Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Analyst – Credit Suisse
Analyst – Credit Suisse
Can you give us any more color on the near-term adoption trends you’re seeing in virtualized server environments? There’s obviously been some signs in the market of some slow in virtualization adoption which I do think is near-term but I’m wondering if that’s translated to the storage side at all?
Thomas Georgens
No I definitely don’t see any slowing. What we’re really seeing probably more symptomatic of our business particularly in large customers is we’re actually seeing the culmination of a lot of proof of concepts in our favor and actually going into production now. So if there’s some short-term slowing of the business I clearly don’t see it. In fact I see more in accounts that we’re actively participating particularly our big accounts, including a lot of them in New York City, we’re actually seeing the conversion from proof of concept into production right now and I don’t see any slowing down at all.
I think clearly the Microsoft announcement which is imminent will be out there. And the other trend is I’m actually seeing a fair amount of desk top virtualization as well as server virtualization and if anything I’d say that that activity is higher now then it was six months ago.
Daniel Warmenhoven
I would echo the same thing internationally. In the past quarter I’ve spent time in both Australia and the Far East and China and Japan, and topic number one throughout the Far East has always been server virtualization. So I don’t sense a slowing down at all.
Operator
Your next question comes from the line of Keith Bachman – BMO Capital Markets
Keith Bachman – BMO Capital Markets
I just wanted to see if you could talk a little more about the product gross margins. Even if I net out the change in the warranty it looked to be a little lower than we were forecasting and I know you said there was volume variance there that impacted it but how do you see the trends in the product gross margins going forward and if you could just repeat what the software add-on number was?
Steven Gomo
With the product gross margins compared to the fourth quarter level, so on a nominal basis as reported they’re down 4.6%, 1.1 percentage points of that is warranty. About two percentage points of that is attributable to the volume of revenue that we had and I think I had talked with a number of folks that came through here and told them that to expect this as business declined from fourth quarter levels as we expected and is seasonal for NetApp. We have many cost of goods sold that are main elements of cost of goods sold that are fixed in nature, like our product transformation costs, like standard revision, like scrap etc.
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