This section and other parts of this Form 10-Q contain forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act
of 1995, that involve risks and uncertainties. Forward-looking statements
provide current expectations of future events based on certain assumptions and
include any statement that does not directly relate to any historical or current
fact. Forward-looking statements also can be identified by words such as
"future," "anticipates," "believes," "estimates," "expects," "intends," "will,"
"would," "could," "can," "may," and similar terms. Forward-looking statements
are not guarantees of future performance and the actual results of NetApp, Inc.
("we," "us," or the "Company") may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such
differences include, but are not limited to, those discussed in Part II, Item 1A
of this Form 10-Q under the heading "Risk Factors," which are incorporated
herein by reference. The following discussion should be read in conjunction with
our consolidated financial statements as of and for the fiscal year ended
April 26, 2019, and the notes thereto, contained in our Annual Report on Form
10-K, and the condensed consolidated financial statements and notes thereto
included elsewhere in this Form 10-Q. We assume no obligation to revise or
update any forward-looking statements for any reason, except as required by law.











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Overview

Our Company



NetApp is the data authority for hybrid cloud. We provide a full range of hybrid
cloud data services that simplify management of applications and data across
cloud and on-premises environments to accelerate digital transformation.
Together with our partners, we empower global organizations to unleash the full
potential of their data to expand customer touchpoints, foster greater
innovation and optimize their operations.

NetApp delivers a Data Fabric built for the data-driven world. Our Data Fabric
simplifies the integration and orchestration of data for applications and
analytics in clouds, across clouds and on-premises to accelerate digital
transformation. We deliver a Data Fabric with consistent data services for data
visibility and insights, data access and control, and data protection and
security, that unleashes the power of data to achieve a new competitive
advantage.

We focus on delivering an exceptional customer experience to become our customers' preferred data partner. NetApp's unique approach to data services enables organizations to inspire innovation with the cloud, build clouds to accelerate new services, and modernize IT architecture with cloud-connected flash.

With NetApp products and solutions, customers can:

• Continually fuel business growth by delivering data-rich customer

experiences through new application deployments that easily use data and

services regardless of where they reside or in what form.

• Accelerate digital transformation by developing a next-generation,


        cloud-architected infrastructure that manages data and services as one
        integrated resource supporting both public and private clouds.


     •  Free the resources necessary to fund transformation by deploying the

industry's leading flash storage solution, which is highly efficient and

scales from the edge to the core to the cloud.




Customers are attracted by the speed and scale benefits of the public cloud but
need new data management capabilities to keep control of data as it moves beyond
the walls of the enterprise. NetApp believes the hybrid cloud is fast becoming
the dominant model for enterprise IT. Our Data Fabric approach enables our
customers to manage, secure and protect their data from on-premises to public to
hybrid clouds, all at the scale needed to accommodate the exponential data
growth of the digital world.

Budget constraints and skill imbalances lead our customers to seek help in
integrating, deploying and managing the solutions they need to stay competitive.
This drives demand for converged and hyper-converged infrastructure solutions.
FlexPod is the converged infrastructure of choice for many of the largest
enterprises around the globe. Customers can break free from the limits of
first-generation HCI with NetApp HCI and attain guaranteed performance with high
levels of flexibility, scale, automation, and integration with the Data Fabric.

Flash plays a key role in customers' digital transformation efforts as they seek
to gain advantage through greater speed, responsiveness and value from key
business applications - all while lowering total cost of ownership. All-flash
array technology is the de facto choice as customers seek performance and
economic benefits from replacing hard disk installations. With a highly
differentiated and broad portfolio of all-flash and hybrid array offerings,
NetApp is well positioned to enable customers to accomplish this transition.

To provide visibility into our transition from older products to our newer,
higher growth products and clarity into the dynamics of our product revenue, we
group our products by "Strategic" and "Mature" solutions. As our product
portfolio evolves, market dynamics change, and management continues to assess
our largest growth opportunities, we periodically change how we group certain
products. Beginning in fiscal 2020, Strategic includes All-flash FAS (AFF)
products, including all related add-on hardware and operating system (OS)
software, private cloud solutions (including SolidFire, converged and
hyper-converged infrastructure products, StorageGrid), enterprise software
license agreements (ELAs) and other optional add-on software products. Mature
now includes Hybrid FAS products, including all related add-on hardware and OS
software, original equipment manufacturers (OEM) products, and branded E-Series.
Prior to this grouping change, Hybrid FAS products and branded E-Series were
included in Strategic, while all add-on hardware and OS software were included
in Mature. For comparability, Strategic and Mature revenues presented for the
prior year periods have been recast based on the revised groupings.

In addition to our products and solutions, we provide a variety of services to
our customers, including software maintenance, hardware maintenance and other
services including professional services, global support solutions, and customer
education and training. Revenues generated by our Cloud Data Services offerings
are included in software maintenance revenues.




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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 cash conversion cycle):



                                                   Three Months Ended                   Six Months Ended
                                             October 25,        October 26,       October 25,       October 26,
                                                2019               2018              2019              2018
Net revenues                                $       1,371      $       1,517     $       2,607     $       2,991
Gross profit                                $         925      $         974     $       1,741     $       1,937
Gross profit margin percentage                         67 %               64 %              67 %              65 %
Income from operations                      $         296      $         286     $         400     $         540
Income from operations as a percentage of
net revenues                                           22 %               19 %              15 %              18 %
Net income                                  $         243      $         241     $         346     $         524
Diluted net income per share                $        1.03      $        0.91     $        1.44     $        1.96
Operating cash flows                        $         (53 )    $         165     $         257     $         491




                                                           October 25,        April 26,
                                                              2019              2019

Deferred revenue and financed unearned services revenue $ 3,468 $ 3,668 Cash conversion cycle (days)

                                         (4 )               3



Stock Repurchase Program and Dividend Activity



During the first six months of fiscal 2020, we repurchased 14 million shares of
our common stock at an average price of $55.06 per share, for an aggregate of
$750 million. We also declared aggregate cash dividends of $0.96 per share in
that period, for which we paid an aggregate of $226 million.

Senior Notes Maturity



On September 27, 2019, we made an aggregate cash payment of $400 million to
extinguish our 2.00% Senior Notes at maturity. This repayment was funded through
the sale of short-term commercial paper notes issued under our existing program
and cash on hand.

Real Estate Transaction

In September 2017, we entered into an agreement to sell certain land and
buildings located in Sunnyvale, California, through two separate and independent
closings, the first of which was completed in the third quarter of fiscal 2018.
The remaining properties, consisting of land, were classified as assets held for
sale, and included as other current assets in our condensed consolidated balance
sheets as of April 26, 2019. On August 29, 2019, the second closing occurred and
we consummated the sale of the land, with a net book value of $53 million, and
received cash proceeds of $96 million, resulting in a gain, net of direct
selling costs, of $38 million.

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 our significant accounting policies is included under Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations of our fiscal 2019 Form 10-K. An accounting policy is deemed to be
critical if it requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate is made, if
different estimates reasonably could have been used, or if changes in the
estimate that are reasonably possible could materially impact the financial
statements. There have been no material changes to the critical accounting
policies and estimates as filed in such report.

New Accounting Standards



See Note 1 - Description of Business and Significant Accounting policies for the
impact to our financial statements of the adoption of the accounting standard
Leases (ASC 842) in the first quarter of fiscal 2020.

                                       29

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

Results of Operations



Our fiscal year is reported as a 52- or 53-week year that ends on the last
Friday in April. Fiscal years 2020 and 2019 are each 52-week years, with 13
weeks in each of their quarters. Unless otherwise stated, references to
particular years, quarters, months and periods refer to the Company's fiscal
years ended in April and the associated quarters, months and periods of those
fiscal years.

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





                                                  Three Months Ended                       Six Months Ended
                                            October 25,         October 26,       October 25,         October 26,
                                               2019                2018              2019                2018
Revenues:
Product                                               56    %             60   %            54    %             60   %
Software maintenance                                  19                  16                19                  16
Hardware maintenance and other services               25                  24                26                  25
Net revenues                                         100                 100               100                 100
Cost of revenues:
Cost of product                                       25                  28                25                  28
Cost of software maintenance                           1                   1                 1                   1
Cost of hardware maintenance and other
services                                               7                   7                 7                   7
Gross profit                                          67                  64                67                  65
Operating expenses:
Sales and marketing                                   28                  27                30                  27
Research and development                              15                  14                16                  14
General and administrative                             5                   5                 5                   5
Restructuring charges                                  -                   -                 1                   1
Gain on sale or derecognition of assets               (3 )                 -                (1 )                 -
Total operating expenses                              46                  45                51                  47
Income from operations                                22                  19                15                  18
Other income, net                                      -                   -                 1                   1
Income before income taxes                            22                  19                16                  19
Provision for income taxes                             4                   3                 3                   1
Net income                                            18    %             16   %            13    %             18   %



Percentages may not add due to rounding

Discussion and Analysis of Results of Operations

Overview



Net revenues for the second quarter and first six months of fiscal 2020 were
$1,371 million and $2,607 million, respectively, reflecting a decrease of $146
million, or 10%, and $384 million, or 13%, respectively, compared to the
corresponding periods of the prior year, primarily reflecting lower product
revenues, and to a lesser extent, the unfavorable impact of foreign exchange
rate fluctuations in the quarter. Hardware maintenance and other services
revenues also decreased compared to the corresponding periods of the prior year,
offset by an increase in software maintenance revenues.

Gross profit as a percentage of net revenues for the second quarter and first
six months of fiscal 2020 increased by three and a half percentage points and
two percentage points, respectively, compared to the corresponding periods in
fiscal 2019, primarily reflecting higher margins on product revenues and
hardware maintenance and other services revenues. Gross profit margins on
product revenues increased by two and a half percentage points in the second
quarter of fiscal 2020 and were relatively flat in the first six months of
fiscal 2020, compared to the corresponding periods of fiscal 2019. Gross profit
margins in both the second quarter and first six months of fiscal 2020
benefitted from a higher mix of All Flash FAS (AFF) product sales and cost
reductions. These benefits were partially offset in the second quarter of fiscal
2020, and fully offset in the first six months of fiscal 2020, by high-margin
revenue recognized related to the software license components of several ELAs in
the corresponding periods of fiscal 2019, which did not repeat in fiscal 2020.

                                       30

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Sales and marketing, research and development, and general and administrative
expenses for the second quarter and the first six months of fiscal 2020 totaled
$667 million, or 49% of net revenues and $1,358 million, or 52% of revenues,
respectively, representing an increase of three and a half percentage points and
six percentage points, respectively, when compared to the corresponding periods
of fiscal 2019, primarily due to lower net revenues in the current year periods.

Net Revenues (in millions, except percentages):





                                               Three Months Ended                                  Six Months Ended
                                   October 25,       October 26,                      October 25,       October 26,
                                      2019              2018          % Change           2019              2018          % Change
Net revenues                      $       1,371     $       1,517           (10 )%   $       2,607     $       2,991           (13 )%




The decrease in net revenues for the second quarter and first six months of
fiscal 2020 compared to the corresponding periods of fiscal 2019 was primarily
due to a decrease in product revenues of $142 million and $373 million,
respectively. Product revenues as a percentage of net revenues decreased by four
percentage points and five and a half percentage points in the second quarter
and first six months of fiscal 2020, respectively, compared to the corresponding
periods of fiscal 2019.

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



                                                     Three Months Ended                      Six Months Ended
                                             October 25,           October 26,        October 25,         October 26,
                                                2019                   2018              2019                2018
Arrow Electronics, Inc.                                24 %                   24 %              24 %                23 %
Tech Data Corporation                                  21 %                   21 %              21 %                19 %



Product Revenues (in millions, except percentages):





                                               Three Months Ended                                  Six Months Ended
                                   October 25,       October 26,                      October 25,       October 26,
                                      2019              2018          % Change           2019              2018          % Change
Product revenues                  $         771     $         913           (16 )%   $       1,415     $       1,788           (21 )%




Product revenues are derived through the sale of our strategic and mature
solutions, and consist of sales of configured AFF and Hybrid systems, which are
bundled hardware and software products, as well as add-on flash, disk and/or
hybrid storage and related OS, private cloud solutions (including SolidFire,
converged and hyper-converged infrastructure products, StorageGrid), original
equipment manufacturer (OEM) products and add-on optional software.

Under the revised Strategic and Mature product groupings, as described in the
Overview section above, product revenues from strategic solutions represented
57% and 55% of product revenues in the second quarter and first six months of
fiscal 2020, respectively, compared to 53% and 54% in the corresponding periods
of the prior year, respectively. Product revenues from mature solutions
represented 43% and 45% of product revenues in the second quarter and first six
months of fiscal 2020, respectively, compared to 47% and 46% in the
corresponding periods of the prior year, respectively.

Product revenues declined in the second quarter and first six months of fiscal
2020 compared to the corresponding periods of the prior year primarily due less
favorable macroeconomic conditions, lower enterprise IT spending and, in the
first quarter of fiscal 2020, go-to-market execution issues experienced with
some of our largest global customer accounts.

Total product revenues from strategic solutions totaled $442 million in the
second quarter of fiscal 2020 reflecting a 9% decrease from $485 million in the
second quarter of fiscal 2019. Total product revenues from strategic solutions
totaled $779 million in the first six months of fiscal 2020 reflecting a 19%
decrease from $960 million in the first six months of fiscal 2019. These
decreases were primarily due to a substantial amount of revenue recognized in
the prior year periods related to the software license components of several
ELAs which did not repeat, a decrease in add-on optional software sales in the
current year periods and, for the six month period, decreased sales of AFF
products. These decreases were partially offset by an increase in revenues from
private cloud solutions in both fiscal 2020 periods and, for the second quarter,
increased sales of AFF products.

Total product revenue from mature solutions totaled $329 million in the second
quarter of fiscal 2020 reflecting a 23% decrease from $428 million in the second
quarter of fiscal 2019. Total product revenue from mature solutions totaled $636
million in the first six months of fiscal 2020 reflecting a 23% decrease from
$828 million in the first six months of fiscal 2019. These decreases were
primarily due to decreased sales of FAS Hybrid and OEM products, as well as
add-on storage, in the current year periods.

                                       31

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Software Maintenance Revenues (in millions, except percentages):





                                                 Three Months Ended                                   Six Months Ended
                                   October 25,         October 26,                      October 25,       October 26,
                                      2019                2018           % Change          2019              2018           % Change

Software maintenance revenues $ 254 $ 236


     8 %   $         504     $         465              8 %



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

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



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



                                                Three Months Ended                                    Six Months Ended
                                   October 25,        October 26,                       October 25,       October 26,
                                      2019               2018           % Change           2019              2018           % Change
Hardware maintenance and other
services revenues                 $         346      $         368             (6 )%   $         688     $         738             (7 )%



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



Hardware maintenance contract revenues decreased year over year, at $286 million
and $570 million, respectively, for the second quarter and first six months of
fiscal 2020, compared to $303 million and $606 million, respectively, for the
corresponding periods of the prior year. The decreases were primarily
attributable to a decline in average selling price on contracts executed
recently.

Professional services and educational and training services revenues were $60
million and $118 million, respectively, for the second quarter and first six
months of fiscal 2020, compared to $65 million and $132 million, respectively,
for the corresponding periods of the prior year.

Revenues by Geographic Area:





                                                     Three Months Ended                      Six Months Ended
                                             October 25,           October 26,        October 25,         October 26,
                                                2019                   2018              2019                2018
United States, Canada and Latin America
(Americas)                                             56 %                   57 %              54 %                57 %
Europe, Middle East and Africa (EMEA)                  29 %                   28 %              31 %                29 %
Asia Pacific (APAC)                                    14 %                   15 %              15 %                14 %



Percentages may not add due to rounding

Americas revenues consist of sales to Americas commercial and U.S. public sector
markets. During the first six months of fiscal 2020, Americas revenues were
negatively impacted by general macroeconomic conditions in the region and, in
the first quarter of fiscal 2020, go-to-market execution issues with some of our
largest customer accounts, which was reflected in the geographic distribution of
revenues as a percentage of net revenues in the second quarter and first six
months of fiscal 2020 compared to the corresponding periods of fiscal 2019.

Cost of Revenues



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

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





                                               Three Months Ended                                  Six Months Ended
                                   October 25,       October 26,                      October 25,       October 26,
                                      2019              2018          % Change           2019              2018          % Change
Cost of product revenues          $         341     $         428           (20 )%   $         653     $         826           (21 )%




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





                                                     Three Months Ended        Six Months Ended
                                                       Fiscal 2020 to           Fiscal 2020 to
                                                        Fiscal 2019              Fiscal 2019
                                                     Percentage Change        Percentage Change
                                                           Points                   Points
Materials costs                                                      (23 )                    (23 )
Excess and obsolete inventory                                          2                        1
Other                                                                  1                        1
Total change                                                         (20 )                    (21 )


Cost of product revenues represented 44% and 46% of product revenues for the
second quarter and first six months of fiscal 2020, respectively, compared to
47% and 46% for the corresponding periods of fiscal 2019. Materials costs
represented 86% and 84% of product costs for the second quarter and first six
months of fiscal 2020, respectively, compared to 91% and 89% in the
corresponding periods of fiscal 2019.

Materials costs decreased $98 million and $190 million in the second quarter and
first six months of fiscal 2020, respectively, compared to the corresponding
periods of the prior year, primarily due to a decline in product revenue and, to
a lesser extent, a decline in the price of certain product components. The
average unit materials costs of both AFF and FAS Hybrid systems decreased in the
second quarter and first six months of fiscal 2020 compared to the corresponding
periods of fiscal 2019.

Margins on revenue recognized for strategic solutions increased during the second quarter and first six months of fiscal 2020 compared to the corresponding periods of fiscal 2019, while margins for mature solutions were relatively flat.

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





                                                 Three Months Ended                                   Six Months Ended
                                   October 25,         October 26,                      October 25,        October 26,
                                      2019                2018           % Change          2019               2018           % Change
Cost of software maintenance
revenues                          $          11       $           8             38 %   $          21      $          15             40 %




Cost of software maintenance revenues in dollars were relatively flat in the
second quarter and first six months of fiscal 2020 compared to the corresponding
periods of fiscal 2019 and represented 4% of software maintenance revenues for
second quarter and first six months of fiscal 2020, and 3% for the corresponding
periods of fiscal 2019.



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



                                                Three Months Ended                                  Six Months Ended
                                   October 25,        October 26,                      October 25,       October 26,
                                      2019               2018          % Change           2019              2018          % Change
Cost of hardware maintenance
and other services revenues       $          94      $         107           (12 )%   $         192     $         213           (10 )%




Cost of hardware maintenance and other services revenues decreased by $13
million, or 12%, and $21 million, or 10%, respectively, for the second quarter
and first six months of fiscal 2020 compared to the corresponding periods of
fiscal 2019, in line with the decreases in hardware maintenance and other
services revenues, and also as a result of cost savings initiatives. Costs
represented 27% of hardware maintenance and other services revenues in the
second quarter, and 28% in the first six months of fiscal 2020, compared to 29%
in the second quarter and first six months of fiscal 2019.



Operating Expenses

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

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



Total compensation costs included in operating expenses decreased by $9 million
and $13 million, respectively, or 2%, in the second quarter and first six months
of fiscal 2020, compared to the corresponding periods of the prior year
primarily due to lower incentive compensation expense and, to a lesser extent,
the favorable impact of foreign exchange rate fluctuations, partially offset by
higher salaries expense, reflecting a 2% increase in average headcount in the
fiscal 2020 periods.

                                       33

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Sales and Marketing (in millions, except percentages):





                                                Three Months Ended                                    Six Months Ended
                                   October 25,        October 26,                       October 25,       October 26,
                                      2019               2018           % Change           2019              2018           % Change

Sales and marketing expenses $ 389 $ 408

    (5 )%   $         794     $         817             (3 )%


Sales and marketing expenses consist primarily of compensation costs,
commissions, outside services, allocated facilities and information technology
(IT) costs, advertising and marketing promotional expense and travel and
entertainment expense.



                                                      Three Months Ended          Six Months Ended
                                                    Fiscal 2020 to Fiscal      Fiscal 2020 to Fiscal
                                                             2019                       2019
                                                      Percentage Change          Percentage Change
                                                            Points                     Points
Compensation costs                                                      (1 )                       (1 )
Advertising and marketing promotional expense                           (3 )                       (2 )
Other                                                                   (1 )                        -
Total change                                                            (5 )                       (3 )


Compensation costs decreased slightly for the second quarter and first six
months of fiscal 2020 compared to the corresponding periods of the prior year,
reflecting a 2% decrease in average headcount in each of the current year
periods. Advertising and marketing promotional expense decreased in the second
quarter and first six months of fiscal 2020, primarily due to certain annual
marketing events being held earlier in the prior year. Sales and marketing
expenses in the second quarter and first six months of fiscal 2020 also
benefitted slightly from foreign exchange rate fluctuations.

Research and Development (in millions, except percentages):





                                                  Three Months Ended                                    Six Months Ended
                                     October 25,        October 26,                       October 25,       October 26,
                                        2019               2018           % Change           2019              2018           % Change

Research and development expenses $ 209 $ 211

      (1 )%   $         424     $         419              1 %


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



                                                      Three Months Ended          Six Months Ended
                                                    Fiscal 2020 to Fiscal      Fiscal 2020 to Fiscal
                                                             2019                       2019
                                                      Percentage Change          Percentage Change
                                                            Points                     Points
Compensation costs                                                       1                          2
Development projects and outside services                               (1 )                       (1 )
Other                                                                   (1 )                        -
Total change                                                            (1 )                        1


The increase in compensation costs for the second quarter and first six months
of fiscal 2020 compared to the corresponding periods in the prior year was
attributable to an increase in average headcount of 9% and 8%, respectively,
resulting in higher salaries, benefits and stock-based compensation expense,
partially offset by lower incentive compensation expense. The increase in
headcount reflects our investment in additional engineering resources to support
the expansion and enhancement of products and solutions targeted at our most
important customer and market opportunities. Development projects and outside
services expense for the second quarter and first six months of fiscal 2020
decreased slightly as a result of lower spending on materials and services
associated with engineering activities to develop new and enhanced products, due
to the timing of new product introductions.

General and Administrative (in millions, except percentages):





                                                     Three Months Ended                                   Six Months Ended
                                       October 25,         October 26,                      October 25,       October 26,
                                          2019                2018           % Change          2019              2018           % Change

General and administrative expenses $ 69 $ 69


         - %   $         140     $         142             (1 )%


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



                                                     Three Months Ended         Six Months Ended
                                                       Fiscal 2020 to        Fiscal 2020 to Fiscal
                                                        Fiscal 2019                   2019
                                                     Percentage Change         Percentage Change
                                                           Points                    Points
Compensation costs                                                   (10 )                       (9 )
Professional and legal fees and outside services                      13                         11
Facilities and IT support costs                                       (6 )                       (5 )
Other                                                                  3                          2
Total change                                                           -                         (1 )


While average headcount increased in the second quarter and first six months of
fiscal 2020 compared to the corresponding periods of the prior year,
compensation costs decreased because a greater percentage of employees were
located in lower cost geographies. The increases in professional and legal fees
and outside services expense in the second quarter and first six months of
fiscal 2020 were primarily due to the higher spending levels on business
transformation projects, while the decreases in facilities and IT support costs
were primarily due to lower spending levels on IT projects.

Restructuring Charges (in millions, except percentages):





                                                Three Months Ended                              Six Months Ended
                                    October 25,       October 26,                  October 25,       October 26,
                                       2019              2018          % Change       2019              2018          % Change
Restructuring charges              $           -     $           -           NM   $          21     $          19           NM






NM - Not Meaningful



In the first quarter of fiscal 2020, we announced a restructuring plan (the May
2019 Plan) to reduce costs and redirect resources to our highest return
activities, which included a reduction in our global workforce of approximately
2%. Charges related to the plan consisted primarily of employee
severance-related costs. Substantially all activities under the plan have been
completed. See Note 12 - Restructuring Charges of the Notes to Condensed
Consolidated Financial Statements for more details.

Gain on sale or derecognition of assets (in millions, except percentages):





                                                Three Months Ended                              Six Months Ended
                                    October 25,       October 26,                  October 25,       October 26,
                                       2019              2018          % Change       2019              2018          % Change
Gain on sale or derecognition of
assets                             $         (38 )   $           -           NM   $         (38 )   $           -           NM




NM - Not Meaningful

In September 2017, we entered into an agreement to sell certain land and
buildings located in Sunnyvale, California, through two separate and independent
closings, the first of which was completed in the third quarter of fiscal 2018.
The remaining properties, consisting of land, were classified as assets held for
sale, and included as other current assets in our condensed consolidated balance
sheet as of April 26, 2019. On August 29, 2019, the second closing occurred and
we consummated the sale of the land, with a net book value of $53 million, and
received cash proceeds of $96 million. resulting in a gain, net of direct
selling costs, of $38 million.



Other Income, Net (in millions, except percentages)

The components of other income, net were as follows:





                                               Three Months Ended                                  Six Months Ended
                                   October 25,       October 26,                      October 25,       October 26,
                                      2019              2018          % Change           2019              2018          % Change
Interest income                   $          12     $          21           (43 )%   $          31     $          46           (33 )%
Interest expense                            (12 )             (14 )         (14 )%             (27 )             (28 )          (4 )%
Other income, net                             3                 -            NM                 14                 7           100 %
Total                             $           3     $           7           (57 )%   $          18     $          25           (28 )%




NM - Not Meaningful

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Interest income decreased in the second quarter and first six months of fiscal
2020 compared to the corresponding periods of the prior year due to a reduction
in size of our investment portfolio as a result of our sale of approximately
$1.0 billion of available-for-sale debt securities in the first quarter of
fiscal 2020. Other income, net increased in the first six months of fiscal 2020
compared to the corresponding period of fiscal 2019 as a result of the $14
million gain we realized from the sale of these securities, partially offset by
differences in foreign exchange gains and losses. Interest expense remained
relatively flat in the second quarter and first six months of fiscal 2020
compared to the corresponding periods of the prior year, as we repaid our
maturing Senior Notes but increased our average outstanding commercial paper
balance.

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





                                                 Three Months Ended                                   Six Months Ended
                                   October 25,         October 26,                      October 25,        October 26,
                                      2019                2018           % Change          2019               2018           % Change
Provision for income taxes        $          56       $          52              8 %   $          72      $          41             76 %


Our effective tax rate for the second quarter of fiscal 2020 was 18.7% compared
to 17.7% for the second quarter of fiscal 2019. Our effective tax rate for the
first six months of fiscal 2020 was 17.2% compared to 7.3% for the corresponding
period of fiscal 2019. Our effective tax rates reflect the impact of a
significant amount of our earnings, primarily income from our European
operations, being taxed in foreign jurisdictions at rates below the U.S.
statutory tax rate. Our effective tax rate increased for the second quarter of
fiscal 2020 compared to the corresponding period of the prior year primarily due
to the discrete tax charge on the sale of land in Sunnyvale, California and the
differences in discrete benefits for stock-based compensation. Our effective tax
rate increased for the first six months of fiscal 2020 compared to the
corresponding period in the prior year primarily due to the discrete tax
benefits related to the adoption of the new revenue standard in fiscal 2019, and
the same items that impacted the second quarter effective tax rate.

On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted into law.
The TCJA made significant changes to the U.S. corporate income tax system
including a reduction of the U.S. federal corporate income tax rate from 35% to
21%, the imposition of a one-time transition tax on deferred foreign earnings,
and the creation of new taxes on certain foreign-sourced earnings. As of April
26, 2019, we had completed the accounting for the tax impacts of the TCJA,
however, we will continue to assess the impact of further guidance from federal
and state tax authorities on our business and consolidated financial statements,
and recognize any adjustments in the period in which they are determined.



During fiscal 2019, we adopted the new revenue accounting standard and, during
the six months ended October 26, 2018, we recognized a $34 million discrete tax
benefit for adjustments to certain intercompany transactions resulting from the
retrospective application of the new revenue accounting standard.

As of October 25, 2019, we had $294 million of gross unrecognized tax benefits.
Inclusive of penalties, interest and certain income tax benefits, $246 million
would affect our provision for income taxes if recognized, and $251 million has
been recorded in other long-term liabilities.

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. We believe that within the next 12 months, it
is reasonably possible that either certain audits will conclude, certain
statutes of limitations will lapse, or both. As a result of uncertainties
regarding tax audits and their possible outcomes, an estimate of the range of
possible impacts to unrecognized tax benefits in the next twelve months cannot
be made at this time.




Liquidity, Capital Resources and Cash Requirements

October 25,       April 26,
(In millions, except percentages)                       2019             

2019

Cash, cash equivalents and short-term investments $ 2,987 $ 3,899 Principal amount of debt

$       1,649     $     1,799

The following is a summary of our cash flow activities:





                                                                Six Months Ended
                                                          October 25,       October 26,
(In millions)                                                2019              2018
Net cash provided by operating activities                $         257     $         491
Net cash provided by investing activities                        1,116      

381


Net cash used in financing activities                           (1,148 )          (1,429 )
Effect of exchange rate changes on cash, cash
equivalents and restricted cash                                     (5 )             (25 )
Net increase (decrease) in cash, cash equivalents and
restricted cash                                          $         220     $        (582 )


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Cash Flows



As of October 25, 2019, our cash, cash equivalents and short-term investments
were $3.0 billion, a decrease of $0.9 billion from April 26, 2019. The decrease
was primarily due to $750 million paid for the repurchase of our common stock,
$400 million used for the repayment of our Senior Notes due September 2019, $226
million used for the payment of dividends, and $68 million in purchases of
property and equipment, partially offset by $249 million in proceeds from the
issuance of commercial paper notes, net, $96 million in proceeds from the sale
of properties, and $257 million of cash provided by operating activities.
Working capital decreased by $0.7 billion to $1.0 billion as of October 25, 2019
compared to April 26, 2019 primarily due to the decreases in cash, cash
equivalents and short-term investments discussed above.

Cash Conversion Cycle

The following table presents the components of our cash conversion cycle:



                                               Three Months Ended
                                  October 25,       April 26,       October 

26,


(In days)                            2019             2019             2018
Days sales outstanding (1)                  52              70              

46


Days inventory outstanding (2)              23              21              

14


Days payables outstanding (3)              (78 )           (87 )             (79 )
Cash conversion cycle (4)                   (4 )             3               (19 )



Days may not add due to rounding

(1) Days sales outstanding, referred to as DSO, calculates the average collection

period of our receivables. DSO is based on ending accounts receivable and net

revenue for each period. DSO is calculated by dividing accounts receivable by

average net revenue per day for the current quarter (91 days for each of the

quarters presented above). DSO for the second quarter of fiscal 2020

increased compared to the corresponding period of fiscal 2019 due to less

favorable shipping linearity and the timing of shipments to certain large

customers, while it decreased compared to the fourth quarter of fiscal 2019

due to lower seasonal invoicing levels and more favorable shipping linearity.

(2) Days inventory outstanding, referred to as DIO, measures the average number

of days from procurement to sale of our products. DIO is based on ending

inventory and cost of revenues for each period. DIO is calculated by dividing

ending inventory by average cost of revenues per day for the current quarter.

DIO for the second quarter of fiscal 2020 increased compared to the

corresponding period of fiscal 2019 as a result of higher levels of on hand

inventory and lower cost of goods sold in the current year period, while it

was relatively flat compared to the fourth quarter of fiscal 2019.

(3) Days payables outstanding, referred to as DPO, calculates the average number

of days our payables remain outstanding before payment. DPO is based on

ending accounts payable and cost of revenues for each period. DPO is

calculated by dividing accounts payable by average cost of revenues per day

for the current quarter. DPO for the second quarter of fiscal 2020 was

relatively consistent with the corresponding period of fiscal 2019, while it

decreased compared to the fourth quarter of 2019, primarily due to the timing

of purchases from contract manufacturers.

(4) The cash conversion cycle is the sum of DSO and DIO less DPO. Items which may

cause the cash conversion cycle in a particular period to differ include, but

are not limited to, changes in business mix, changes in payment terms

(including extended payment terms from suppliers), the extent of shipment

linearity, seasonal trends and the timing of revenue recognition and

inventory purchases within the period.

Cash Flows from Operating Activities



During the first six months of fiscal 2020, we generated cash from operating
activities of $257 million, reflecting net income of $346 million, adjusted by
non-cash depreciation and amortization of $99 million, stock-based compensation
of $82 million, and a gain on sale of properties of $38 million, compared to
$491 million of cash generated from operating activities during the first six
months of fiscal 2019.

Changes in assets and liabilities in the first six months of fiscal 2020 included the following:



  • Accounts receivable decreased $435 million, reflecting lower DSO.


  • Accounts payable decreased $157 million, reflecting lower DPO.


  • Accrued expenses decreased $315 million, primarily due to employee

compensation payouts related to fiscal year 2019 commissions and incentive

compensation plans and payments of income taxes.

• Deferred revenue and financed unearned services revenue decreased $197


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


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

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Cash Flows from Investing Activities



During the first six months of fiscal 2020, we generated $1.1 billion from
maturities and sales of investments, net of purchases, and paid $68 million for
capital expenditures, while during the first six months of fiscal 2019, we
generated $489 million from maturities and sales of investments, net of
purchases, and paid $107 million for capital expenditures. Additionally, during
the first six months of fiscal 2020, we received $96 million for the sale of
land in Sunnyvale, California and paid $56 million net to acquire a
privately-held company.

Cash Flows from Financing Activities



During the first six months of fiscal 2020, we used $750 million for the
repurchase of fourteen million shares of our common stock, $226 million for the
payment of dividends, and $400 million for the repayment of our Senior Notes due
September 2019, partially offset by $249 million in proceeds from the issuance
of commercial paper notes, net, compared to $1.1 billion used for the repurchase
of fourteen million shares of common stock, $207 million used for the payment of
dividends, and $135 million used for the repayment of commercial paper notes,
net, during the first six months of fiscal 2019.

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

Liquidity



Our principal sources of liquidity as of October 25, 2019 consisted of cash,
cash equivalents and short-term investments, cash we expect to generate from
operations, and our commercial paper program and related credit facility.

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



                             October 25,       April 26,
                                2019             2019
Cash and cash equivalents   $       2,545     $     2,325
Short-term investments                442           1,574
Total                       $       2,987     $     3,899


As of October 25, 2019 and April 26, 2019, $2.9 billion and $3.7 billion,
respectively, of cash, cash equivalents and short-term investments were held by
various foreign subsidiaries and were generally based in U.S. dollar-denominated
holdings, while $0.1 billion and $0.2 billion, respectively, were available in
the U.S. The TCJA imposed a one-time transition tax on substantially all
accumulated foreign earnings through December 31, 2017, and generally allows
companies to make distributions of foreign earnings without incurring additional
federal taxes. As a part of the recognition of the impacts of the TCJA, we have
reviewed our projected global cash requirements and have determined that certain
historical and future foreign earnings will no longer be indefinitely
reinvested.

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,
service interest and principal payments on our debt, fund our stock repurchase
program, and pay dividends, as and if declared.

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
25, 2019.

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Our investment portfolio has been and will continue to be exposed to market risk
due to trends in the credit and capital markets. We continue to closely monitor
current economic and market events to minimize the market risk of our investment
portfolio. We routinely monitor our financial exposure to both sovereign and
non-sovereign borrowers and counterparties. 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 also have an automatic
shelf registration statement on file with the Securities and Exchange Commission
(SEC). We may in the future offer an additional unspecified amount of debt,
equity and other securities.

Senior Notes

The following table summarizes the principal amount of our Senior Notes as of October 25, 2019 (in millions):





3.375% Senior Notes Due June 2021       $   500
3.25% Senior Notes Due December 2022        250
3.30% Senior Notes Due September 2024       400
Total                                   $ 1,150


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

Commercial Paper Program and Credit Facility



We have a commercial paper program (the Program), under which we may issue
unsecured commercial paper notes. Amounts available under the Program may be
borrowed, repaid and re-borrowed, with the aggregate face or principal amount of
the notes outstanding under the Program at any time not to exceed $1.0 billion.
The maturities of the notes can vary, but may not exceed 397 days from the date
of issue. The notes are sold under customary terms in the commercial paper
market and may be issued at a discount from par or, alternatively, may be sold
at par and bear interest at rates dictated by market conditions at the time of
their issuance. The proceeds from the issuance of the notes are used for general
corporate purposes. As of October 25, 2019, we had commercial paper notes
outstanding with an aggregate principal amount of $499 million, a
weighted-average interest rate of 2.20% and maturities ranging from 7 days to 91
days.

In connection with the Program, we have a senior unsecured credit agreement that
expires on December 10, 2021. The credit agreement provides a $1.0 billion
revolving unsecured credit facility that serves as a back-up for the Program.
Proceeds from the facility may also be used for general corporate purposes,
providing another potential source of liquidity to the extent that the credit
facility exceeds the outstanding debt issued under the Program. The credit
agreement also includes options that allow us to request an increase in the
facility of up to an additional $300 million and to extend its maturity date for
two additional one-year periods, both subject to certain conditions. As of
October 25, 2019, we were in compliance with all associated covenants in this
agreement. No amounts were drawn against this facility during any of the periods
presented.

Capital Expenditure Requirements



We expect to fund our capital expenditures, including our commitments related to
facilities, equipment, operating leases and internal-use software development
projects over the next few years through existing cash, cash equivalents,
investments and cash generated from operations. The timing and amount of our
capital requirements cannot be precisely determined and will depend on a number
of factors, including future demand for products, changes in the network storage
industry, hiring plans and our decisions related to the financing of our
facilities and equipment requirements. We anticipate capital expenditures for
the remainder of fiscal 2020 to be between $75 million and $100 million.

Dividends and Stock Repurchase Program

On November 13, 2019, we declared a cash dividend of $0.48 per share of common stock, payable on January 22, 2020 to holders of record as of the close of business on January 3, 2020.



Our Board of Directors has authorized the repurchase of up to $13.6 billion of
our common stock under our stock repurchase program. Under this program, we may
purchase shares of our outstanding common stock through solicited or unsolicited
transactions in the open market, in privately negotiated transactions, through
accelerated share repurchase programs, pursuant to a Rule 10b5-1 plan or in such
other manner as 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 25, 2019, we repurchased a total of
327 million shares of our common stock at an average price of $38.20 per share,
for an aggregate purchase price of $12.5 billion. As of October 25, 2019, the
remaining authorized amount for stock repurchases under this program was $1.1
billion.

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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

Purchase Orders and Other Commitments



In the ordinary course of business, we make commitments to our third-party
contract manufacturers to manage manufacturer lead times and meet product
forecasts, and to other parties to purchase various key components used in the
manufacture of our products. A significant portion of our reported purchase
commitments arising from these agreements consists of firm, non-cancelable, and
unconditional commitments. As of October 25, 2019, we had $447 million in
non-cancelable purchase commitments for inventory. We record a liability for
firm, non-cancelable and unconditional purchase commitments for quantities in
excess of our future demand forecasts consistent with the valuation of our
excess and obsolete inventory. To the extent that such forecasts are not
achieved, our commitments and associated accruals may change.

In addition to inventory commitments with contract manufacturers and component
suppliers, we have open purchase orders and construction related obligations
associated with our ordinary course of business for which we have not received
goods or services. As of October 25, 2019, we had $5 million in construction
related obligations and $244 million in other purchase obligations.

Unrecognized Tax Benefits



As of October 25, 2019, our liability for uncertain tax positions was
$251 million, including interest, penalties and certain income tax benefits. Due
to uncertainties regarding tax audits and their possible outcomes, we are unable
to make reasonably reliable estimates of the period of cash settlement with the
taxing authorities.

Financing Guarantees

While most of our arrangements for sales include short-term payment terms, from
time to time we provide long-term financing to creditworthy customers. We have
generally sold receivables financed through these arrangements on a non-recourse
basis to third party financing institutions within 10 days of the contracts'
dates of execution, and we classify the proceeds from these sales as cash flows
from operating activities in our condensed consolidated statements of cash
flows. We account for the sales of these receivables as "true sales" as defined
in the accounting standards on transfers of financial assets, as we are
considered to have surrendered control of these financing receivables. Provided
all other revenue recognition criteria have been met, we recognize product
revenues for these arrangements, net of any payment discounts from financing
transactions, upon product acceptance. We sold $34 million and $43 million of
receivables during the first six months of fiscal 2020 and fiscal 2019,
respectively.

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

Some of the leasing arrangements described above have been financed on a
recourse basis through third-party financing institutions. Under the terms of
recourse leases, which are generally three years or less, we remain liable for
the aggregate unpaid remaining lease payments to the third-party leasing
companies in the event of end-user customer default. These arrangements are
generally collateralized by a security interest in the underlying assets. Where
we provide a guarantee for recourse leases and collectability is probable, we
account for these transactions as sales type leases. If collectability is not
probable, the cash received is recorded as a deposit liability and revenue is
deferred until the arrangement is deemed collectible. For leases that we are not
a party to, other than providing recourse, we recognize revenue when control is
transferred. As of October 25, 2019 and April 26, 2019, the aggregate amount by
which such contingencies exceeded the associated liabilities was not
significant. To date, we have not experienced significant losses under our lease
financing programs or other financing arrangements.

We have entered into service contracts with certain of our end-user customers
that are supported by third-party financing arrangements. If a service contract
is terminated as a result of our non-performance under the contract or our
failure to comply with the terms of the financing arrangement, we could, under
certain circumstances, be required to acquire certain assets related to the
service contract or to pay the aggregate unpaid payments under such
arrangements. As of October 25, 2019, we have not been required to make any
payments under these arrangements, and we believe the likelihood of having to
acquire a material amount of assets or make payments under these arrangements is
remote. The portion of the financial arrangement that represents unearned
services revenue is included in deferred revenue and financed unearned services
revenue in our condensed consolidated balance sheets.

Indemnification Agreements



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

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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 16 - Commitments
and Contingencies of the Notes to Condensed Consolidated Financial Statements.

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