Percentage Change
Points	 	
Materials cost	  	 	(1	) 	 	 	(5	) 	
Warranty	  	 	(1	) 	 	 	(2	) 	
Excess and obsolete inventory	  	 	(1	) 	 	 	(1	) 	
Other	  	 	(2	) 	 	 	(1	) 	
 	  	 	 	 	 	 	 	 	
Total change	  	 	(5	) 	 	 	(9	) 	
 	  	 	 	 	 	 	 	 	
Cost of product revenues represented 43% and 44% of product revenues for the three and six months ended October 24, 2014, respectively, compared to 44% and 46% for the corresponding period of the prior year. As a result, product gross margin percentages were 57% and 56% for the for the three and six months ended October 24, 2014, respectively compared to 56% and 54% for the corresponding period of the prior year.
Materials cost represented 86% and 83% of product costs for the three months ended October 24, 2014 and October 25, 2013, respectively. Materials cost decreased $5.4 million in the three months ended October 24, 2014, compared to the corresponding period of the prior year. Material costs were impacted by a 6% unit volume increase in configured systems in the three months ended October 24, 2014. Overall materials unit cost for configured systems increased slightly due to an increase in average unit materials cost of our FAS entry level systems, partially offset by a decrease in average unit materials costs of our FAS high end and E-Series systems, as well as changes in product mix. However, this increase in average materials unit cost was offset by lower OEM product volume and lower materials cost of add-on hardware. In addition, cost of product revenues were favorably impacted by decreases of $6.1 million in warranty expense and $2.3 million in excess and obsolete inventory write-downs.
Materials cost represented 86% and 83% of product costs for the six months ended October 24, 2014 and October 25, 2013, respectively. Materials cost decreased $42.1 million in the six months ended October 24, 2014, compared to the corresponding period of the prior year. Material costs were impacted by a 2% unit volume increase in configured systems in the six months ended October 24, 2014, compared to the corresponding period of the prior year. Overall materials unit cost for configured systems decreased slightly due to a decrease in average unit materials costs across all of our FAS systems and E-Series platforms, as well as changes in product mix and supply chain cost savings. Additionally, total material costs decreased due to lower OEM product volume and lower materials cost of add-on hardware. Cost of product revenues were also favorably impacted by decreases of $19.5 million in warranty expense and $5.9 million in excess and obsolete inventory write-downs.
 
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Cost of Software Entitlements and Maintenance Revenues (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	 	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	
Cost of software entitlements and maintenance revenues	  	$	8.6	  	  	$	7.5	  	  	 	15	% 	 	$	16.8	  	  	$	15.0	  	  	 	12	% 	
Cost of SEM revenues increased primarily due to higher royalty costs and software maintenance costs in the three and six months ended October 24, 2014, compared to the three and six months ended October 25, 2013. Cost of SEM revenues represented 4% of SEM revenues for each of the three and six months ended October 24, 2014 compared to 3% for each of the three and six months ended October 25, 2013.
Cost of Service Revenues (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	 	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	
Cost of service revenues	  	$	149.6	  	  	$	153.9	  	  	 	(3	)% 	 	$	298.3	  	  	$	303.1	  	  	 	(2	)% 	
Cost of service revenues decreased during the three and six months ended October 24, 2014, compared to the three and six months ended October 25, 2013, primarily due to lower logistics, materials rework and service delivery costs, partially offset by an increase in spares materials costs. Costs represented 38% and 42% of service revenues for the three months ended October 24, 2014 and October 25, 2013, respectively, and represented 39% and 42% of service revenues for the six months ended October 24, 2014 and October 25, 2013, respectively.
Operating Expenses
Sales and Marketing, Research and Development and General and Administrative Expenses
Compensation costs comprise 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 were flat for the three and six months ended October 24, 2014 and October 25, 2013, compared to the corresponding periods in the prior year, and the components within such costs did not fluctuate significantly.
Sales and Marketing (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	 	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	
Sales and marketing expenses	  	$	488.0	  	  	$	479.5	  	  	 	2	% 	 	$	968.2	  	  	$	947.3	  	  	 	2	% 	
Sales and marketing expenses consist primarily of compensation costs, commissions, outside services, allocated facilities and information technology costs, advertising and marketing promotional expense, and travel and entertainment expense. Sales and marketing expenses increased due to the following:

 	  	Three Months Ended
Fiscal  2015 to Fiscal 2014
Percentage Change
Points	 	  	Six Months Ended
Fiscal  2015 to Fiscal 2014
Percentage Change
Points	 	
Commissions	  	 	2	  	  	 	2	  	
 	  	 	 	 	  	 	 	 	
Total change	  	 	2	  	  	 	2	  	
 	  	 	 	 	  	 	 	 	
Commissions expense increased during the three and six months ended October 24, 2014 reflecting higher bookings achievement compared to the corresponding periods in the prior year.
 
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Research and Development (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	 	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	
Research and development expenses	  	$	229.0	  	  	$	228.2	  	  	 	—  	% 	 	$	457.0	  	  	$	456.3	  	  	 	—  	% 	
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. The changes in research and development expense consisted of the following:

 	  	Three Months Ended
Fiscal  2015 to Fiscal 2014
Percentage Change
Points	 	 	Six Months Ended
Fiscal  2015 to Fiscal 2014
Percentage Change
Points	 	
Outside services	  	 	1	  	 	 	1	  	
Development projects	  	 	(1	) 	 	 	(1	) 	
 	  	 	 	 	 	 	 	 	
Total change	  	 	—  	  	 	 	—  	  	
 	  	 	 	 	 	 	 	 	
Outside services expense during the three and six months ended October 24, 2014 increased due to higher spending on contractors. The decrease in development projects expense during the three and six months ended October 24, 2014 reflects lower spending on materials and services associated with engineering activities to develop new product lines and enhancements to existing products.
We believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. We expect to continue to spend on current and future product development efforts, broaden our existing product offerings and introduce new products that expand our solutions portfolio.
General and Administrative (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	 	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	
General and administrative expenses	  	$	73.0	  	  	$	69.5	  	  	 	5	% 	 	$	143.0	  	  	$	137.9	  	  	 	4	% 	
General and administrative expenses consist primarily of compensation costs, professional and corporate legal fees, outside services and allocated facilities and IT support costs. General and administrative expense increased due to the following:

 	  	Three Months Ended
Fiscal  2015 to Fiscal 2014
Percentage Change
Points	 	  	Six Months Ended
Fiscal  2015 to Fiscal 2014
Percentage Change
Points	 	
Compensation costs	  	 	1	  	  	 	—  	  	
Professional and legal fees and outside services	  	 	3	  	  	 	1	  	
Bad debt expense	  	 	1	  	  	 	1	  	
Other	  	 	—  	  	  	 	2	  	
 	  	 	 	 	  	 	 	 	
Total change	  	 	5	  	  	 	4	  	
 	  	 	 	 	  	 	 	 	
The increase in compensation costs for the three months ended October 24, 2014 is primarily due to higher salaries, and stock-based compensation expense, reflecting an increase in headcount, partially offset by lower incentive compensation and benefits expenses. The increase in professional and legal fees and outside services for the three months and six months ended October 24, 2014 reflects higher spending levels on contractors and professional services. Bad debt expense for the three and six months ended October 24, 2014 increased $0.6 million and $1.7 million, respectively, compared to the corresponding periods in the prior year.
Restructuring and other charges (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	 	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	
Restructuring and other charges	  	$	—  	  	  	$	1.1	  	  	 	(100	)% 	 	$	—  	  	  	$	49.5	  	  	 	(100	)% 	
 
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In March 2014 and May 2013, we initiated business realignment plans designed to focus our resources on key strategic initiatives and streamline our business in light of the constrained IT spending environment, resulting in a reduction of our global workforce. The charges for the three and six months ended October 25, 2013 represent employee severance costs recognized in connection with the May 2013 restructuring plan. We completed all activities under the May 2013 plan during fiscal 2014, and have substantially completed activities under the March 2014 plan in the second quarter of fiscal 2015.
Other Income (Expense), Net
Interest Income (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	 	October  24,
2014	 	  	October  25,
2013	 	  	% Change	 	
Interest income	  	$	8.1	  	  	$	8.5	  	  	 	(5	)% 	 	$	16.4	  	  	$	18.5	  	  	 	(11	)% 	
The decrease in interest income during the three and six months ended October 24, 2014 was primarily due to a decrease in our average investment portfolio compared to the corresponding periods in the prior year.
Interest Expense (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October  24,
2014	 	 	October  25,
2013	 	 	% Change	 	 	October  24,
2014	 	 	October  25,
2013	 	 	% Change	 	
Interest expense	  	$	(10.9	) 	 	$	(6.5	) 	 	 	68	% 	 	$	(19.9	) 	 	$	(23.0	) 	 	 	(13	)% 	
Interest expense, including the amortization of debt discount and issuance costs, is related to our Senior Notes and Convertible Notes as summarized below:

 	  	Three Months Ended	 	  	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	October 24,
2014	 	  	October 25,
2013	 	
Senior Notes	  	$	10.6	  	  	$	6.2	  	  	$	19.4	  	  	$	12.5	  	
Convertible Notes	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	10.2	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	10.6	  	  	$	6.2	  	  	$	19.4	  	  	$	22.7	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
The increase in interest expense related to our Senior Notes reflects the issuance of our 3.375% Senior Notes due 2021 in June 2014, and the decrease in interest expense related to our Convertible Notes reflects their maturity in June 2013.
Other Income (Expense), Net (in millions, except percentages):

 	  	Three Months Ended	 	  	Six Months Ended	 	
 	  	October 24,
2014	 	 	October 25,
2013	 	  	% Change	 	  	October 24,
2014	 	 	October 25,
2013	 	  	% Change	 	
Other income (expense), net	  	$	(0.8	) 	 	$	3.3	  	  	 	NM	  	  	$	(0.3	) 	 	$	5.2	  	  	 	NM	  	
 
NM - Not Meaningful
The changes in other income (expense), net for the three and six months ended October 24, 2014 compared to the corresponding period in the prior year is primarily due to higher net foreign exchange losses.
Provision for Income Taxes (in millions, except percentages):

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	 	October 24,
2014	 	  	October 25,
2013	 	  	% Change	 	
Provision for income taxes	  	$	29.1	  	  	$	25.4	  	  	 	15	% 	 	$	100.4	  	  	$	36.1	  	  	 	178	% 	
 
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Our effective tax rate for the three months ended October 24, 2014 was 15.4% compared to an effective tax rate of 13.2% for the three months ended October 25, 2013. Our effective tax rate for the six months ended October 24, 2014 was 28.8% compared to an effective tax rate of 12.7% for the six months ended October 25, 2013. 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 during the three and six months ended October 24, 2014 and October 25, 2013, respectively, were favorably impacted by the geographic mix of profits. Our effective tax rate increased for the three and six months ended October 24, 2014 compared to the corresponding periods in the prior year, primarily as a result of discrete provision charges related to audit settlements as discussed below. Higher pre-tax profits and a lapse of the federal research credit statute also contributed to the increases in the effective tax rate.
In July 2014, the Internal Revenue Service (IRS) completed the examination of our fiscal 2005 to 2007 income tax returns upon approval by the Joint Committee of Taxation. We recorded a $47.4 million tax provision attributable to the audit settlement and related re-measurement of uncertain tax positions for tax years subject to future audits. The conclusion of the fiscal 2005 to 2007 income tax audit resulted in a net refund of $8.0 million, excluding interest.
In October 2014, the United Kingdom’s (UK’s) tax authority concluded the examination of our fiscal 2009 to 2012 UK income tax returns. We recorded a $1.0 million income tax benefit for the net impact of the audit adjustments and related release of unrecognized tax benefits.
As of October 24, 2014, we had $274.5 million of gross unrecognized tax benefits, of which $220.2 million has been recorded in other long-term liabilities. Unrecognized tax benefits of $168.2 million, including penalties, interest and indirect benefits, would affect our provision for income taxes if recognized. During the six months ended October 24, 2014, there was an increase in our unrecognized tax benefits of $12.7 million for tax positions related to the current year, a gross increase of $98.8 million and a gross decrease, including statute lapses, of $18.6 million for tax positions related to prior years. We also recorded a gross decrease of $54.3 million related to settlements with taxing authorities during the period.
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.
Liquidity and Capital Resources
The following sections discuss our principal liquidity requirements, as well as our sources and uses of cash flows on our liquidity and capital resources. 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 24, 2014.
Liquidity, Capital Resources and Cash Requirements

($ in Millions)	  	October 24, 2014	 	 	April 25, 2014	 	
Cash and cash equivalents and short-term investments	  	$	5,269.4	  	 	$	5,003.3	  	
Principal amount of Senior Notes	  	 	1,500.0	  	 	 	1,000.0	  	
Debt as a % of stockholders’ equity	  	 	43	% 	 	 	26	% 	
The following is a summary of our cash flows activities:

 	 	
 	  	Six Months Ended	 	
(In Millions)	  	October 24, 2014	 	 	October 25, 2013	 	
Net cash provided by operating activities	  	$	596.9	  	 	$	648.3	  	
Net cash provided by investing activities	  	 	250.7	  	 	 	568.0	  	
Net cash used in financing activities	  	 	(212.6	) 	 	 	(2,239.9	) 	
Effect of exchange rate changes on cash and cash equivalents	  	 	(20.8	) 	 	 	7.0	  	
 	  	 	 	 	 	 	 	 	
Net increase (decrease) in cash and cash equivalents	  	$	614.2	  	 	$	(1,016.6	) 	

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Cash Flows
As of October 24, 2014, our cash, cash equivalents and short-term investments increased by $0.3 billion from April 25, 2014 to $5.3 billion. The increase was primarily due to $494.7 million of net proceeds received from the issuance of long-term debt and $596.9 million of cash provided by operating activities, partially offset by $718.9 million in cash paid for the repurchase of our common stock. Accounts receivable days sales outstanding as of October 24, 2014 decreased to 37 days from 47 days as of April 25, 2014, reflecting improvements in shipment linearity. Working capital increased by $221.4 million to $4.0 billion as of October 24, 2014 primarily as a result of increases in cash, cash equivalents and short-term investments and accounts receivable, partially offset by a decrease in accrued compensation and other current liabilities.
Cash Flows from Operating Activities
The primary sources of cash from operating activities during the six months ended October 24, 2014 consisted of net income of $248.2 million, adjusted by non-cash depreciation and amortization of $155.1 million and stock-based compensation of $130.1 million.
Changes in assets and liabilities as of October 24, 2014 included the following:
 
 	•	 	Accounts receivable decreased $222.4 million in the six months ended October 24, 2014 and decreased $209.3 million in the six months ended October 25, 2013, reflecting seasonal improvement of shipment linearity in the second quarter of our fiscal years compared to the fourth quarter of our fiscal years.	
 
 	•	 	Accrued compensation and related benefits decreased $136.5 million due primarily to employee compensation payouts related to fiscal year 2014 incentive compensation plans and restructuring obligations, compared to $102.4 million for the corresponding period of the prior year, reflecting higher incentive compensation plan payouts in the current period.	
We expect that cash provided by operating activities may materially fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, 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 six months ended October 24, 2014, we generated $361.1 million from maturities and sales of investments, net of purchases, and paid $109.5 million for capital expenditures, compared to $672.1 million and $107.5 million, respectively, in the corresponding period of the prior year.
Cash Flows from Financing Activities
During the six months ended October 24, 2014, we generated $494.7 million, net, from the issuance of long-term debt and used $718.9 million for the repurchase of 18.4 million shares of our common stock and $105.5 million for the payment of dividends, compared to $1,000.0 million used for the repurchase of common stock and $102.7 million for the payment of dividends in the corresponding period of the prior year. In addition, we repaid $1,264.9 million of our Convertible Debt in the prior year.
Liquidity
Our principal sources of liquidity as of October 24, 2014 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 consist of the following (in millions):

 	  	October 24, 2014	 	  	April 25, 2014	 	
Cash and cash equivalents	  	$	2,905.2	  	  	$	2,291.0	  	
Short-term investments	  	 	2,364.2	  	  	 	2,712.3	  	
 	  	 	 	 	  	 	 	 	
Total	  	$	5,269.4	  	  	$	5,003.3	  	

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As of October 24, 2014 and April 25, 2014, $4.4 billion and $4.3 billion, respectively, of cash, cash equivalents and short-term investments was held by various foreign subsidiaries and was generally based in U.S. dollar-denominated holdings, while $0.9 billion and $0.7 billion, respectively, was available in the United States. Most of the amounts held outside the United States can be repatriated to the United States but, under current law, would be subject to U.S. federal, state income and foreign withholding taxes. If we were to repatriate foreign earnings for cash requirements in the United States, we would incur U.S. federal and state income taxes reduced by the current amount of our U.S. federal and state tax credit carry forwards. However, our intent is to keep these funds permanently reinvested outside of the United States, 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, invest in critical or complementary technologies, and service interest and principal payments on our debt.
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 and inventories, the timing and amount of stock repurchases and payment of cash dividends, 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.
Our investment portfolio, including auction rate securities, 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 24, 2014 (in millions):

2.00% Senior Notes Due 2017	  	$	750.0	  	
3.375% Senior Notes Due 2021	  	 	500.0	  	
3.25% Senior Notes Due 2022	  	 	250.0	  	
 	  	 	 	 	
Total	  	$	1,500.0	  	
 	  	 	 	 	
Interest on the Senior Notes is payable semi-annually. For further information on the underlying terms, see Note 7 of the accompanying condensed consolidated financial statements.
Credit Facility
Our credit facility, under which we may borrow up to $250.0 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 $100.0 million and request two additional one-year extensions, subject to certain conditions. As of October 24, 2014, no borrowings were outstanding under the facility and we were in compliance with all covenants associated with the facility.
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.
 
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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. Our capital expenditures were $109.5 million during the six months ended October 24, 2014. We anticipate capital expenditures for the remainder of fiscal 2015 to be between $100.0 million and $150.0 million.
Acquisition Requirements
On October 27, 2014, we completed the acquisition of Riverbed Technology Inc.’s SteelStore product line for approximately $80.0 million in cash. The SteelStore product line supports leading backup applications and cloud providers so that customers have a choice in how they extend their existing data protection infrastructure into the cloud.
Dividends and Stock Repurchase Program
On November 12, 2014, we declared a cash dividend of $0.165 per share of common stock, payable on January 22, 2015 to holders of record as of the close of business on January 9, 2015.
Our Board of Directors has authorized the repurchase of up to $7.1 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 24, 2014, we repurchased a total of 202.7 million shares of our common stock at an average price of $33.14 per share, for an aggregate purchase price of $6.7 billion. As of October 24, 2014, the remaining authorized amount for stock repurchases under this program was $405.9 million with no termination date, which we plan to complete by May 2015.
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 24, 2014, future annual minimum lease payments under non-cancelable operating leases with an initial term in excess of one year totaled $206.5 million.
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. We establish accruals for estimated losses on purchased components to the extent we believe it is probable that such components will not be utilized in future operations. To the extent that product forecasts are not achieved, our commitments and associated accruals may change. As of October 24, 2014, we had $253.2 million in non-cancelable purchase commitments with our contract manufacturers. In addition, we recorded a liability for firm, non-cancelable and unconditional purchase commitments with contract manufacturers for quantities in excess of our future demand forecasts through a charge to cost of product revenues. As of October 24, 2014 and April 25, 2014, such liability amounted to $8.7 million and $11.5 million, respectively, and is included in other current liabilities in our condensed consolidated balance sheets.
In addition to commitments with contract manufacturers and component suppliers, we have open purchase orders and contractual obligations associated with our ordinary course of business for which we have not received goods or services. As of October 24, 2014, we had $73.3 million in capital purchase commitments and $197.0 million in other purchase commitments.
Unrecognized Tax Benefits
As of October 24, 2014, our liability for uncertain tax positions was $198.5 million, including penalties, interest and 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.
 
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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 14 to our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
In the ordinary course of business, we provide standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated either by us or our subsidiaries. As of October 24, 2014, our financial guarantees of $10.6 million that were not recorded on our consolidated balance sheet consisted of standby letters of credit and surety bonds.
In the ordinary course of business, some of our customers have entered into recourse and non-recourse financing leasing arrangements using third-party financing companies, and in some situations, we enter into customer financing arrangements for our products and services that are contemporaneously sold on a recourse or non-recourse basis to third-party financing companies. During 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. 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. We defer revenue associated with these advance payments until the related refund rights expire and we perform the services. As of October 24, 2014, the maximum guaranteed payment contingencies under our financing arrangements totaled $214.1 million and the related deferred revenue totaled $197.4 million.
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.
 
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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk related to fluctuations in interest rates, market prices, and foreign currency exchange rates. We use certain derivative financial instruments to manage foreign currency exchange risks. We do not use derivative financial instruments for speculative or trading purposes. All financial instruments are used in accordance with management-approved policies.
Market Risk and Market Interest Risk
Investment and Interest Income — As of October 24, 2014, we had debt investments of $2.4 billion. Our investment portfolio primarily consists of investments with original maturities greater than three months at the date of purchase, which are classified as available-for-sale investments. These investments, which consist primarily of corporate bonds, commercial paper, certificates of deposit, U.S. Treasury securities and U.S. government agency securities, are subject to interest rate and interest income risk and will decrease in value if market interest rates increase. Conversely, declines in interest rates, including the impact from lower credit spreads, could have a material adverse impact on interest income for our investment portfolio. A hypothetical 100 basis point increase in market interest rates from levels as of October 24, 2014 would have resulted in a decrease in the fair value of our fixed-income securities of approximately $19 million. Volatility in market interest rates over time will cause variability in our interest income. We do not use derivative financial instruments in our investment portfolio.
Our investment policy is to limit credit exposure through diversification and investment in highly rated securities. We further mitigate concentrations of credit risk in our investments by limiting our investments in the debt securities of a single issuer and by diversifying risk across geographies and type of issuer. We actively review, along with our investment advisors, current investment ratings, company-specific events and general economic conditions in managing our investments and in determining whether there is a significant decline in fair value that is other-than-temporary. We monitor and evaluate our investment portfolio on a quarterly basis for any other-than-temporary impairments.
We are also exposed to market risk relating to our auction rate securities (ARSs) due to uncertainties in the credit and capital markets. As of October 24, 2014, our holdings in these securities had a par value of $23.3 million and an estimated fair value of $23.0 million. The fair value of our ARSs may change significantly due to events and conditions in the credit and capital markets. These securities/issuers could be subject to review for possible downgrade. Any downgrade in these credit ratings may result in an additional decline in the estimated fair value of our ARSs. Changes in the various assumptions used to value these securities and any increase in the market’s perceived risk associated with such investments may also result in a decline in the estimated fair value.
Debt — As of October 24, 2014, we have outstanding $1.5 billion aggregate principal amount of Senior Notes. We carry these instruments at face value less unamortized discount on our condensed consolidated balance sheets. Since these instruments bear interest at fixed rates, we have no financial statement risk associated with changes in interest rates. However, the fair value of these instruments fluctuates when interest rates change. See Note 7 of the accompanying consolidated financial statements for more information.
Credit Facility — We are exposed to the impact of changes in interest rates in connection with our $250.0 million five-year revolving credit facility. Borrowings under the facility accrue interest at rates that vary based on certain market rates and our credit rating on our Senior Notes. Consequently, our interest expense would fluctuate with any changes in these market interest rates or in our credit rating if we were to borrow any amounts under the credit facility. As of October 24, 2014, no amounts were outstanding under the credit facility.
Foreign Currency Exchange Rate Risk
We hedge risks associated with foreign currency transactions to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize foreign currency exchange forward and option contracts to hedge against the short-term impact of foreign currency fluctuations on certain foreign-currency-denominated monetary assets and liabilities. We also use foreign currency exchange forward contracts to hedge foreign currency exposures related to forecasted sales transactions denominated in certain foreign currencies. These derivatives are designated and qualify as cash flow hedges under accounting guidance for derivatives and hedging.
We do not enter into foreign currency exchange contracts for speculative or trading purposes. In entering into foreign currency exchange forward and option contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of the contracts. We attempt to limit our exposure to credit risk by executing foreign exchange contracts with creditworthy multinational commercial banks. All contracts have a maturity of less than six months.
 
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The following table provides information about our U.S. dollar equivalent foreign currency exchange forward contracts outstanding on October 24, 2014 and April 25, 2014 (in millions):

 	  	October 24, 2014	 	  	April 25, 2014	 	
 	  	Notional
Contract
Amount	 	  	Notional
Contract
Amount	 	
Forward contracts sold	  	$	187.4	  	  	$	155.5	  	
Forward contracts purchased	  	 	456.4	  	  	 	512.5	  	
The fair value of these contracts did not differ materially from their notional contract amounts.
 
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Item 4.  Controls and Procedures.
Disclosure Controls and Procedures
The phrase “disclosure controls and procedures” refers to controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the Exchange Act), such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (SEC). Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of October 24, 2014, the end of the fiscal period covered by this Quarterly Report on Form 10-Q (the Evaluation Date). Based on this evaluation, our CEO and CFO concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information required to be disclosed in our SEC reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with our evaluation that occurred during the second quarter of fiscal 2015 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
 
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PART II — OTHER INFORMATION
Item 1.  Legal Proceedings.
None
Item 1A.  Risk Factors.
The following risk factors and other information included elsewhere in this Quarterly Report on Form 10-Q should be considered and understood in the context of the following risk factors, which describe circumstances that may materially harm our future business, operating results or financial condition. The following discussion reflects our current judgment regarding the most significant risks we face. These risks can and will change in the future.
Our business may be harmed by trends in the storage market or if we are unable to keep pace with rapid industry, technological and market changes.
Our industry and the markets in which we compete have historically experienced significant growth due to the increase in the demand for storage solutions by consumers, enterprises and government bodies around the world, and the resultant purchases of storage solutions to address this demand. However, despite continued data growth, the storage market did not experience growth in calendar year 2013 due to a combination of customers delaying purchases in the face of technology transitions, increased storage efficiency, and changing economic and business environments. Recent technology trends, such as the emergence of cloud storage, software as a service (SaaS) and flash storage and converged architectures are driving significant changes in storage architectures and solution requirements. The impact of these trends on both short-term and long-term growth patterns is uncertain. If the general historical rate of industry growth declines, if the growth rates of the specific markets in which we compete decline, or if the consumption model of storage changes and our new and existing products and solutions do not receive customer acceptance, our business, operating results and financial condition could suffer.
Continuing uncertain economic and political conditions restrict our visibility and may harm our operating results, including our revenue growth and profitability.
The continuing global economic uncertainty and political and fiscal challenges in the United States (U.S.) and abroad due to the financial and fiscal crises of recent years have, among other things, limited our ability to forecast future demand for our products, contributed to increased periodic volatility in the computer, storage, and networking industries at large, as well as the information technology (IT) market, and could constrain future access to capital for our suppliers, customers and partners. The impacts of these circumstances are global and pervasive, and the timing and nature of any ultimate resolution of these matters remain highly uncertain. Additionally, budgetary constraints and shifts in government spending priorities have caused, and may in the future again cause, governments, including the U.S. government, to decrease purchases of storage equipment. Consequently, we expect these concerns to challenge our business for the foreseeable future, and potentially cause harm to our operating results. Such conditions have resulted, and may in the future again result in failure to meet our forecasted financial expectations and to achieve historical levels of revenue growth.
Our quarterly operating results may fluctuate materially, which could harm our common stock price.
Our operating results have fluctuated in the past and will continue to do so, sometimes materially. All of the matters discussed in this Risk Factor section could impact our operating results in any fiscal quarter or year. In addition to those matters, we face the following issues which could impact our quarterly results:
 
 	•	 	Seasonality, such as our historical seasonal decline in revenues in the first quarter of our fiscal year and seasonal increase in revenues in the second quarter of our fiscal year, with the latter due in part to the impact of the U.S. federal government’s September 30 fiscal year end on the timing of its orders; and	
 
 	•	 	Linearity, such as our historical intra-quarter bookings and revenue pattern in which a disproportionate percentage of each quarter’s total bookings and related revenue occur in the last month of the quarter.	
If our operating results fall below our forecasts and the expectations of public market analysts and investors, the trading price of our common stock would likely decline.
 
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Our sales and distribution structure makes forecasting revenues difficult and, if disrupted, could harm our operating results.
Our business and sales models make revenues difficult to forecast. We sell to a variety of customers, with a corresponding variety of sales cycles. In addition, the majority of our sales are made and/or fulfilled indirectly through channel partners, including value-added resellers, systems integrators, distributors, original equipment manufacturers (OEMs) and strategic business partners. During the six months ended October 24, 2014, revenues generated from sales through our indirect channel accounted for 80% of net revenues. This structure significantly complicates our ability to forecast future revenue, particularly within any particular fiscal quarter or year. Moreover, our relationships with our indirect channel partners are critical to our success. The loss of one or more of our key indirect channel partners in a given geographic area could harm our operating results, as qualifying and developing new indirect channel partners typically require a significant investment of time and resources before acceptable levels of productivity are met. If we fail to maintain our relationships with our indirect channel partners, if their financial condition, business or customer relationships were to weaken or if they fail to comply with legal or regulatory requirements, our business, operating results and financial condition could be harmed.
If we do not achieve forecasted bookings in any quarter, our financial results will be harmed.
We derive a majority of our revenues in any given quarter from orders booked in the same quarter. Bookings typically follow intra-quarter seasonality patterns weighted toward the back end of the quarter. If we do not achieve the level, timing and mix of bookings consistent with our quarterly targets and historical patterns, or if we experience cancellations of significant orders, our financial results will be harmed.
We often incur expenses before we receive related benefits, and expenses may be difficult to reduce quickly if demand declines.
We base our expense levels in part on future revenue expectations and a significant percentage of our expenses is fixed. It is difficult to reduce our fixed costs quickly, and if revenue levels are below our expectations, operating results will be adversely impacted. During periods of uneven growth or decline, we may incur costs before we realize the anticipated related benefits, which could also harm our operating results. We have made, and will continue to make, significant investments in engineering, sales, service and support, marketing and other functions to support and grow our business. We are likely to recognize the costs associated with these investments earlier than some of the related anticipated benefits, such as revenue growth, and the return on these investments may be lower, or may develop more slowly, than we expect, which could harm our business, operating results and financial condition.
Any disruption to our supply chain could materially harm our business, operating results and financial condition.
We do not manufacture our products or their components. Instead, we rely on third parties to make our products and critical components, such as disk drives, as well as for associated logistics. Our lack of direct responsibility for, and control over, these elements of our business, as well as the diverse international geographic locations of our manufacturing partners and suppliers, creates significant risks for us, including, among other things:
 
 	•	 	Limited ability to control the quality, quantity and cost of our products or of their components;	
 
 	•	 	The potential for binding price or purchase commitments with our suppliers that are higher than market rates;	
 
 	•	 	Limited ability to adjust production volumes in response to our customers’ demand fluctuations;	
 
 	•	 	Labor and political unrest at facilities we do not operate or own;	
 
 	•	 	Geopolitical disputes disrupting our supply chain;	
 
 	•	 	Business, legal compliance, litigation and financial concerns affecting our suppliers or their ability to manufacture and ship our products in the quantities, quality and manner we require; and	
 
 	•	 	Disruptions due to floods, earthquakes, storms and other natural disasters, particularly in countries with limited infrastructure and disaster recovery resources.	
 
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Such risks have in the past and could again in the future subject us to supply constraints, price increases and minimum purchase requirements and our business, operating results and financial condition could be harmed. The risks associated with our out-sourced manufacturing model are particularly acute when we transition products to new facilities or manufacturers, introduce and increase volumes of new products or qualify new contract manufacturers or suppliers, at which times our ability to manage the relationships among us, our manufacturing partners and our component suppliers, becomes critical. New manufacturers, products, components or facilities create increased costs and risk that we will fail to deliver high quality products in the required volumes to our customers. Any failure of a manufacturer or component supplier to meet our quality, quantity or delivery requirements in a cost-effective manner will harm our business, operating results and customer relationships.
We rely on a limited number of suppliers for critical product components.
We rely on a limited number of suppliers for drives and other components utilized in the assembly of our products, including certain single source suppliers, which has subjected us, and could in the future subject us to price rigidity, periodic supply constraints, and the inability to produce our products with the quality and in the quantities demanded. When industry supply is constrained, our suppliers may allocate volumes away from us and to our competitors, all of which rely on many of the same suppliers as we do. Accordingly, our operating results may be harmed.
Our gross margins vary.
Our gross margins reflect a variety of factors, including competitive pricing, component and product design, the volume and relative mix of product, services and software entitlements and maintenance (SEM) revenues. Increased component costs, increased pricing pressures, the relative and varying rates of increases or decreases in component costs and product prices, changes in product, services and SEM revenue mix or decreased volume could harm our revenues, gross margins or earnings. Our gross margins are also impacted by the cost of any materials that are of poor quality and our sales and distribution activities, including, without limitation, pricing actions, rebates, sales initiatives and discount levels, and the timing of service contract renewals.
The costs of third-party components comprise a significant portion of our product costs. While we generally have been able to manage our component and product design costs, we may have difficulty managing these costs if supplies of certain components become limited or component prices increase. Any such limitation could result in an increase in our product costs. An increase in component or design costs relative to our product prices could harm our gross margins and earnings.
If we are unable to develop, introduce and gain market acceptance for clustered Data ONTAP-based products or other new products while managing the transition from older products, or if we cannot provide the expected level of quality, service and support for our new products, our business, operating results and financial condition could be harmed.
Our future growth depends upon the successful development and introduction of new hardware and software products. Due to the complexity of storage subsystems and appliances and the difficulty in gauging the engineering effort required to produce new products, such products are subject to significant technical and quality control risks.
We are currently devoting considerable effort and resources to develop, introduce and gain customer acceptance for our clustered Data ONTAP (cDOT)-based products. cDOT is our next generation storage operating system for our core products and represents a fundamental and revolutionary change to our solution architecture. Over time, our goal is to replace our existing technology Data ONTAP 7-Mode with cDOT and, consequently, we anticipate that a majority of our revenues will ultimately derive from cDOT. We face considerable challenges as we develop and market cDOT, including, without limitation, cost and complexity associated with migrating customer data and applications from legacy systems to cDOT-based systems, developing some features for cDOT currently available with Data ONTAP 7-Mode and potentially required by our customers, and maintaining service, support and customer relationships as we replace Data ONTAP 7-Mode with cDOT.
If we are unable, for technological, customer reluctance or other reasons, to develop, introduce and gain market acceptance for cDOT, or any other new products, as and when required by the market and our customers, our business, operating results and financial condition could be materially and adversely affected.
 
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New or additional product introductions, including new software and flash product offerings, such as Cloud ONTAP, StorageGRID Webscale, all flash FAS, and FlashRay, subject us to additional financial and operational risks, including our ability to forecast customer preferences or demand, our ability to expand production capacity to meet the demand for new products, our ability to successfully manage the transition from older products, and our ability to forecast the impact of customers’ demand for new products or the products being replaced. In addition, as new or enhanced products are introduced, we must also avoid excessive levels of older product inventories and related components and ensure that enough supplies of new products can be delivered to meet customers’ demands. Further risks inherent in new product introductions include the uncertainty of price-performance relative to products of competitors, competitors’ responses to the introductions and the desire by customers to evaluate new products for extended periods of time. If these risks are not managed effectively, we could experience material risks to our operations, financial condition and business model.
As we enter new or emerging markets, we will likely increase demands on our service and support operations and may be exposed to additional competition. We may not be able to provide products, service and support to effectively compete for these market opportunities.
Increasing competition and industry consolidation could harm our business and operating results.
The storage and data management markets are intensely competitive and are characterized by rapidly changing technology and fragmentation. We compete with many companies in the markets we serve, including companies that offer a broad spectrum of IT products and services (full-stack vendors) and others that offer a more limited set of storage and data management products or services. Several key competitors have greater financial resources and offer a more diverse portfolio of products and services.
By extending our flash and software-defined storage offerings, we are competing in new segments with both traditional competitors and new competitors, particularly smaller emerging storage vendors. The longer-term potential and competitiveness of these emerging vendors remains to be determined. In cloud and converged infrastructure, we also compete with large well-established competitors.
For information regarding our competitors, see the section entitled “Competition” contained in Item 1. Business of this report. It is possible that new competitors or alliances among competitors might emerge and rapidly acquire significant market share.
An increase in industry consolidation might result in stronger competitors that are better able to compete as sole-source vendors for customers. In addition, current and potential competitors have established or might establish cooperative relationships among themselves or with third parties, including some of our partners.
Our OEM relationships may not generate significant revenues.
We have OEM relationships with several companies, which collectively accounted for 8% of our net revenues during the six months ended October 24, 2014, compared to 10% during the corresponding period of the prior year. These OEMs market and sell their branded solutions based on our unified solutions, as well as associated software offerings. While these arrangements are part of our general strategy to expand our reach to more customers and into more countries, we do not have exclusive relationships with our OEMs, and there is no minimum commitment for any given period of time. We also compete with some of our OEMs, further complicating our relationships with them. Therefore, our relationships with these OEMs may not continue to generate significant revenues and our total revenues may decline. In addition, we have no control over the products that the OEMs select to sell, or their release schedule and timing of those products; nor do we control their pricing.
A portion of our revenues is generated by large, recurring purchases from various customers, resellers and distributors. A loss, cancellation or delay in purchases by any of these parties has negatively affected us in the past, and in the future could negatively affect our revenues.
For the six months ended October 24, 2014, sales to distributors Arrow Electronics, Inc. and Avnet, Inc. accounted for 23% and 17%, respectively, of our net revenues. We generally do not enter into binding purchase commitments with our customers, resellers and distributors for extended periods of time, and thus we may not be able to continue to receive large, recurring orders from these customers, resellers or distributors. For example, our reseller agreements generally do not require minimum purchases, and our customers, resellers and distributors can stop purchasing and marketing our products at any time. In addition, unfavorable economic conditions may negatively impact the solvency of our customers, resellers and distributors or the ability of such customers, resellers and distributors to obtain credit to finance purchases of our products. If any of our key customers, resellers or distributors changes its pricing practices, reduces the size or frequency of its orders for our products, or stops purchasing our products altogether, our operating results and financial condition could be materially adversely impacted.
 
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Reduced U.S. government demand could materially harm our business and operating results. In addition, we could be harmed by claims that we have or a channel partner has failed to comply with regulatory and contractual requirements applicable to sales to the U.S. government.
The U.S. government is an important customer for us. However, government demand is uncertain, as it is subject to political and budgetary fluctuations and constraints. Recent events, such as the U.S. federal government shutdown in October 2013 and continued uncertainty regarding the U.S. budget and debt levels, has increased demand uncertainty for our products, and has recently resulted in lower sales to these customers. If the U.S. government or an individual agency or multiple agencies within the U.S. government continue to reduce or shift their IT spending patterns, our revenues and operating results may be harmed.
Selling our products to the U.S. government, whether directly or through channel partners, also subjects us to certain regulatory and contractual requirements. Failure to comply with these requirements by either us or our channel partners could subject us to investigations, fines, and other penalties, which could materially harm our operating results and financial condition. As an example, the United States Department of Justice (DOJ) and the General Services Administration (GSA) have in the past pursued claims against and financial settlements with IT vendors, including us and several of our competitors and channel partners, under the False Claims Act and other statutes related to pricing and discount practices and compliance with certain provisions of GSA contracts for sales to the federal government. Although the DOJ and GSA currently have no claims pending against us, we could face claims in the future. Violations of certain regulatory and contractual requirements could also result in us being suspended or debarred from future government contracting. Any of these outcomes could have a material adverse effect on our business, operating results and financial condition.
Some of our products are subject to U.S. export control laws and other laws affecting the countries in which our products and services may be sold, distributed, or delivered; any violation of these laws could have a material and adverse effect on our business, operating results and financial condition.
Due to the global nature of our business, we are subject to import and export restrictions and regulations, including the Export Administration Regulations administered by the Commerce Department’s Bureau of Industry and Security (BIS) and the trade and economic sanctions regulations administered by the Treasury Department’s Office of Foreign Assets Control (OFAC). The U.S., through the BIS and OFAC, places restrictions on the sale or export of certain products and services to certain countries and persons. Violators of these export control and sanctions laws may be subject to significant penalties, which may include significant monetary fines, criminal proceedings against them and their officers and employees, a denial of export privileges, and suspension or debarment from selling products to the federal government. We take a variety of precautions to prevent our products from being shipped to U.S.-sanctioned targets; however, our products could be shipped to those targets by third parties, including potentially our channel partners, despite such precautions.
For instance, media reports starting in November 2011 asserted that certain of our products were delivered to Syria through a third-party possibly in violation of U.S. export-control laws. Following these media reports, we met with U.S. government officials, provided information at their request, and expressed our willingness to continue cooperating with any further inquiry or investigation. In April 2014, we were notified by the U.S. government that it had completed its review of the matter and determined that we did not violate the U.S. export laws and that the government had closed its inquiry into the matter. However, if in the future we are ever found to have violated U.S. export control laws, we may be subject to various penalties available under the laws, any of which could have a material and adverse impact on our business, operating results and financial condition. As in the case of the media reports regarding Syria described above, even if we are not found to have violated such laws, the political and media scrutiny surrounding any governmental investigation of us could cause us significant expense and reputational harm and distract senior executives from managing our normal day-to-day operations. Such collateral consequences could have a material adverse impact on our business, operating results and financial condition.
If we are unable to maintain and develop relationships with strategic partners, our revenues may be harmed.
Our growth strategy includes developing and maintaining strategic partnerships with major third-party software and hardware vendors to integrate our products into their products and also co-market our products with them. A detailed description of these partnership relationships is identified in the Business Section of our Annual Report on Form 10-K. A number of these strategic partners are industry leaders that offer us expanded access to segments of the storage and data management markets. However, there is intense competition for attractive strategic partners, and these relationships may not be exclusive, may not generate significant revenues and may be terminated on short notice. For instance, some of our partners are also partnering with our competitors, which may increase the availability of competing solutions and harm our ability to grow our relationships with those partners. Moreover, some of our partners, particularly large, more diversified technology companies, are also competitors, complicating our relationships. If we are unable to establish new partnerships or maintain existing partnerships, if our strategic partners favor their relationships with other vendors in the storage industry or if our strategic partners increasingly compete with us, we could experience lower than expected revenues, suffer delays in product development, or experience other harm to our business, operating results and financial condition.
 
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Our failure to adjust to emerging standards in the storage industry may harm our business.
Emerging standards in the storage and data management markets may adversely affect the UNIX®, Windows® and the World Wide Web server markets upon which we depend. For example, we provide our open access data retention solutions to customers within the financial services, healthcare, pharmaceutical and government market segments, industries that are subject to various evolving governmental regulations with respect to data access, reliability and permanence (such as Rule 17(a)(4) of the Securities Exchange Act of 1934, as amended) in the U.S. and in the other countries in which we operate. If our products do not meet and continue to comply with these evolving governmental regulations in this regard, customers in these market and geographical segments will not purchase our products, and we will not be able to expand our product offerings in these market and geographical segments at the rates which we have forecasted.
If our products are defective, our gross margins, operating results and customer relationships may be harmed.
Our products are complex. We have experienced in the past, and expect to experience in the future, quality issues. Quality risk is most acute when we are introducing new products. Quality issues have and could again in the future cause customers to experience outages or disruptions in service, data loss or data corruption. If we fail to remedy a product defect, we may experience a failure of a product line, temporary or permanent withdrawal from a product or market, damage to our reputation, loss of revenue, inventory costs or product reengineering expenses and higher ongoing warranty and service costs, and these occurrences could have a material impact on our gross margins, business and operating results. Customers and we may experience losses that may result from or are alleged to result from defects in our products, which could subject us to claims for damages, including consequential damages.
Due to the global nature of our business, risks inherent in our international operations could materially harm our business.
A significant portion of our operations are located, and a significant portion of our revenues are derived, outside of the U.S. For the six months ended October 24, 2014, our international revenues accounted for 48% of our net revenues. In addition, a substantial portion of our products are manufactured outside of the U.S., and we have research and development and service centers overseas. Accordingly, our business and our future operating results could be adversely affected by factors affecting our international operations, but not experienced in the U.S., including, among other things, local political or economic conditions, trade protection and export and import requirements, local labor conditions, transportation costs, government spending patterns, acts of terrorism, international conflicts and natural disasters in areas with limited infrastructure. In addition, due to the global nature of our business, we are subject to complex legal and regulatory requirements in the U.S. and the foreign jurisdictions in which we operate and sell our products, including antitrust and anti-competition laws, rules and regulations, and regulations related to data privacy. We are also subject to the potential loss of proprietary information due to piracy, misappropriation, or laws that may be less protective of our intellectual property rights than U.S. laws. Such factors could have an adverse impact on our business, operating results and financial condition.
We face exposure to adverse movements in foreign currency exchange rates as a result of our international operations. These exposures may change over time as business practices evolve, and they could have a material adverse impact on our financial results and cash flows. We utilize forward and option contracts in an attempt to reduce the adverse earnings impact from the effect of exchange rate fluctuations on certain assets and liabilities as well as certain anticipated foreign currency cash flows on a short-term basis. Our hedging strategies may not be successful, and currency exchange rate fluctuations could have a material adverse effect on our operating results. In addition, our foreign currency exposure on assets and liabilities for which we do not hedge could have a material impact on our results of operations in periods when the U.S. dollar significantly fluctuates in relation to unhedged non-U.S. currencies in which we transact business.
Additional risks inherent in our international business activities generally include, among others, longer accounts receivable payment cycles and difficulties in managing international operations.
Moreover, in many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by our internal policies and procedures, or U.S. laws and regulations applicable to us, such as the Foreign Corrupt Practices Act. There can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, will comply with these policies, procedures, laws and/or regulations. Any such violation could subject us to fines and other penalties, which could have a material adverse effect on our business, operating results and financial condition.
 
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Changes in our effective tax rate or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
Our effective tax rate is influenced by a variety of factors, many of which are outside of our control. These factors include among other things, fluctuations in our earnings and financial results in the various countries and states in which we do business, the outcome of income tax audits and changes to the tax laws in such jurisdictions. Any of these factors could materially impact our operating results.
We receive significant tax benefits from sales to our non-U.S. customers. These benefits are contingent upon existing tax laws and regulations in the U.S. and in the countries in which our international operations are located. Future changes in domestic or international tax laws and regulations could adversely affect our ability to continue to realize these tax benefits. We have not provided for U.S. federal and state income taxes or foreign withholding taxes that may result from future remittances of undistributed earnings of foreign subsidiaries. The United States, countries in the European Union and other countries where we do business have been considering changes in relevant tax laws applicable to multinational corporations such as ours. These potential changes could adversely affect our effective tax rate or result in higher cash tax liabilities.
We are currently undergoing income tax audits in the U.S. and several foreign tax jurisdictions, as described in Note 11 to our consolidated financial statements. The U.S. and foreign tax authorities have questioned our intercompany transfer pricing arrangements during these audits. In recent years, several other U.S. companies have had their transfer pricing arrangements challenged as part of Internal Revenue Service (IRS) examinations, which have resulted in material proposed assessments and/or litigation with respect to those companies.
If the ultimate determination of income taxes or at-source withholding taxes assessed under the current IRS audits or audits being conducted in any other tax jurisdiction results in an amount in excess of the tax provision we have recorded or reserved for, our operating results, cash flows and financial condition would be adversely affected. In July 2014, the IRS completed the examination of our fiscal 2005 to 2007 income tax returns upon approval by the Joint Committee of Taxation. We recorded a $47.4 million tax provision attributable to the audit closure and related re-measurement of uncertain tax positions for tax years subject to future audits. In October 2014, the United Kingdom’s (UK’s) tax authority concluded the examination of our fiscal 2009 to 2012 UK income tax returns. We recorded a $1.0 million income tax benefit for the net impact of the audit adjustments and related release of unrecognized tax benefits.
Our effective tax rate could also be adversely affected by different and evolving interpretations of existing law or regulations, which in turn would negatively impact our operating and financial results as a whole. Additionally, our effective tax rate could also be adversely affected if there is a change in international operations and how the operations are managed and structured. The price of our common stock could decline to the extent that our financial results are materially affected by an adverse change in our effective tax rate.
Our failure to pay quarterly dividends to our stockholders and to fully consummate our stock repurchase program could cause the market price of our stock to decline significantly.
Our ability to pay quarterly dividends and to continue to execute our stock repurchase program as planned will be subject to, among other things, our financial condition and results of operations, available cash and cash flows in the U.S., capital requirements, and other factors. Future dividends are subject to declaration by our Board of Directors, and our stock repurchase program does not obligate us to acquire any specific number of shares. If we fail to meet any expectations related to dividends and/or stock repurchases, the market price of our stock could decline significantly, and could have a material adverse impact on investor confidence. Additionally, price volatility of our stock over a given period may cause the average price at which we repurchase our own stock to exceed the stock’s market price at a given point in time.
 
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Our acquisitions may not achieve expected benefits, and may increase our liabilities, disrupt our existing business and harm our results of operations.
As part of our strategy, we seek to acquire other businesses and technologies to complement our current products, expand the breadth of our markets, or enhance our technical capabilities. In fiscal 2012, we completed the acquisition of certain assets related to Engenio, in fiscal 2013, we completed the acquisitions of CacheIQ and ionGrid and in October 2014, we acquired the SteelStore product line from Riverbed Technology, Inc. The benefits we expect to receive from these and other acquisitions depend on our ability to successfully conduct due diligence, negotiate the terms of the acquisition and integrate the acquired business. Any inaccuracy in our acquisition assumptions, any failure to uncover liabilities or risks associated with the acquisition, any failure to make the acquisition on favorable terms, or any failure to integrate the acquired business or assets as and when expected, may reduce or eliminate the expected benefits of the acquisition to us, increase our costs, disrupt our operations, result in additional liabilities, investigations and litigation, and may also harm our strategy, our results of operations or our business. The failure to achieve expected acquisition benefits may also result in impairment charges for goodwill and purchased intangible assets.
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates; impairment of our investments could harm our financial results.
We maintain an investment portfolio of various holdings, types, and maturities. A significant part of our investment portfolio consists of U.S. government securities. If global credit experiences prolonged periods of decline, or if there is a downgrade of U.S. government debt, our investment portfolio may be adversely impacted and we could determine that more of our investments have experienced an other-than-temporary decline in fair value, requiring impairment charges that could adversely affect our financial results. For a summary of these investments and our management of the same, please see “Quantitative and Qualitative Disclosures About Market Risk” in this document.
We are exposed to the credit and non-payment risk of our customers, resellers and distributors, especially during times of economic uncertainty and tight credit markets, which could result in material losses.
Most of our sales to customers are on an open credit basis, with typical payment terms of 30 days. While we monitor individual customer payment capability in granting such open credit arrangements, and seek to limit such open credit to amounts we believe are reasonable, we may experience losses due to a customer’s inability to pay.
Beyond our open credit arrangements, some of our customers have entered into recourse and non-recourse financing leasing arrangements using third-party leasing companies. 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.
We expect demand for customer financing to continue. During periods of economic uncertainty, our exposure to credit risks from our customers increases. In addition, our exposure to credit risks of our customers may increase further if our customers and their customers or their lease financing sources are adversely affected by global economic conditions.
In the past, there have been bankruptcies by our customers to whom we had extended open credit, provided lease financing arrangements or guaranteed lease payments under full recourse lease arrangements. Such events have caused us to incur bad debt charges, in the case of financing arrangements have caused a loss of revenues, and in the case of recourse lease arrangements have caused us to make payments to third-party financers. We may be subject to similar losses in future periods. Any future losses could harm our business and have a material adverse effect on our operating results and financial condition. Additionally, to the extent that turmoil in the credit markets makes it more difficult for customers to obtain open credit or lease financing, those customers’ ability to purchase our products could be adversely impacted, which in turn could have a material adverse impact on our financial condition and operating results.
A repatriation of cash held by our foreign subsidiaries to fund U.S. operations, strategic opportunities or debt service may subject us to a significant tax liability.
As of October 24, 2014, $4.4 billion of cash, cash equivalents and short-term investments was held by our foreign subsidiaries. Under current law, repatriation of this cash may trigger significant adverse tax consequences in the U.S. As a result, if the cash generated by our domestic operations is not sufficient to fund our domestic operations and our broader corporate initiatives, such as stock repurchases, dividends, acquisitions, and other strategic opportunities; and to service our outstanding indebtedness, we may need to raise additional funds through public or private debt or equity financings, or we may need to obtain new credit facilities to the extent we choose not to repatriate our overseas cash. Such additional financing may not be available on terms favorable to us, or at all, and any new equity financings or offerings would dilute our current stockholders’ ownership. Furthermore, lenders may not agree to extend us new, additional or continuing credit. If adequate funds are not available, or are not available on acceptable terms, we may be forced to repatriate our foreign-held cash and incur a significant tax expense. In any such case, our business, operating results or financial condition could be adversely impacted.
 
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If we default under our significant debt obligations, including our Senior Notes, our business, operating results and financial condition will be harmed. Moreover, covenants associated with our Senior Notes may unduly restrict our business.
We have Senior Notes outstanding as of October 24, 2014 in an aggregate principal amount of $1.5 billion that mature at specific dates in calendar 2017, 2021 and 2022. We have also established a revolving credit facility under which we may borrow an aggregate amount outstanding at any time of $250.0 million, under which we had no borrowings outstanding as of October 24, 2014. We may fail to pay these obligations, as and when required. Specifically, if we are unable to generate sufficient cash flows from operations or to borrow sufficient funds in the future to service or refinance our debt, our business, operating results and financial condition will be harmed.
In addition, our debt and credit facility arrangements subject us to continued compliance with restrictive and financial covenants. If we do not comply with these covenants or otherwise default under the arrangements, we may be required to repay any outstanding amounts borrowed under these agreements. Moreover, compliance with these covenants may restrict our strategic or operational flexibility in the future, which could harm our business, operating results and financial condition.
We have in the past and may in the future incur restructuring charges and asset impairment in response to changing market conditions or cost-cutting initiatives.
We have in the past undertaken cost savings initiatives in response to changes in market conditions and market demand for our products. For example, in May 2013 and March 2014 we executed restructuring events designed to focus our resources on key strategic initiatives and streamline our business in light of the constrained IT spending environment. As a result, we recognized substantial restructuring expenses. We may in the future undertake initiatives that may include restructuring, disposing of, and/or otherwise discontinuing certain products, or both. Any decision to take these actions may result in charges to earnings associated with, among other things, inventory or other fixed, intangible or goodwill asset reductions (including, without limitation, impairment charges), workforce and facility reductions and penalties and claims from third party resellers or users of discontinued products. These charges would harm our operating results. In addition to the costs associated with these activities, we may not realize any of the anticipated benefits of the underlying restructuring activities.
We are continually seeking ways to make our cost structure, business processes and systems more efficient, including by moving activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing new business information systems. Problems with the execution of these activities could have an adverse effect on our business, operating results and financial condition.
We continuously seek to make our cost structure and business processes more efficient, including by moving our business activities from higher-cost to lower-cost locations, outsourcing certain business processes and functions, and implementing changes to our business information systems. These efforts involve a significant investment of financial and human resources and significant changes to our current operating processes. In addition, as we move operations into lower-cost jurisdictions and outsource certain business processes, we become subject to new regulatory regimes and lose control of certain aspects of our operations and, as a consequence, become more dependent upon the systems and business processes of third-parties. If we are unable to move our operations, outsource business processes and implement new business information systems in a manner that complies with local law and maintains adequate standards, controls and procedures, the quality of our products and services may suffer and we may be subject to increased litigation risk, either of which could have an adverse effect on our business, operating results and financial condition.
If we are unable to attract and retain qualified personnel, our business, operating results and financial condition could be harmed.
Our continued success depends, in part, on our ability to hire and retain qualified personnel and to preserve the key aspects of our corporate culture. Because our future success is dependent on our ability to continue to enhance and introduce new products, we are particularly dependent on our ability to hire and retain qualified engineers. Competition for qualified employees, particularly in Silicon Valley, is intense. The loss of the services of a significant number of our employees, particularly our engineers, salespeople and key managers, could be disruptive to our development efforts or business relationships and could materially and adversely affect our operating results. Equity grants are a critical component of our current compensation programs. If we reduce, modify or eliminate our equity programs, due to increased shareholder activism, heightened focus on corporate compensation practices, or increased scrutiny of the dilutive effects of such programs, we may have difficulty attracting and retaining critical employees.
 
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In addition, because of the structure of our cash and equity incentive compensation plans, we may be at increased risk of losing employees at certain times. For example, the retention value of our compensation plans decreases after the payment of annual bonuses or the vesting of equity awards.
Our business could be materially and adversely affected as a result of a natural disaster, terrorist acts or other catastrophic events.
We depend on the ability of our personnel, raw materials, equipment and products to move reasonably unimpeded around the world. Any political, military, terrorism, global trade, world health or other issue that hinders this movement or restricts the import or export of materials could lead to significant business disruptions. Furthermore, any economic failure or other material disruption caused by natural disasters, including fires, floods, hurricanes, earthquakes, and volcanoes; power loss or shortages; environmental disasters; telecommunications or business information systems failures or break-ins and similar events could also adversely affect our ability to conduct business. If such disruptions result in cancellations of customer orders or contribute to a general decrease in economic activity or corporate spending on information technology, or directly impact our marketing, manufacturing, financial and logistics functions, or impair our ability to meet our customer demands, our results of operations and financial condition could be materially adversely affected. In addition, our headquarters and one of our major data centers are located in Northern California, an area susceptible to earthquakes. If any significant disaster were to occur, our ability to operate our business and our financial condition could be impaired.
Our failure to protect our intellectual property could harm our business, operating results and financial condition.
Our success depends significantly upon developing, maintaining and protecting proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions with employees, resellers, strategic partners and customers, to protect our proprietary rights. We currently have multiple U.S. and international patent applications pending and multiple U.S. and international patents issued. The pending applications may not be approved, and our existing and future patents may be challenged. If such challenges are brought, the patents may be invalidated. We may not be able to develop proprietary products or technologies that are patentable, and patents issued to us may not provide us with any competitive advantages and may be challenged by third parties. Further, the patents of others may materially and adversely affect our ability to do business. In addition, a failure to obtain and defend our trademark registrations may impede our marketing and branding efforts and competitive condition.
Litigation may be necessary to protect our proprietary technology. Any such litigation may be time-consuming and costly. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the U.S. Our means of protecting our proprietary rights may not be adequate or our competitors may independently develop similar technology, duplicate our products, or design around patents issued to us or other intellectual property rights of ours.
We are subject to intellectual property infringement claims. We may, from time to time, receive claims that we are infringing third parties’ intellectual property rights. Third parties may in the future, claim infringement by us with respect to current or future products, patents, trademarks or other proprietary rights. We expect that companies in the network storage and data management markets will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims could be time consuming, result in costly litigation, cause product shipment delays, require us to redesign our products, or require us to enter into royalty or licensing agreements, any of which could materially and adversely affect our operating results. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all.
Changes in regulations relating to our products or their components, or the manufacture, sourcing, distribution or use thereof, may harm our business and operating results.
The laws and regulations governing the manufacturing, sourcing, distribution and use of our products have become more complex and stringent over time. For example, in addition to various environmental laws relating to carbon emissions and the use and discharge of hazardous materials, the SEC has recently adopted regulations concerning the supply of certain minerals originating from the conflict zones of the Democratic Republic of Congo or adjoining countries. We may incur costs to comply with the new disclosure requirements of this law and may realize other costs relating to the sourcing and availability of minerals used in our products. Further, since our supply chain is complex, we may face reputational harm if our customers or other stakeholders conclude that we are unable to verify sufficiently the origins of the minerals used in the products we sell. As the laws and regulations governing our products continue to expand and change, our costs are likely to rise, and the failure to comply with any such laws and regulations could subject us to business interruptions, litigation risks and reputational harm.
 
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If a data center or other third-party who relies on our products experiences a disruption in service or a loss of data, such disruption could be attributed to the quality of our products, thereby causing financial or reputational harm to our business.
Our clients (including data centers, SaaS, cloud computing and Internet infrastructure and bandwidth providers) rely on our products for their data storage needs. We exercise little control over how our clients use or maintain our products, and in some cases improper usage or maintenance could impair the performance of our products.
Our clients may authorize third-party technology providers to access their data on our systems. Because we do not control the transmissions between our clients, their customers, and third-party technology providers, or the processing of such data by third-party technology providers, we cannot ensure the complete integrity or security of such transmissions or processing. Errors or wrongdoing by clients, their customers, or third-party technology providers resulting in security breaches may be attributed to us.
A failure or inability to meet our clients’ expectations with respect to security and confidentiality through a disruption in the services provided by these third-party vendors, or the loss of data stored by such vendors, could result in financial or reputational harm to our business to the extent that such disruption or loss is caused by, or perceived by our customers to have been caused by, defects in our products. Moreover, the risk of reputational harm may be magnified and/or distorted through the rapid dissemination of information over the Internet, including through news articles, blogs, chat rooms, and social media sites. This may affect our ability to retain clients and attract new business.
If a cybersecurity or other security breach occurs on our systems or on our end user customer systems, or if stored data is improperly accessed, customers may reduce or cease using our solutions, our reputation may be harmed and we may incur significant liabilities.
We store and transmit sensitive and proprietary data related to our employees, customers, clients and partners (including third-party vendors such as data centers and providers of SaaS, cloud computing, and Internet infrastructure and bandwidth), and their respective customers, including intellectual property, books of record and personally identifiable information. In the current environment there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, state-sponsored intrusions, industrial espionage, human error and technological vulnerabilities. Cybersecurity incidents or other security breaches could result in unauthorized access to, or loss or unauthorized disclosure of, such information, litigation, indemnity obligations, government investigations and other possible liabilities, as well as negative publicity, which could damage our reputation and public perception of the security and reliability of our products. Additionally, our clients and customers use our platforms for the transmission and storage of sensitive data. We do not regularly monitor or review the information or content that our clients and their customers upload and store, and, therefore, we have no direct control over the substance of the information or content stored within our platforms. Therefore, if employees, clients, partners or their respective customers use our platforms for the transmission or storage of personally identifiable or other sensitive information and our security measures are breached as a result of third-party action, employee error, malfeasance, stolen or fraudulently obtained log-in credentials or otherwise, our reputation could be damaged, our business may be harmed and we could incur significant liabilities. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. As we continue to increase our client base and expand our brand, we may become more of a target for third parties seeking to compromise our security systems.
Many jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. These mandatory disclosures regarding security breaches often lead to widespread negative publicity. Moreover, the risk of reputational harm may be magnified and/or distorted through the rapid dissemination of information over the Internet, including through news articles, blogs, chat rooms, and social media sites. Any security breach, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our data security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their support contracts, or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.
 
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There can be no assurance that the limitations of liability in our contracts would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. Our existing general liability insurance coverage and coverage for errors and omissions may not continue to be available on acceptable terms or may not be available in sufficient amounts to cover one or more large claims, or our insurers may deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, operating results and financial condition.
Changes in financial accounting standards may cause adverse unexpected fluctuations and affect our reported results of operations.
A change in accounting standards or practices and varying interpretations of existing accounting pronouncements, the increased use of fair value measures, changes to revenue recognition, lease accounting, financial instruments and other accounting standards could have a significant effect on our reported financial results or the way we conduct our business.
Implementation of accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could cause us to defer recognition of revenue or recognize lower revenue, which may affect our results of operations.
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of equity securities
The following table provides information with respect to the shares of common stock repurchased by us during the three months ended October 24, 2014:

   Period	  	Total Number
of Shares
Purchased	 	  	Average
Price Paid
per Share	 	  	Total Number of Shares
Purchased as Part of
Publicly Announced
Program  (1)	 	  	Approximate Dollar Value
of Shares That May Yet
Be Purchased Under The
Repurchase Program  (1)	 	
 	  	(Shares in
thousands)	 	  	 	 	  	(Shares in thousands)	 	  	(Dollars in millions)	 	
July 26, 2014 – August 22, 2014	  	 	7,672	  	  	$	39.10	  	  	 	195,410	  	  	$	705.9	  	
August 23, 2014 – September 19, 2014	  	 	3,251	  	  	$	41.95	  	  	 	198,661	  	  	 	569.6	  	
September 20, 2014 – October 24, 2014	  	 	4,047	  	  	$	40.43	  	  	 	202,708	  	  	 	405.9	  	
 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	 	14,970	  	  	$	40.08	  	  	 	 	 	  	 	 	 	

(1)	As of October 24, 2014, our Board of Directors had authorized the repurchase of up to $7.1 billion of our common stock under a stock repurchase program. Since the May 13, 2003 inception of this program through October 24, 2014, we repurchased a total of 202.7 million shares of our common stock at an average price of $33.14 per share, for an aggregate purchase price of $6.7 billion. As of October 24, 2014, the remaining authorized amount for stock repurchases under this program was $0.4 billion with no termination date. The stock repurchase program may be suspended or discontinued at any time.	
Item 3.   Defaults upon Senior Securities.
None
Item 4.   Mine Safety Disclosures.
Not Applicable.
Item 5.   Other Information.
None
Item 6.   Exhibits.
See the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q.
 
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	NETAPP, INC.	
 	 	(Registrant)	
 	 	
 	 	/s/    NICHOLAS R. NOVIELLO	
 	 	Nicholas R. Noviello	
 	 	Executive Vice President,
Finance and Operations and	
 	 	Chief Financial Officer	
Dated: November 25, 2014
 
53

Table of Contents
EXHIBIT INDEX

 	  	 	  	Incorporation by Reference	
Exhibit
No	  	Description	  	Form	  	File No.	  	Exhibit	  	Filing Date	
    3.1	  	Certificate of Incorporation of the Company, as amended.	  	10-Q	  	000-27130	  	3.1	  	November 26, 2013	
 	 	 	 	 	 	
    3.2	  	Bylaws of the Company, as amended.	  	8-K	  	000-27130	  	3.1	  	February 13, 2014	
 	 	 	 	 	 	
    4.1	  	Underwriting Agreement dated June 2, 2014 by and between the Company and Goldman, Sachs & Co. and J.P. Morgan Securities LLC as Managers of the Underwriters.	  	8-K	  	000-27130	  	1.1	  	June 5, 2014	
 	 	 	 	 	 	
    4.2	  	Second Supplemental Indenture dated June 5, 2014 by and between the Company and U.S. Bank National Association.	  	8-K	  	000-27130	  	4.1	  	June 5, 2014	
 	 	 	 	 	 	
  10.1	  	The Company’s Amended and Restated 1999 Stock Option Plan, as amended effective July 23, 2014.	  	—	  	—	  	—	  	—	
 	 	 	 	 	 	
  10.2	  	The Company’s Amended and Restated Employee Stock Purchase Plan, as amended effective July 23, 2014.	  	Proxy

Statement	  	000-27130	  	Appendix B	  	July 25, 2014	
 	 	 	 	 	 	
  10.3	  	The Company’s Amended and Restated Executive Compensation Plan, as amended effective July 23, 2014.	  	Proxy

Statement	  	000-27130	  	Appendix C	  	July 25, 2014	
 	 	 	 	 	 	
  31.1	  	Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.	  	—	  	—	  	—	  	—	
 	 	 	 	 	 	
  31.2	  	Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.	  	—	  	—	  	—	  	—	
 	 	 	 	 	 	
  32.1	  	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.	  	—	  	—	  	—	  	—	
 	 	 	 	 	 	
  32.2	  	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.	  	—	  	—	  	—	  	—	
 	 	 	 	 	 	
101.INS	  	XBRL Instance Document	  	—  	  	—  	  	—  	  	—  	
 	 	 	 	 	 	
101.SCH	  	XBRL Taxonomy Extension Schema Document	  	—  	  	—  	  	—  	  	—  	
 	 	 	 	 	 	
101.CAL	  	XBRL Taxonomy Calculation Linkbase Document	  	—  	  	—  	  	—  	  	—  	
 	 	 	 	 	 	
101.DEF	  	XBRL Taxonomy Extension Definition Linkbase Document	  	—  	  	—  	  	—  	  	—  	
 	 	 	 	 	 	
101.LAB	  	XBRL Taxonomy Label Linkbase Document	  	—  	  	—  	  	—  	  	—  	
 	 	 	 	 	 	
101.PRE	  	XBRL Taxonomy Extension Presentation Linkbase Document	  	—  	  	—  	  	—  	  	—  	
 
54

Exhibit 10.1
NETAPP, INC.
1999 STOCK OPTION PLAN
AS AMENDED AND RESTATED THROUGH JULY 23, 2014
ARTICLE ONE 
GENERAL PROVISIONS
 
 	I.	PURPOSE OF THE PLAN	
This 1999 Stock Option Plan is intended to promote the interests of NetApp, Inc., a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in the attached Appendix.
All share numbers in this document reflect (i) the 2-for-1 split of the Common Stock effected on December 20, 1999 and (ii) the 2-for-1 split of the Common Stock effected on March 22, 2000.
 
 	II.	STRUCTURE OF THE PLAN	
A. The Plan shall be divided into five separate equity programs:
(i) the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock,
(ii) the Stock Appreciation Rights Program under which eligible persons may, at the discretion of the Plan Administrator, be granted stock appreciation rights that will allow individuals to receive the appreciation in Fair Market Value of the Shares subject to the award between the exercise date and the date of grant,
(iii) the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the issuance or immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary) or pursuant to restricted stock units on such terms as the Plan Administrator deems appropriate,

(iv) the Performance Share and Performance Unit Program under which eligible persons may, at the discretion of the Plan Administrator, be granted performance shares and performance units, which are awards that will result in a payment to a Participant only if the performance goals or other vesting criteria the established by the Plan Administrator are achieved or the awards otherwise vest, or
(v) the Automatic Award Program (formerly known as the Automatic Option Grant Program) under which non-employee Board members automatically receive award grants pursuant to a compensation policy as in effect from time to time.
B. The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan.
 
 	III.	ADMINISTRATION OF THE PLAN	
A. The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant, the Stock Appreciation Rights Program, Stock Issuance Programs and the Performance Share and Performance Unit Program with respect to Section 16 Insiders. Administration of the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs with respect to all other eligible persons may, at the Board’s discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer that program with respect to all such persons.
B. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee.
C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance or Performance Share and Performance Unit Program under its jurisdiction or any award granted thereunder.
D. Service by Board members on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and Board members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants under the Plan.
E. Administration of the Automatic Award Program shall be self-executing in accordance with the terms of that program, and no Plan Administrator shall exercise any discretionary functions with respect to award grants made thereunder, except that the Plan Administrator, in its discretion, may change and otherwise revise the terms of any compensation policy relating to non-employee Board members.
 
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 	IV.	ELIGIBILITY	
A. The persons eligible to participate in the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs are as follows:
(i) Employees,
(ii) non-employee Board members, and
(iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority (subject to the provisions of the Plan) to determine (i) with respect to the Discretionary Option Grant and Stock Appreciation Rights Programs, which eligible persons are to receive awards under the Discretionary Option Grant and Stock Appreciation Rights Programs, the time or times when such awards are to be made, the number of shares to be covered by each such grant, the status of an option as either an Incentive Option or a Non-Statutory Option, the time or times when each award is to become exercisable, the vesting schedule (if any) applicable to the award, the maximum term for which the award is to remain outstanding, and whether to modify or amend each award, including the discretionary authority to extend the post-termination exercisability period of awards longer than is otherwise provided for in the Plan, and (ii) with respect to awards granted under the Stock Issuance and Performance Share and Performance Unit Programs, which eligible persons are to receive awards, the time or times when such awards are to be made, the number of shares subject to awards to be issued to each Participant, the vesting schedule (if any) applicable to the awards, the consideration, if any, to be paid for shares subject to such awards and the form (cash, shares of Common Stock, or a combination thereof) in which the award is to be settled.
C. Only non-employee Board members shall be eligible to participate in the Automatic Award Program.
 
 	V.	STOCK SUBJECT TO THE PLAN	
A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the
 
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open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 128,880,429 shares. Such authorized share reserve is comprised of (i) the 13,200,000 shares of Common Stock initially authorized for issuance under the Plan, (ii) an additional increase of 15,000,000 shares authorized by the Board on August 17, 2000 and approved by the stockholders at the 2000 Annual Meeting, (iii) an additional increase of 13,400,000 shares authorized by the Board on August 9, 2001 and approved by the stockholders at the 2001 Annual Meeting, (iv) an additional increase of 14,000,000 shares authorized by the Board on July 2, 2002 and approved by the stockholders at the 2002 Annual Meeting, (v) an additional increase of 10,200,000 shares authorized by the Board on July 7, 2004 and approved by the stockholders at the 2004 Annual Meeting, (vi) an additional increase of 10,600,000 shares authorized by the Board on July 1, 2005 and approved by the stockholders at the 2005 Annual Meeting, (vii) an additional increase of 10,900,000 shares authorized by the Board on July 10, 2006 and approved by the stockholders at the 2006 Annual Meeting, (viii) an additional increase of 7,200,000 shares authorized by the Board on July 13, 2007 and approved by the stockholders at the 2007 Annual Meeting, (ix) an additional increase of 6,600,000 shares authorized by the Board on July 11, 2008 and approved by the stockholders at the 2008 Annual Meeting, (x) an additional increase of 7,000,000 shares authorized by the Board on July 13, 2010 and approved by the stockholders at the 2010 Annual Meeting, (xi) an additional increase of 7,700,000 shares authorized by the Board on July 14, 2011 and approved by the stockholders at the 2011 Annual Meeting, (xii) an additional increase of 7,350,000 shares authorized by the Board on July 18, 2012 and approved by the stockholders at the 2012 Annual Meeting, (xiii) an additional increase of 10,000,000 shares authorized by the Compensation Committee of the Board (pursuant to authority delegated by the Board) on July 31, 2013 and approved by the stockholders at the 2013 Annual Meeting, plus (xiv) an additional increase of 7,500,000 shares authorized by the Compensation Committee of the Board (pursuant to authority delegated by the Board) on July 23, 2014, subject to the approval by the stockholders at the 2014 Annual Meeting. Pursuant to the one-time stock option exchange program, as described in the proxy statement pursuant to the Special Meeting of Stockholders held on April 21, 2009, all of the shares underlying options surrendered in the option exchange program were returned to the Plan and restricted stock unit grants made in connection with the stock option exchange program were made from such returned shares. After making the restricted stock unit grants in connection with the stock option exchange program, the Plan’s share reserve was reduced such that, in effect, only 3,500,000 of the shares underlying the surrendered options were retained as available for future grant under the Plan, thereby reducing the number of shares of Common Stock which may be issued over the term of the Plan from 101,100,000 shares to 89,330,429 shares. In addition, shares issued under the Corporation’s 1995 Stock Incentive Plan or the Special Non-Officer Stock Option Plan shall not reduce or otherwise affect the number of shares of Common Stock available for issuance under this Plan. Any shares subject to awards granted under the Plan other than options to purchase shares of Common Stock or stock appreciation rights and granted after the 2013 Annual Meeting, will be counted against the maximum number of shares of Common Stock which may be issued over the term of the Plan pursuant to this Article One Section V.A. as two (2) shares for every one (1) share subject thereto.
 
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B. No one person participating in the Plan may receive stock options and/or stock appreciation rights under the Plan for more than 3,000,000 shares of Common Stock in the aggregate per calendar year.
C. Shares of Common Stock subject to outstanding options or stock appreciation rights shall be available for subsequent issuance under the Plan to the extent the options or stock appreciation rights expire or terminate for any reason prior to exercise in full. In addition, any unvested shares issued under the Plan and subsequently repurchased or reacquired by the Corporation pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent awards under the Plan. If shares subject to awards granted under the Plan were counted against the maximum number of shares of Common Stock which may be issued over the term of the Plan pursuant to Article One Section V.A. as two (2) shares for every one (1) share subject thereto and are forfeited or otherwise return to the Plan, two (2) times the number of shares so forfeited will return to the Plan and will again become available for issuance. For purposes of clarity, shares subject to awards granted under the Plan prior to the 2013 Annual Meeting that are forfeited or otherwise return to the Plan, will return to the Plan as one (1) share for every one (1) share subject thereto and will again become available for issuance. Should the exercise price of an award under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an award or the vesting or disposition of exercised shares or stock issuances under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the award is exercised or the gross number of exercised shares or stock issuances which vest, and not by the net number of shares of Common Stock issued to the holder of such award or exercised shares or stock issuances.
D. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which any one person may be granted stock options and/or stock appreciation rights or awards under the Stock Issuance and Performance Share and Performance Unit Programs per calendar year, (iii) the number and/or class of securities for which automatic award grants are to be made subsequently under the Automatic Award Program and (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding award in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.
 
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ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
 
 	I.	OPTION TERMS	
Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.
2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the forms specified by the Plan Administrator, including without limitation, by one of the following forms of consideration:
(i) cash or check made payable to the Corporation,
(ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or
(iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a brokerage firm reasonably satisfactory to the Corporation for purposes of administering such procedure to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction.
Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of seven (7) years measured from the option grant date.

C. Effect of Termination of Service.
1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the Optionee’s cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the Optionee at the time of death may be exercised subsequently by the personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares.
(iv) Should the Optionee’s Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding.
2. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to extend the period of time for which the option is to remain exercisable following the Optionee’s cessation of Service from the period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term.
D. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms
 
7

upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right.
F. Limited Transferability of Options. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of inheritance following the Optionee’s death. However, Non-Statutory Options may be assigned in whole or in part during the Optionee’s lifetime to one or more members of the Optionee’s family or to a trust established exclusively for one or more such family members or the Optionee’s former spouse, to the extent such assignment is in connection with the Optionee’s estate plan, or to the Optionee’s former spouse pursuant to a domestic relations order. The person or persons who acquire a proprietary interest in the option pursuant to the assignment may only exercise the assigned portion. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate.
 
 	II.	INCENTIVE OPTIONS	
The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall  not  be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
B. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.
C. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date.
 
 	III.	CORPORATE TRANSACTION/CHANGE IN CONTROL	
A. Each option, to the extent outstanding under the Plan at the time of a Corporate Transaction but not otherwise exercisable for all the option shares, shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate
 
8

Transaction, become exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding option shall not become exercisable on such an accelerated basis if and to the extent: (i) such option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or replaced with a comparable option to purchase shares of the capital stock of the successor corporation (or parent thereof), (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).
D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option,  provided  the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options under the Plan per calendar year.
E. The Plan Administrator shall have the full power and authority to accelerate the vesting of options granted under the Discretionary Option Grant Program upon a Corporate Transaction or Change in Control or upon an event or events occurring in connection with such transactions. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Qualified Option under the Federal tax laws.
F. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
 
9

 	IV.	REPRICING OR CANCELLATION AND REGRANT OF AWARDS	
The Plan Administrator may not modify or amend a stock option or stock appreciation right to reduce the exercise price of such stock option or stock appreciation right after it has been granted (except for adjustments made pursuant to Article One Section V.D.), unless approved by the Corporation’s stockholders and neither may the Plan Administrator, without the approval of the Corporation’s stockholders, cancel any outstanding stock option or stock appreciation right and immediately replace it with a new stock option or stock appreciation right with a lower exercise price, awards of a different type, and/or cash.
 
10

ARTICLE THREE 
STOCK APPRECIATION RIGHTS PROGRAM
 
 	I.	STOCK APPRECIATION RIGHT TERMS	
Each stock appreciation right shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided , however, that each such document shall comply with the terms specified below.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.
B. Payment of SAR Amount. Upon exercise of a stock appreciation right, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying:
1. The difference between the Fair Market Value of a share of Common Stock on the date of exercise over the exercise price; times
2. The number of shares of Common Stock with respect to which the stock appreciation right is exercised.
At the discretion of the Plan Administrator, the payment upon the exercise of a stock appreciation right may be in cash, in shares of Common Stock of equivalent value, or in some combination thereof.
C. Exercise and Term of Stock Appreciation Rights. Each stock appreciation right shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the stock appreciation right. However, no stock appreciation right shall have a term in excess of seven (7) years measured from the stock appreciation right grant date.
D. Effect of Termination of Service. A stock appreciation right granted under the Plan will expire upon the date determined by the Plan Administrator, in its sole discretion, and set forth in the agreement evidencing the award. Notwithstanding the foregoing, the rules of Article Two Section I.C. also will apply to stock appreciation rights.
E. Stockholder Rights. The holder of a stock appreciation right shall have no stockholder rights with respect to the shares subject to the stock appreciation right until such person shall have exercised the stock appreciation right and become a holder of record of shares, if any, issued thereunder.

 	II.	CORPORATE TRANSACTION/CHANGE IN CONTROL	
A. Each stock appreciation right, to the extent outstanding under the Plan at the time of a Corporate Transaction but not otherwise exercisable for all the shares subject thereto, shall automatically accelerate so that each such stock appreciation right shall, immediately prior to the effective date of the Corporate Transaction, become exercisable for all of the shares of Common Stock at the time subject to such stock appreciation right and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstanding stock appreciation right shall not become exercisable on such an accelerated basis if and to the extent: (i) such stock appreciation right is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or replaced with a comparable award, (ii) such stock appreciation right is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested shares subject to the award at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to the award or (iii) the acceleration of such stock appreciation right is subject to other limitations imposed by the Plan Administrator at the time of grant. The determination of stock appreciation right comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive.
B. Immediately following the consummation of the Corporate Transaction, all outstanding stock appreciation rights shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).
C. Each stock appreciation right which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Participant in consummation of such Corporate Transaction had the stock appreciation right been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding stock appreciation right,  provided  the aggregate exercise price for such award shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan, and (iii) the maximum number and/or class of securities for which any one person may be granted stock appreciation rights under the Plan per calendar year.
D. The Plan Administrator shall have the full power and authority to accelerate the vesting of stock appreciation rights granted under the Stock Appreciation Rights Program upon a Corporate Transaction or Change in Control or upon an event or events occurring in connection with such transactions.
E. The outstanding stock appreciation rights shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
 
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 	III.	REPRICING OR CANCELLATION AND REGRANT OF AWARDS	
The Plan Administrator may not modify or amend a stock option or stock appreciation right to reduce the exercise price of such stock option or stock appreciation right after it has been granted (except for adjustments made pursuant to Article One Section V.D.), unless approved by the Corporation’s stockholders and neither may the Plan Administrator, without the approval of the Corporation’s stockholders, cancel any outstanding stock option or stock appreciation right and immediately replace it with a new stock option or stock appreciation right with a lower exercise price, awards of a different type, and/or cash.
 
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ARTICLE FOUR 
STOCK ISSUANCE PROGRAM
 
 	I.	STOCK ISSUANCE TERMS	
Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to grants of restricted stock and restricted stock units which entitle the recipients to retain or receive, as applicable, the shares underlying the award upon the attainment of designated performance goals or the satisfaction of specified Service requirements. To the extent any shares issued pursuant to awards granted under the Stock Issuance Program are forfeited or otherwise return to the Plan, such shares will not count against the number of shares of Common Stock which may be issued under the Plan pursuant to Article One, Section V of the Plan and may once again be issued pursuant to awards under the Plan as if the original award were never granted. The Plan Administrator, in its sole discretion, shall determine the number of shares of Common Stock and/or restricted stock units to be granted to each Participant, provided that during any calendar year, no Participant shall receive an award under the Stock Issuance Program covering more than 1,000,000 shares of Common Stock.
A. Purchase Price.
1. The purchase price per share of Common Stock, if any, shall be fixed by the Plan Administrator.
2. Shares of Common Stock may be issued under the Stock Issuance Program for any item of consideration which the Plan Administrator may deem appropriate in each individual instance, including, without limitation, the following:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any Parent or Subsidiary).
B. Vesting/Issuance Provisions.
1. The Plan Administrator may issue shares of Common Stock under the Stock Issuance Program which are fully and immediately vested upon issuance or which are to vest in one or more installments over the Participant’s period of Service or upon attainment of specified performance objectives. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to restricted stock units which entitle the recipients to receive the shares underlying the restricted stock units and which vest in one or more installments over the Participant’s period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any awards granted under the Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant or the performance objectives to be attained,

(ii) the number of installments in which the awards are to vest,
(iii) the interval or intervals (if any) which are to lapse between installments, and
(iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. For purposes of qualifying awards made under the Stock Issuance Program as “performance-based compensation” under Section 162(m) of the Code, the Plan Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals, which shall be set by the Plan Administrator on or before the Determination Date. In establishing Performance Goals, the Plan Administrator may provide that performance shall be appropriately adjusted as follows:
(i) to include or exclude restructuring charges;
(ii) to include or exclude exchange rate effects, as applicable, for non-U.S. dollar denominated Performance Goals;
(iii) to include or exclude the effects of changes to generally accepted accounting principles required by the Financial Accounting Standards Board;
(iv) to include or exclude the effects of any statutory adjustments to corporate tax rates;
(v) to include or exclude the effects of any “extraordinary items” as determined under generally accepted accounting principles;
(vi) to include or exclude the effect of payment of bonuses under any cash bonus plan of the Corporation;
(vii) to include or exclude the effect of stock based compensation and/or deferred compensation;
 
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(viii) to include or exclude any other unusual gain or loss or other extraordinary item;
(ix) to respond to, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development;
(x) to respond to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or industry conditions;
(xi) to include or exclude the effects of divestitures, acquisitions or joint ventures;
(xii) to include or exclude the effects of discontinued operations that do not qualify as a segment of a business unit under generally accepted accounting principles;
(xiii) to assume that any business divested by the Corporation achieved performance objectives at targeted levels during the balance of a Performance Period following such divestiture;
(xiv) to include or exclude the effect of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common shareholders other than regular cash dividends;
(xv) to reflect a corporate transaction, such as a merger, consolidation, separation (including a spinoff or other distribution of stock or property by a corporation), or reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code);
(xvi) to reflect any partial or complete corporate liquidation; and
(xvii) to include or exclude the amortization of purchased intangibles and technology license arrangements.
In this connection, the Plan Administrator shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of awards made under the Stock Issuance Program under Section 162(m) of the Code (e.g., in determining the Performance Goals). To the extent necessary to comply with the performance-based compensation provisions of Section 162(m) of the Code, with respect to any award granted subject to Performance Goals, within the first twenty-five percent (25%) of the Performance Period, but in no event more than ninety (90) days following the commencement of any Performance Period (or such other time as may be required or permitted by Section 162(m) of the Code), the Plan Administrator shall, in writing, (A) designate one or more Participants to
 
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whom awards made under the Stock Issuance Program shall be made, (B) select the Performance Goals applicable to the Performance Period, (C) establish the Performance Goals and amounts of such awards made under the Stock Issuance Program, as applicable, which may be earned for such Performance Period, and (D) specify the relationship between the Performance Goals and the amounts of such awards made under the Stock Issuance Program, as applicable, to be earned by each Participant for such Performance Period. Following the completion of each Performance Period, the Plan Administrator shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amounts earned by a Participant, the Plan Administrator shall have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Plan Administrator may deem relevant to the assessment of individual or corporate performance for the Performance Period. A Participant shall be eligible to receive payment pursuant to an award intended to qualify as performance-based compensation under Section 162(m) of the Code made under the Stock Issuance Program for a Performance Period only if the Performance Goals for such period are achieved. Notwithstanding any other provision of the Plan, any award which is granted to a Participant and is intended to constitute qualified performance-based compensation under Section 162(m) of the Code shall be subject to any additional limitations set forth in the Code (including any amendment to Section 162(m)) or any regulations and ruling issued thereunder that are requirements for qualification as qualified performance-based compensation as described in Section 162(m) of the Code, and the Plan shall be deemed amended to the extent necessary to conform to such requirements.
2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to his or her unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program (for these purposes, shares to be issued upon settlement of a restricted stock unit award will not be issued until the award has actually been settled), whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for cash consideration, unless the Plan Administrator provides otherwise, the Corporation shall repay that consideration to the Participant at the time the shares are surrendered.
 
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5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the cessation of the Participant’s Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives.
6. Outstanding restricted stock units under the Stock Issuance Program shall automatically terminate, and no shares of Common Stock shall actually be issued in satisfaction of those awards, if the performance goals or Service requirements established for such awards are not attained or satisfied. The Plan Administrator, however, shall have the discretionary authority to issue shares of Common Stock under outstanding awards in satisfaction of one or more outstanding restricted stock unit awards as to which the designated performance goals are not attained or satisfied. On the date set forth in the Stock Issuance Agreement, all unearned restricted stock units shall be forfeited to the Company.
7. Upon meeting the applicable vesting criteria, the Participant shall be entitled to a payout of restricted stock units as specified in the Stock Issuance Agreement. Notwithstanding the foregoing, after the grant of restricted stock units, the Plan Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such restricted stock units. Payment of earned restricted stock units shall be made as soon as practicable after the date(s) set forth in the Stock Issuance Agreement or as otherwise provided in the applicable Stock Issuance Agreement or as required by applicable laws. The Plan Administrator, in its sole discretion, may pay earned restricted stock units in cash, in shares of Common Stock (which have an aggregate Fair Market Value equal to the value of the earned restricted stock units), or a combination thereof.
 
 	II.	CORPORATE TRANSACTION/CHANGE IN CONTROL	
A. All of the Corporation’s outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights and the awards issued under the Stock Issuance Program shall immediately vest in full (with all performance goals or other vesting criteria deemed achieved at target levels), in the event of any Corporate Transaction, except to the extent (i) the awards as to which those repurchase rights or other vesting criteria pertain are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement.
B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation’s repurchase rights remain outstanding under the Stock Issuance Program or while the awards under the Stock Issuance Program are unvested, to provide that those rights or awards shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights or awards shall immediately vest upon a Corporate Transaction or Change in Control or upon an event or events associated with such transactions.
 
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 	III.	SHARE ESCROW/LEGENDS	
Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.
 
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ARTICLE FIVE
PERFORMANCE SHARE AND PERFORMANCE UNIT PROGRAM
 
 	I.	PERFORMANCE UNITS AND PERFORMANCE SHARES	
Shares of Common Stock or cash may be issued under the Performance Share or Performance Unit Program through awards of performance shares and performance units, which are awards that will result in a payment to a Participant only if the performance goals or other vesting criteria established by the Plan Administrator are achieved or the awards otherwise vest. Each award granted hereunder shall be evidenced by an agreement in such form as the Plan Administrator shall determine which complies with the terms specified below. To the extent any shares issued pursuant to awards granted under the Performance Share and Performance Unit Program are forfeited or otherwise return to the Plan, such shares will not count against the number of shares of Common Stock which may be issued under the Plan pursuant to Article One, Section V of the Plan and may once again be issued pursuant to awards under the Plan as if the original award were never granted.
A. Grant of Performance Units/Shares. The Plan Administrator will have complete discretion in determining the number of performance units and performance shares granted to each Participant provided that during any calendar year, (a) no Participant will receive performance units having an initial value greater than $5,000,000, and (b) no Participant will receive more than 1,000,000 performance shares.
B. Value of Performance Units/Shares. Each performance unit will have an initial value that is established by the Plan Administrator on or before the date of grant. Each performance share will have an initial value equal to the Fair Market Value of a share of Common Stock on the date of grant.
C. Performance Objectives and Other Terms. The Plan Administrator will set performance objectives or other vesting provisions (including, without limitation, continued status as an Employee) in its discretion which, depending on the extent to which they are met, will determine the number or value of performance units/shares that will be paid out to the Participant. Each Award of performance units/shares will be evidenced by an agreement that will specify the Performance Period, and such other terms and conditions as the Plan Administrator, in its sole discretion, will determine.
1. General Performance Objectives. The Plan Administrator may set performance objectives based upon the achievement of Company-wide, divisional, or individual goals, or any other basis determined by the Plan Administrator in its discretion.
2. Section 162(m) Performance Objectives. For purposes of qualifying grants of performance units/shares as “performance-based compensation” under Section 162(m) of the Code, the Plan Administrator, in its discretion, may determine that the performance objectives applicable to performance units/shares will be based on the achievement

of Performance Goals. The Plan Administrator will set the Performance Goals on or before the Determination Date. In establishing Performance Goals, the Plan Administrator may provide that performance shall be appropriately adjusted as follows:
(i) to include or exclude restructuring charges;
(ii) to include or exclude exchange rate effects, as applicable, for non-U.S. dollar denominated Performance Goals;
(iii) to include or exclude the effects of changes to generally accepted accounting principles required by the Financial Accounting Standards Board;
(iv) to include or exclude the effects of any statutory adjustments to corporate tax rates;
(v) to include or exclude the effects of any “extraordinary items” as determined under generally accepted accounting principles;
(vi) to include or exclude the effect of payment of bonuses under any cash bonus plan of the Corporation;
(vii) to include or exclude the effect of stock based compensation and/or deferred compensation;
(viii) to include or exclude any other unusual gain or loss or other extraordinary item;
(ix) to respond to, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development;
(x) to respond to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or industry conditions;
(xi) to include or exclude the effects of divestitures, acquisitions or joint ventures;
(xii) to include or exclude the effects of discontinued operations that do not qualify as a segment of a business unit under generally accepted accounting principles;
(xiii) to assume that any business divested by the Corporation achieved performance objectives at targeted levels during the balance of a Performance Period following such divestiture;
 
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(xiv) to include or exclude the effect of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common shareholders other than regular cash dividends;
(xv) to reflect a corporate transaction, such as a merger, consolidation, separation (including a spinoff or other distribution of stock or property by a corporation), or reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code);
(xvi) to reflect any partial or complete corporate liquidation; and
(xvii) to include or exclude the amortization of purchased intangibles and technology license arrangements
In granting performance units/shares which are intended to qualify under Section 162(m) of the Code, the Plan Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the performance units/shares under Section 162(m) of the Code (e.g., in determining the Performance Goals). To the extent necessary to comply with the performance-based compensation provisions of Section 162(m) of the Code, with respect to any award granted subject to Performance Goals, within the first twenty-five percent (25%) of the Performance Period, but in no event more than ninety (90) days following the commencement of any Performance Period (or such other time as may be required or permitted by Section 162(m) of the Code), the Plan Administrator shall, in writing, (A) designate one or more Participants to whom awards made under the Performance Share and Performance Unit Program shall be made, (B) select the Performance Goals applicable to the Performance Period, (C) establish the Performance Goals and amounts of such awards made under the Performance Share and Performance Unit Program, as applicable, which may be earned for such Performance Period, and (D) specify the relationship between the Performance Goals and the amounts of such awards made under the Performance Share and Performance Unit Program, as applicable, to be earned by each Participant for such Performance Period. Following the completion of each Performance Period, the Plan Administrator shall certify in writing whether the applicable Performance Goals have been achieved for such Performance Period. In determining the amounts earned by a Participant, the Plan Administrator shall have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Plan Administrator may deem relevant to the assessment of individual or corporate performance for the Performance Period. A Participant shall be eligible to receive payment pursuant to an award intended to qualify as performance-based compensation under Section 162(m) of the Code made under the Performance Share and Performance Unit Program for a Performance Period only if the Performance Goals for such period are achieved. Notwithstanding any other provision of the Plan, any award which is granted to a Participant and is intended to constitute qualified performance-based compensation under Section 162(m) of the Code shall be subject to any additional limitations set forth in the Code (including any amendment to Section 162(m)) or any regulations and ruling issued
 
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thereunder that are requirements for qualification as qualified performance-based compensation as described in Section 162(m) of the Code, and the Plan shall be deemed amended to the extent necessary to conform to such requirements.
D. Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of performance units/shares will be entitled to receive a payout of the number of performance units/shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a performance unit/share, the Plan Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such performance unit/share.
E. Form and Timing of Payment of Performance Units/Shares. Payment of earned performance units/shares will be made as soon as practicable after the expiration of the applicable Performance Period. The Administrator, in its sole discretion, may pay earned performance units/shares in the form of cash, in shares of Common Stock (which have an aggregate Fair Market Value equal to the value of the earned performance units/shares at the close of the applicable Performance Period) or in a combination thereof.
F. Cancellation of Performance Units/Shares. On the date set forth in the agreement evidencing the award, all unearned or unvested performance units/shares will be forfeited to the Company, and again will be available for grant under the Plan.
 
 	II.	CORPORATE TRANSACTION/CHANGE IN CONTROL	
A. All performance goals or other vesting criteria will be deemed achieved at target levels and all other terms and conditions met with respect to performance shares and performance units in the event of any Corporate Transaction, except to the extent (i) those awards are assumed or an equivalent option or right substituted by the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the award Agreement.
B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested awards are granted or any time while such awards remain unvested and outstanding under the Performance Share or Performance Unit Program, to provide that those awards shall immediately vest upon a Corporate Transaction or Change in Control or upon an event or events associated with such transactions.
 
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ARTICLE SIX
AUTOMATIC AWARD PROGRAM
On August 17, 2000, the Board approved the following changes to the Automatic Award Program which became effective when approved by the stockholders at the 2000 Annual Meeting: (i) reduced the number of shares of Common Stock for which option grants are to be made to new non-employee Board members under the Automatic Award Program from 160,000 shares (as adjusted to reflect the two splits of the Common Stock which have occurred since the implementation of the Plan) to 40,000 shares and (ii) reduced the number of shares of Common Stock for which option grants are to be made to continuing non-employee Board members under the Automatic Award Program from 40,000 shares (as adjusted to reflect the two splits of the Common Stock which have occurred since the implementation of the Plan) to 15,000 shares.
On August 9, 2001, the Board approved the following changes to the Automatic Award Program which became effective with stockholder approval at the 2001 Annual Meeting: (i) increase the number of shares of Common Stock for which option grants are to be made to new non-employee Board members under the Automatic Award Program from 40,000 shares to 55,000 shares and (ii) modify the vesting schedule applicable to each such option grants from four (4) successive equal annual installments to the vesting of 25,000 shares after one (1) year of Board service and the balance in three (3) successive equal annual installments thereafter.
On May 16, 2006, the Board approved the following changes to the Automatic Award Program which became effective with stockholder approval at the 2006 Annual Meeting: increase the number of shares of Common Stock for which option grants are to be made to continuing non-employee Board members under the Automatic Award Program from 15,000 shares to 20,000 shares.
On July 13, 2007, the Board approved the following changes to the Automatic Award Program which became effective with stockholder approval at the 2007 Annual Meeting: reduce the term of option grants under the Automatic Award Program from ten (10) years to seven (7) years.
On August 17, 2009, the Board approved the following changes to the Automatic Award Program which became effective with stockholder approval at the 2009 Annual Meeting: amend the Automatic Award Program so that the Plan Administrator may institute a program whereby a non-employee Board member may elect to receive his or her automatic equity grants in the form of all stock options or in a combination of stock options and restricted stock units. With this amendment, the title of this Article Six was changed from “Automatic Option Grant Program” to “Automatic Award Program” and references in the Plan to the “Automatic Option Grant Program” were modified to reference the “Automatic Award Program.”
On July 14, 2011, the Board approved the following changes to the Automatic Award Program: amend the Automatic Award Program so that non-employee Board members would receive equity grants under the Plan (in any form of award permitted under the

Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs) pursuant to a compensation policy applicable to non-employee Board members as the Board or Primary Committee may determine from time to time.
 
 	I.	GRANTING OF AWARDS	
A. Nonemployee Board Member Compensation Policy. Each individual who is or becomes a non-employee Board member on or after July 14, 2011 shall be granted equity awards pursuant to a compensation policy adopted by the Board or a Primary Committee, as in effect from time to time.
B. Adjustments. The Board or a Primary Committee, in their respective discretion, may change and otherwise revise the terms of awards granted under the compensation policy for non-employee Board members for awards granted on or after the date the Board or the Primary Committee determines to make any such change or revision. For purposes of clarification, the changes or other revisions the Board or the Primary Committee can make to the compensation policy include, but are not limited to, the number of shares of Common Stock subject to the awards, the type of awards granted, and the vesting and other conditions of the awards.
 
 	II.	CORPORATE TRANSACTION/CHANGE IN CONTROL	
A. The shares of Common Stock subject to each outstanding option granted under the Automatic Award Program at the time of a Corporate Transaction, but not otherwise vested, shall automatically vest in full so that each such option shall, immediately prior to the effective date of that Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each such option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof).
B. The shares of Common Stock subject to each outstanding option granted under the Automatic Award Program at the time of a Change in Control, but not otherwise vested, shall automatically vest in full so that each such option shall, immediately prior to the effective date of that Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested shares until the expiration or sooner termination of the option’s term.
C. All repurchase rights of the Corporation outstanding under the Automatic Award Program at the time of a Corporate Transaction or Change in Control shall automatically terminate at that time, and the shares of Common Stock subject to those terminated rights shall immediately vest.
D. Each option granted under the Automatic Award Program that is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after
 
25

such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had such option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to the exercise price payable per share under each such outstanding option, provided the aggregate exercise price payable for such securities shall remain the same.
E. All vesting criteria relating to any outstanding restricted stock units granted under the Automatic Award Program shall be deemed satisfied and all other terms and conditions met with respect to such awards in the event of any Corporate Transaction or a Change in Control.
F. The grant of awards under the Automatic Award Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets
 
 	III.	REMAINING TERMS	
The remaining terms of each award granted under the Automatic Award Program shall be the same as the terms in effect for same type of awards made under the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs.
 
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ARTICLE SEVEN
MISCELLANEOUS
 
 	I.	TAX WITHHOLDING	
A. The Corporation’s obligation to deliver shares of Common Stock upon the exercise or issuance of awards or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all holders of unexercised or unvested awards under the Plan (other than the options granted or the shares issued under the Automatic Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the minimum Withholding Taxes to which such holders become subject in connection with the exercise of their awards or the vesting or disposition of their shares issued pursuant thereto. Such right may be provided to any such holder in either or both of the following formats:
(i) Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such award, the vesting or issuance of such shares or upon disposition of the shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%) of the minimum amount required to be withheld) designated by the holder.
(ii) Stock Delivery: The election to deliver to the Corporation, at the time the award is exercised, the shares vest or are otherwise issued or upon disposition of the shares, one or more shares of Common Stock previously acquired by such holder (other than in connection with the exercise of an award or share vesting triggering the Withholding Taxes) with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%) of the minimum amount required to be withheld) designated by the holder.
 
 	II.	EFFECTIVE DATE AND TERM OF THE PLAN	
The Plan became effective on the Plan Effective Date and shall remain in effect until the earliest of (i) August 16, 2019, (ii) the date on which all shares available for issuance under the Plan shall have been issued or (iii) the termination of all outstanding awards in connection with a Corporate Transaction (unless the acquiror assumes the Plan in the transaction). Upon such Plan termination, all outstanding awards and unvested shares issued pursuant to awards shall continue to have force and effect in accordance with the provisions of the documents evidencing such awards.

 	III.	AMENDMENT OF THE PLAN	
A. The Board or the Primary Committee shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects, subject to any stockholder approval which may be required pursuant to applicable laws or regulations; provided, however, that the Board or the Primary Committee may not, without stockholder approval, (i) increase the number of shares of Common Stock authorized for issuance under the Plan, or (ii) materially increase the benefits offered to participants under the 1999 Plan. No amendment or modification shall adversely affect any rights and obligations with respect to awards at the time outstanding under the Plan unless the Optionee or Participant consents to such amendment or modification.
B. The Plan was amended on August 17, 2000, to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 15,000,000 shares. The amendment was approved by the stockholders at the 2000 Annual Meeting, and no option grants were made on the basis of the 15,000,000-share increase, until such stockholder approval was obtained.
C. The Plan was amended on August 9, 2001, to: (i) increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 13,400,000 shares, (ii) increase the number of shares of Common Stock for which option grants are to be made to newly elected or appointed non-employee Board members under the Automatic Option Grant Program from 40,000 shares to 55,000 shares and (iii) modify the vesting schedule applicable to such option grants from four (4) successive equal annual installments to the vesting of 25,000 shares after one (1) year of Board service and the balance in three (3) successive equal annual installments. Such amendment was approved by the stockholders at the 2001 Annual Meeting, and no options grants were made on the basis of the 13,400,000-share increase or the amendments to the Automatic Option Grant Program until such stockholder approval was obtained.
D. The Plan was amended on July 2, 2002, to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 14,000,000 shares. Such amendment was approved by the stockholders at the 2002 Annual Meeting, and no option grants were made on the basis of the 14,000,000-share increase, until such stockholder approval was obtained.
E. The Plan was amended and restated on June 12, 2003, so that awards under the Plan could qualify as “performance based compensation” under Section 162(m) of the Code. The stockholders approved the amended and restated Plan at the 2003 Annual Meeting.
F. The Plan was amended and restated on July 7, 2004, to (i) increase the number of share of Common Stock authorized for issuance under the Plan by an additional 10,200,000, and (ii) to add the Stock Appreciation Rights and Performance Share and Performance Unit Programs. The stockholders approved the amended and restated Plan at the 2004 Annual Meeting.
 
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G. The Plan was amended on July 1, 2005, to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 10,600,000 shares. Such amendment was approved by the stockholders at the 2005 Annual Meeting, and no awards were granted on the basis of the 10,600,000-share increase, until such stockholder approval was obtained.
H. The Plan was amended on July 10, 2006, to (i) increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 10,900,000 shares, and (ii) increase the number of shares of Common Stock for which option grants are to be made to continuing non-employee Board members under the Automatic Option Grant Program from 15,000 shares to 20,000 shares. Such amendment was approved by the stockholders at the 2006 Annual Meeting, and no awards were granted on the basis of the 10,900,000-share increase, until such stockholder approval was obtained.
I. The Plan was amended on July 13, 2007, to (i) increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 7,200,000 shares, (ii) extend the term of the Plan by ten (10) years, (iii) provide that the number of shares subject to awards granted under the Stock Issuance and Performance Share and Performance Unit Programs may not exceed more than thirty percent (30%) of the sum of (1) the number of shares of Common Stock added to the Plan at the 2007 Annual Meeting, (2) the number of shares of Common Stock available to be granted pursuant to awards under the Plan as of May 25, 2007, and (3) the number of shares of Common Stock subject to outstanding awards as of May 25, 2007 that actually return to the Plan upon the repurchase or reacquisition of unvested shares or that were subject to awards that terminated without any shares actually having been issued pursuant thereto, (iv) increase the initial value of performance units that a Participant may receive during any calendar year from $1,000,000 to $2,000,000 and (v) decrease the maximum term of options granted under the Discretionary Option Grant Program and Automatic Option Grant Program and of stock appreciation rights granted under the Stock Appreciation Rights Program from ten (10) years to seven (7) years. Such amendments were approved by the stockholders at the 2007 Annual Meeting, and no awards were granted on the basis of the 7,200,000-share increase or the amendments to the Stock Issuance, Performance Share and Performance Unit Programs, Discretionary Option Grant Program, Automatic Option Grant Program and Stock Appreciation Rights Program until such stockholder approval was obtained.
J. The Plan was amended on July 11, 2008, to (i) increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 6,600,000 shares, (ii) permit the Company to grant equity awards to the Company’s non-employee Board members under all equity programs under the Plan and (iii) provide that the number of shares subject to awards granted under the Stock Issuance and Performance Share and Performance Unit Programs may not exceed more than thirty percent (30%) of the sum of (1) the number of shares of Common Stock added to the Plan at the 2008 Annual Meeting, (2) the number of shares of Common Stock available to be granted pursuant to awards under the Plan as of May 23, 2008, and (3) the number of shares of Common Stock subject to outstanding awards as of May 23, 2008. Such amendments were approved by the stockholders at the 2008 Annual Meeting, and no awards were granted on the basis of the 6,600,000-share increase or the other amendments to the Plan until such stockholder approval was obtained.
 
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K. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under such program are held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess grants are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees the exercise price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.
L. The Plan was amended on March 6, 2009, to provide for a one-time stock option exchange program, as described in the proxy statement pursuant to the Special Meeting of Stockholders held on April 21, 2009, under which certain outstanding options may be surrendered in exchange for a lesser number of restricted stock units (or cash payment involving exchanges of a small number of surrendered options). Pursuant to the stock option exchange program, all of the shares underlying options surrendered in the option exchange program were returned to the Plan and restricted stock unit grants made in connection with the stock option exchange program were made from such returned shares. After making the restricted stock unit grants in connection with the stock option exchange program, the Plan’s share reserve was reduced such that, in effect, only 3,500,000 of the shares underlying the surrendered options were retained as available for future grant under the Plan, thereby reducing the number of shares of Common Stock which may be issued over the term of the Plan from 101,100,000 shares to 89,330,429 shares.
M. The Plan was amended on August 17, 2009, to (i) approve an amendment to the Automatic Award Program (formerly known as the Automatic Option Grant Program) so that the Plan Administrator may implement a program whereby a non-employee Board member may elect to receive his or her automatic equity grants in the form of all stock options or in a combination of stock options and restricted stock units, and (ii) provide that the number of shares of Common Stock that may be issued pursuant to the Stock Issuance and Performance Share or Performance Unit Programs equals 8,893,237 plus the sum of: (A) fifty percent (50%) of the number of shares subject to outstanding awards as of August 17, 2009 that actually return to the Plan pursuant to Article One, Section V, Clause C, and (B) fifty percent (50%) of the number of shares of Common Stock that are added to the Plan upon approval of the Corporation’s stockholders after the 2009 Annual Meeting. Such amendments were approved by the stockholders at the 2009 Annual Meeting, and no awards were granted based on the amendments to the Plan until such stockholder approval was obtained.
N. The Plan was amended on July 13, 2010, to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 7,000,000 shares. The stockholders approved such amendment at the 2010 Annual Meeting, and no awards were granted on the basis of the 7,000,000-share increase until such stockholder approval was obtained.
 
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O. The Plan was amended on July 14, 2011, to (i) amend the Automatic Award Program so that non-employee Board members would receive equity grants under the Plan (in any form of award permitted under the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs) pursuant to a compensation policy applicable to non-employee Board members as the Board or Primary Committee may determine from time to time, and (ii) to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 7,700,000 shares. The stockholders approved the share increase at the 2011 Annual Meeting, and no awards were granted on the basis of the 7,700,000-share increase until such stockholder approval was obtained.
P. The Plan was amended on July 18, 2012, to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 7,350,000 shares. The stockholders approved such amendment at the 2012 Annual Meeting and no awards were granted on the basis of the 7,350,000-share increase until such stockholder approval was obtained.
Q. The Plan was amended on July 22, 2013, (i) to increase the number of shares of Common Stock that a Participant may receive during any calendar year pursuant to an award granted under the Stock Issuance Program from 200,000 to 1,000,000, and (ii) to increase the number of shares of Common Stock and the initial value of an award that a Participant may receive during any calendar year pursuant to an award granted under the Performance Share and Performance Unit Program from 200,000 to 1,000,000 and from $2,000,000 to $5,000,000, respectively. The stockholders approved such amendments at the 2013 Annual Meeting and no awards were granted on the basis of the amendments until such stockholder approval was obtained.
R. The Plan was amended on July 31, 2013, (i) to amend the Stock Issuance and Performance Share and Performance Unit Programs such that the number of shares of Common Stock which may be issued under each such program will not be subject to a share limitation specific to that program, but will remain subject to the limitations with respect to the number of shares of Common Stock which may be issued under the Plan pursuant to Article One, Section V of the Plan, (ii) to amend Article One Section V.A. of the Plan such that any shares subject to awards granted under the Plan other than options to purchase shares of Common Stock or stock appreciation rights will be counted against the maximum number of shares of Common Stock which may be issued over the term of the Plan as two (2) shares for every one (1) share subject thereto, (iii) to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 10,000,000 shares and (iv) amend the performance criteria that may be used as a basis for establishing performance-based compensation under the 1999 Plan. The stockholders approved such amendments at the 2013 Annual Meeting and no awards were granted on the basis of the amendments until such stockholder approval was obtained.
S. The Plan was amended on July 23, 2014, to increase the number of shares of Common Stock authorized for issuance under the Plan by an additional 7,500,000 shares. The stockholders will be asked to approve such amendment at the 2014 Annual Meeting, and no awards will be granted on the basis of the amendment until such stockholder approval is obtained.
 
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 	IV.	REGULATORY APPROVALS	
A. The implementation of the Plan, the granting of any award under the Plan and the issuance of any shares of Common Stock pursuant to an award shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the awards granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading.
 
 	V.	USE OF PROCEEDS	
Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.
 
 	VI.	NO EMPLOYMENT/SERVICE RIGHTS	
Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.
 
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APPENDIX
The following definitions shall be in effect under the Plan:
A.Annual Revenue means, as to any Performance Period, the Corporation’s or business unit’s net sales.
B.Automatic Award Program shall mean the automatic award program in effect under Article Six of the Plan.
C.Board shall mean the Corporation’s Board of Directors.
D.Cash Position means, as to any Performance Period, the Corporation’s level of cash and cash equivalents.
E.Change in Control shall mean a change in ownership or control of the Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders, or
(ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination.
F.Code shall mean the Internal Revenue Code of 1986, as amended.
G.Common Stock shall mean the Corporation’s common stock.
H.Corporate Transaction shall mean either of the following stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; or
(ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation.
 
A-1

I.Corporation shall mean NetApp, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of NetApp, Inc. which shall by appropriate action adopt the Plan.
J.Determination Date means the latest possible date that will not jeopardize the qualification of an award granted under the Plan as “performance-based compensation” under Section 162(m) of the Code.
K.Discretionary Option Grant Program shall mean the discretionary option grant program in effect under Article Two of the Plan.
L.Earnings Per Share means, as to any Performance Period, the Corporation’s or a business unit’s Net Income, divided by a weighted average number of common shares outstanding and dilutive common equivalent shares deemed outstanding.
M.EBIT means, as to any Performance Period, income before taxes excluding depreciation and amortization.
N.EBITDA means, as to any Performance Period, cash provided by operating activities less cash paid to purchase property and equipment.
O.Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.
P.Exercise Date shall mean the date on which the Corporation shall have received written notice of the option exercise.
Q.Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in  The Wall Street Journal . If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.
 
A-2

(ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in  The Wall Street Journal . If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.
(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Plan Administrator.
R.Free Cash Flow means, as to any Performance Period, cash provided by operating activities less cash paid to purchase property and equipment.
S.Incentive Option shall mean an option which satisfies the requirements of Code Section 422.
T.Individual Objectives means as to an Optionee or Participant for any Performance Period, the objective and measurable goals set by a process and approved by the Plan Administrator (in its discretion).
U.Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee or other person in the Service of the Corporation (or any Parent or Subsidiary).
V. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
W.Net Income means, as to any Performance Period, the Corporation’s or a business unit’s income after taxes.
X.Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.
Y.Operating Cash Flow means, as to any Performance Period, the Corporation’s or a business unit’s sum of Net Income plus depreciation and amortization less capital expenditures plus changes in working capital comprised of accounts receivable, inventories, other current assets, trade accounts payable, accrued expenses, product warranty, advance payments from customers and long-term accrued expenses.
 
A-3

Z.Operating Income orOperating Profit means, as to any Performance Period, the Corporation’s or a business unit’s income from operations.
AA.Optionee shall mean any person to whom an option is granted under the Plan.
BB.Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
CC.Participant shall mean any person who is issued an award under the Stock Appreciation Rights, Stock Issuance, or Performance Share and Performance Unit Programs.
DD.Performance Goals means the goal(s) (or combined goal(s)) determined by the Plan Administrator (in its discretion) to be applicable to an Optionee or Participant with respect to an award granted under the Plan (an “Award”). As determined by the Plan Administrator, the Performance Goals applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: (a) Annual Revenue, (b) Cash Position, (c) Earnings Per Share, (d) EBIT, (e) EBITDA, (f) Free Cash Flow, (g) Individual Objectives, (h) Net Income, (i) Operating Cash Flow, (j) Operating Income, (k) Operating Profit, (l) Return on Assets, (m) Return on Capital, (n) Return on Equity, (o) Return on Sales, and (p) Total Stockholder Return. The Performance Goals may differ from Optionee to Optionee and from award to award. Prior to the Determination Date, the Plan Administrator shall determine whether any significant element(s) shall be included in or excluded from the calculation of any Performance Goal with respect to any Optionee or Participant. For example (but not by way of limitation), the Plan Administrator may determine that the measures for one or more Performance Goals shall be based upon the Corporation’s pro-forma results and/or results in accordance with generally accepted accounting principles.
EE.Performance Period means any fiscal year of the Corporation or such other period as determined by the Administrator in its sole discretion.
FF.Performance Share and Performance Unit Program shall mean the performance share and performance unit program in effect under Article Five of the Plan.
GG.Permanent Disability or Permanently Disabled shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for the purposes of the Automatic Option Grant Program, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more.
 
A-4

HH.Plan shall mean the Corporation’s 1999 Stock Option Plan, as set forth in this document.
II.Plan Administrator shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant, Stock Appreciation Rights, Stock Issuance and Performance Share and Performance Unit Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under such program with respect to the persons under its jurisdiction.
JJ.Plan Effective Date shall mean August 17, 1999, the date on which the Board adopted the Plan.
KK.Primary Committee shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant Program with respect to Section 16 Insiders or to determine the terms of, and otherwise administer, any compensation policy adopted by the Company for non-employee Board members.
LL.Return on Assets means, as to any Performance Period, the percentage equal to the Corporation’s or a business unit’s Operating Income before incentive compensation, divided by average net Corporation or business unit, as applicable, assets.
MM.Return on Capital means, as to any Performance Period, income from operations less income taxes on operations divided by the sum of the book value of debt and the book value of equity less cash.
NN.Return on Equity means, as to any Performance Period, the percentage equal to the Corporation’s Net Income divided by average stockholder’s equity.
OO.Return on Sales means, as to any Performance Period, the percentage equal to the Corporation’s or a business unit’s Operating Income before incentive compensation, divided by the Corporation’s or the business unit’s, as applicable, revenue.
PP.Secondary Committee shall mean a committee of Board members or of other individuals satisfying applicable laws appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders.
QQ.Section 16 Insider shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act.
RR.Service shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance.
 
A-5

SS.Stock Appreciation Rights Program shall mean the stock appreciation rights program in effect under Article Three of the Plan.
TT.Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange.
UU.Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock or the grant of restricted stock units under the Stock Issuance Program.
VV.Stock Issuance Program shall mean the stock issuance program in effect under Article Four of the Plan.
WW.Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
XX.10% Stockholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).
YY.Total Stockholder Return means as to any Performance Period, the total return (change in share price plus reinvestment of any dividends) of a Share.
ZZ.Withholding Taxes shall mean the Federal, state and local income and employment withholding taxes to which the holder of options or unvested shares of Common Stock becomes subject in connection with the exercise of those options, or the vesting of those shares or upon the disposition of shares acquired pursuant to an option or stock issuance.
 
A-6

Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas Georgens, certify that:
1) I have reviewed this Quarterly Report on Form 10-Q of NetApp, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 	 	/s/ THOMAS GEORGENS	
 	 	Thomas Georgens	
 	 	Chairman of the Board and Chief Executive Officer,	
 	 	(Principal Executive Officer and Principal Operating Officer)	
Dated: November 25, 2014

Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302(a)
OF THE SARBANES-OXLEY ACT OF 2002
I, Nicholas R. Noviello, certify that:
1) I have reviewed this Quarterly Report on Form 10-Q of NetApp, Inc.;
2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4) The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5) The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 	 	/s/ NICHOLAS R. NOVIELLO	
 	 	Nicholas R. Noviello	
 	 	Executive Vice President, Finance and Operations and
Chief Financial Officer	
 	 	(Principal Financial Officer and Principal Accounting Officer)	
Dated: November 25, 2014

Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas Georgens, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of NetApp, Inc., on Form 10-Q for the quarterly period ended October 24, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of NetApp, Inc.

 	 	/s/ THOMAS GEORGENS	
 	 	Thomas Georgens	
 	 	Chairman of the Board and Chief Executive Officer,	
 	 	(Principal Executive Officer and Principal Operating Officer)	
Dated: November 25, 2014

Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Nicholas R. Noviello, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of NetApp, Inc., on Form 10-Q for the quarterly period ended October 24, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of NetApp, Inc.

 	 	/s/ NICHOLAS R. NOVIELLO	
 	 	Nicholas R. Noviello	
 	 	Executive Vice President, Finance and Operations and
Chief Financial Officer	
 	 	(Principal Financial Officer and Principal Accounting Officer)	
Dated: November 25, 2014