NTAP Management Meeting Highlights
Yesterday, we met with management at both Network Appliance and Cache Flow to
discuss general business trends and outlook for 2000 and beyond. Key
highlights included an update on current business trends, overview of the
company's caching business and the recent changes implemented; discussion of
the NAS business, and overview of the competitive landscape.

NAS Business Highlights
Management noted that North American sales in November and December were “on
fire” in what would typically be a softer growth quarter. There has been no
Y2K slowdown effect at NTAP – in fact, seemingly the reverse has happened. In
part, we believe that as corporate customers moved past Y2K and begin to focus
on preparing themselves for the NetEconomy, storage, and the management and
deployment of resources in this market have been an increasing priority.
Caching also fits into this thesis as corporate customers seek to embrace the
world of “clicks and mortar” in an effort to compete against the pure on-line
companies which garnered an early lead. The market for caching appliances
will correspondingly expand as customers increasingly seek to speed access to
-- and delivery of -- content.
In addition, after making significant investments in its direct sales hiring,
we believe NTAP is reaping the benefits. Specifically, now in markets like
New York, where there were just two reps a short time ago, there are now 8.
With increased coverage and increased focus, sales reps have increased market
penetration. This has also been a key factor in the company's recent growth
acceleration. The company is currently having little difficulty attracting
talent at this time – as a hot company in an emerging industry - sales reps
and engineers are easily attracted.
We believe it is possible that if current business trends hold, NTAP could
potentially maintain or even accelerate its 90% Y/Y growth rate posted last
quarter. In addition to the expanding market opportunity and increasing
market enthusiasm for NAS – and storage and general – we believe the sales
cycles are accelerating. In addition, we believe margin trends may be
tracking above plan with the company's s/w and services mix in the quarter is
holding surprisingly firm at approximately 14% following the initial
introduction of Snap Mirror in volume last quarter.
OEM relationships continue to track to plan but are not expected to materially
increase as a % of the mix near-term – primarily because the core business
continues to grow very rapidly. There has been only limited conflict/overlap
and management clearly believes the Dell relationship is driving incremental
sales. In fact, approximately 70% of the Dell filers sold were to dedicated
NT-only accounts, a market that NTAP has historically not penetrated as much

Future product introductions will mirror historical trends with expectations
for next generation products in the Spring. Again, the primary changes will
be a rolling of the price points and increased performance and the high-end.
Capacity points will migrate from 3TB to 6TB in 2000. Component availability
remains good and costs continue to decline.
The competitive landscape remains relatively unchanged. One factor to keep an
eye on will be EMC's new NAS offerings. Management views EMC's pending
announcement of a NAS product using DG technology as a positive for the
industry with EMC effectively endorsing the NAS market. Still, uncertainties
exist about what the actual product will look like, how it will be priced and
how competitive it will be. Nonetheless, we view the addressable market
opportunity as significantly larger than either vendor could address
independently and believe the market opportunity is expanding.
Caching Highlights
Following the company's July quarter results in which caching revenues
declined sequentially, caching sales rebounded in the October quarter and
remain on track. NTAP's decision to create a dedicated caching sales force
has proved to be the right strategy and business momentum – while always
“lumpy” as a result of the small relative size of the caching business and
potential clustering of deals – is back on track. Last quarter this business
increased 66% Q/Q to represent 7% of revenues. And while the % of mix
 could continue to fluctuate, we believe the new sales strategy has proved
successful. Caching reps tend to have different backgrounds and skill sets
than traditional filer reps and are frequently recruited out of the networking
world.
International sales remain the sweet spot for the company's caching sales and
continue to represent approximately 80% of the mix. However, management
expects the domestic sales opportunity to continue to accelerate over the next
several years as customers' increasingly deploy caching solutions within
enterprise accounts.
Competitively, the caching market remains relatively unchanged with Inktomi,
Novel, and CacheFlow continuing to battle for share. Companies like Akamai,
with a caching services strategy, represent potential partners for NTAP. In
fact, we believe NTAP appears to be on the short list with Akamai, and a deal
could be announced between the two companies this year. Such a deal would
further endorse the NTAP caching solution and likely open new doors for
additional opportunities.
There is still no formal benchmark established amongst the caching vendors.
Caching implementations segment into s/w, h/w and combination solutions – with
some running on traditional O/S platforms while others have proprietary
software. The market remains relatively small for caching today but industry
forecasts have recently increased the expected market for enterprise accounts
to a climb to an estimated $3B by 2003.

New Appliances on the Horizon?
For NTAP, management believes that the current opportunities in the caching
space are sufficient at this time. Specifically, the company intends to focus
on the NAS and caching appliance markets for the foreseeable future.
Investment Recommendation
We believe the shares are poised to outperform once again in 2000. With an
accelerating growth environment, strong competitive positioning and solid
execution, we believe the company's 3 year growth rate will exceed our initial
expectations of 50%. We are raising our 3 year growth assumptions to 60%. We
are also correspondingly raising our price target to $105 from $93 per share
based on 2.5X our 60% growth assumptions on the core NAS business and an
additional $31 per share in value to the caching business valued as a % of
revenues. NTAP remains one of our favorite names for 2000.