You ready to begin? Okay. Good afternoon, everyone. Asiya Merchant. Day one of Citi's conference, just after lunch, mid-afternoon. Actually, there's been a couple of sessions after lunch, but the afternoon of day one of Citi's tech conference. Asiya Merchant here. I lead the tech sector on the hardware and tech supply chain. Really happy here to have NetApp's CFO, Wissam Jabre, as well as IR, VP of IR, Kris Newton here. We have a bunch of questions. We're going to be doing this fireside. If you have any questions at the end, we're going to leave a few minutes here for investors to ask questions. Please do raise your hand so we can bring the mic to you. All right. Well, thank you for coming. I'm going to first give it over to Kris. She has a few comments.
All right. Thanks for having us. Today's discussion may include forward-looking statements regarding NetApp's future performance, which are subject to risk and uncertainty. Actual results may differ materially from the statements made today for a variety of reasons described in our most recent 10-K and 10-Q filed with the SEC and available on our website at netapp.com. We disclaim any obligation to update information in any forward-looking statement for any reason.
All right. Well, Wissam, Kris, you guys just reported earnings. It was not even a week ago. Right? You had very strong results for fiscal 1Q coming out, and then you did raise your whole fiscal year outlook as well. Almost 2X. Right? I think one of the questions that investors here were asking, and have been asking, something I've been asking all my companies, especially on the enterprise OEM side of things. What gives you confidence that this is durable? Right? You still have three quarters to go, and it's not just customers double ordering. You guys have backlog demand outlooks. It's not just customers double ordering and trying to get a secure spot in place, given the constraints that are out there.
Thanks, Asiya. First, happy to be here. Thank you for having us. Look, we had a stellar start to the year. As you mentioned, we reported last week. When it comes to Q1, we saw some really good broad-based strength in demand driven by AI adoption and infrastructure modernization. There's also many ways that we typically monitor our business. We look at pipeline, we look at orders, we look at backlog, and we monitor it that way. So far, we haven't seen anything out of the ordinary.
We do think that we do see an underlying strength in demand that basically also gave us enough confidence to increase the guidance for the fiscal year. As you noted, we basically increased the guidance for fiscal year 2027, doubling roughly the growth rate year- on -year relative to where the guidance was 90 days ago. And that also goes to EPS more than doubling that. The last point I would say in terms of our business, our business goes directly to is linked to end customer demand, so there is no stocking the channel, for instance, type of dynamics that works in it.
Okay. While we are on the topic of demand, because you are pretty well exposed, you have exposure to commercial, of course, enterprise, also government. Maybe if you can talk a little bit about demand. Was it a pretty broad base that was underpinning your revenue outlook? Was it pretty broad based? You also have first-party services on cloud as well. Yeah.
Yeah. So in Q1, we experienced broad-based demand. We saw growth across various geographic regions, and we saw growth across the various types of customers and across various types of industries. When it comes to our public cloud business, which is where really the three top hyperscalers are our customers, and they offer our software as a native storage software solution. We have also experienced some really nice growth. We reported around 28%, but then when we adjust for the extra week that we had in Q1, it was around 19%. The growth was fairly broad based.
Okay. Given that supply, you guys have to have supply in order to underpin your demand outlook. I think at the start of the year, a lot of questions were around supply. Do the OEMs have the supply in order to underpin the demand outlook here? You guys are doubling your demand outlook. What has changed on the supply side? Have you signed LTAs that gives you access to supply? Just help us on the supply side.
Yeah, we've always worked very closely with our suppliers on not only understanding what their supply situation is, but also sharing with them what our outlook looks like. That sort of has been our mode of operation for quite some time. Where we are now, we basically have, at this time, we feel comfortable about the supply we have to be able to deliver the outlook we guided. We have different types of arrangements with different types of suppliers. In some cases, we have LTAs. In others, we basically have agreed upon commitments and so on. But we feel comfortable from a supply perspective at this time to be able to deliver our outlook.
Okay. Outside of supply, Wissam, are there other things? You have a range, right? When you provide the outlook as well, both for the quarter, for the year. What would it take for, outside of supply, are there other gating factors that we should think or other factors that could cause you to upside on that side? Maybe we can also talk about the risks maybe towards the lower end of your guide then.
Yeah. When you look at the guide, we basically take into account all the information we have at the time when we build our outlook on which the guidance is based. We're one quarter in the year, so we'll wait until the end of this quarter, and we'll be able to provide a better update for the rest of the year.
Okay. What about pricing? Because I know people often do the P x Q. I know I bugged Kris during the quarter to talk about this, that P x Q, when people look at the bits that you're shipping, but of course, pricing has gone up quite meaningfully for not just for yourself, for your entire OEM space. So how much is pricing factored into that outlook? If we do continue to see uptick in pricing, is that upside to your guide? Is that how we should think about it?
It is pretty normal and understandable in an inflationary environment for pricing to be a factor. But what is most important is that what is underlying the growth and the outlook is more of a strength in the business, driven by what I mentioned earlier with respect to AI adoption in the enterprise as well as infrastructure modernization.
Okay. Your growth rate, though, obviously you had pretty meaningful growth in fiscal 1Q. You are guiding for strength in fiscal 2Q. Then there was the extra week in 1Q, I get that. But then the implied guide at least was a little bit of deceleration here as we get into the back half of your fiscal year. What is underpinning that? Is it you are just being very prudent given you are just one quarter into the fiscal year? Are there other factors that we should think about, maybe supply, etc , that is baked into a deceleration in growth rates in the back half?
Yeah. When you look at the guidance, it is important to note that the guidance for the full year relative to 90 days ago is higher. The guidance for the second half also is higher than what we had 90 days ago. When we looked at the full year guidance, we basically updated the guidance in total, and both the first and the second half year are incrementally better than what we thought they would be 90 days ago. Now, when you look at the seasonality of the business, and you factor in the extra week in Q1, it looks like roughly the revenue at the midpoint, roughly the revenue is split almost 50/50.
Right.
50% first half, 50% second half. In fact, it's slightly less than 50% if you want to go to the first decimal point.
Okay.
But let's call it 50/50, which is not necessarily far from the area, the split that we've had for multiple years.
Okay. All right. Okay. Then a little bit on margins, because obviously product gross margins, you talked about component inflation here. They are expected to moderate in 2Q, and I think you said about towards the low 50s, if I'm not mistaken, for the product gross margins. Can you talk a little bit about how should investors think about that? Components typically are passed through for you guys. At what point do you see component inflation moderating here, maybe even reversing?
Look, we are operating in a tight supply chain environment, so it's too early to make a call on the component pricing. But when it comes to product gross margin, what we guided for Q2 and for the rest of the year, so think of Q2 to Q4, is slightly better product gross margin than we had expected 90 days ago. Now, when it comes to the full year gross margin, the number is the guide is slightly lower, but that's solidly driven by the richer product revenue mix. All the margin lines are either similar to what we thought they would be 90 days ago or better.
Right. Okay. But on the product gross margin side, you are seeing more mix towards flash, right? In general, the product is mixing more towards flash. Your flash revenues are very strong year-on-year. Typically, those are associated with higher margins, product margins, because there is more software component in there. Just walk us through what it that puts and takes to product gross margins as you continue to maybe see more demand mixing towards flash, which carry typically higher software components.
Yeah. I think your comment is accurate for Q1, Asiya. We did see a higher flash mix in the overall revenue relative to the hybrid flash side. For the forward-looking numbers, we typically don't break it out as such.
Okay.
To the extent it happens, maybe. But it's too early to tell.
Okay. All right.
We did call out strength in the hybrid flash business. As we look forward, that could come through.
Okay.
I wouldn't necessarily assume that the historical relative margin performance of different product classes stand in this current environment.
Then to mitigate the cost headwinds, right? We've talked, what are the additional tools? Some of it's just pass-through pricing. What other tools would you have to mitigate some of the costs?
Yeah. The first one is, as you mentioned, we tend to focus on, and it's very customary in our space to pass through the component cost inflation, which we've done for now a couple of quarters. We've built also a certain agility in the business to enable us to do that in a faster way, meaning whether it's the duration of our quotes, et c, to enable us to react faster in the event we are encountering component cost increases and we have to increase our prices. We also have many other ways where we work with our suppliers. For most of the commodities we purchase, we have more than one supplier, and so that helps us work on securing the supply, but in some cases also it helps a little bit on the cost side.
But from the business itself, when you look at our portfolio, we have a very broad portfolio. We do not only necessarily carry only all-flash. We have all-flash, we have hybrid flash, we have Keystone, and we have the public cloud business. We are happy to help our customers solve their problem regardless which service we offer. For customers that tend to really want to focus on very high performance, for instance, they may want to choose an all-flash array solution where capacity is probably more important or maybe they are much more cost sensitive and capacity is more important than we are happy to offer a hybrid flash, which is hard disk drive based.
For customers who have limited budgets and prefer to split their spending over multi years, we could offer Keystone, which is our Storage-as-a-Service solution. For customers who are comfortable doing a consumption approach, we are happy to offer our public cloud business. There are some ways we address it through the supply side, through the cost side. There are other ways we address it also by offering different solutions. As Kris Newton mentioned, now from a hybrid flash versus all-flash, we do not have much of a differential on the margin side as well.
Okay. All right. That is good to know. AI wins. I know NetApp often talks about the AI wins per quarter and people track. That is a KPI that you share on the call. Fiscal 1Q numbers showed a little bit of deceleration, but I think the size of these deals are getting larger. Just help investors understand, as these AI wins are coming through, and that is one of the focus for this conference as well about enterprise adoption. Are you seeing much more storage being attached to all these AI wins as you are talking to your customers? What kind of storage? Just help us understand what you are seeing as your customers are talking about these AI wins that you are then communicating to the investor base.
Yeah. What we disclosed for Q1 was much higher than what Q1 2026 was in terms of the number of AI wins. That is what we disclosed. What we have noticed in Q1 also is that the average size of the deal is now bigger than before. For some of the proof of concept type of deals that we had, let us say, a year ago, we are starting to see more of a production type of deals now, and that sort of helps explain that larger average size deal. This just basically demonstrates that our customers, once they test the product, they are happy. In terms of the AI workloads, they are happy with it and they come back for larger deployments.
Okay. When you think about some of your compute vendors or competitors, for example, in the ecosystem, they're talking about very strong, a lot of strength in the traditional servers for CPU-based servers, like AI workloads. As you're thinking about storage attach, like you said, it's being reflected in the size of these deals. Are you seeing that inflection where compute and storage may be more closely aligned versus compute, which is obviously first we had a lot of GPU spend, now we're seeing a lot of CPU spend. Are you starting to see storage being more and more attached to these agentic AI workloads? How meaningful could it be in the next couple of years?
There is, as I mentioned earlier, a certain broad-based strength in demand, so some of it, I would imagine, has to do with some of the CPU server deployment. Because ultimately, after all these servers are deployed, they will need to have some form of storage attached to them. It's a bit too early to tell the magnitude, but I would imagine that typically it would be a tailwind to our business.
Okay. I know you said it's difficult to size it right now, but when you talk about these deals that you're winning and tracking, is there any way to carve out how big it could be over the next two or three years? In terms of percentage of revenues that have come from just these AI wins?
Look, we know that AI is giving us a tailwind on the top line, right? The one thing to note is there's the AI sort of workloads, but there's also other types of infrastructure modernization that could be related to or associated with AI workloads that are also happening at the same time, since AI could generate other types of applications and infrastructure needs. I think over time, the line between AI and non-AI could become blurry. If you think of, you mentioned two, three, four years down the road, that could become a little bit of a blurry line.
Right. On the other hand, let's just talk about the broader industry TAM. As you think about the AI, whether it's data modernization, whether it's this incremental workloads, is there any way, the way you guys think about the TAM, how big could enterprise storage become for the next two to three years as we're starting to see AI workloads now?
It's clear that we're experiencing, at least today, based on-
Yeah.
... what we've reported and what we're seeing in the market, it's clear that we're experiencing a certain TAM growth.
Okay.
It is too early for us to tell where this could be two to three years from now, but what's clear is that there's certain underlying demand that's driven from the AI adoption and from infrastructure modernization.
Okay. And then just your own competitive dynamics here. How you think you could grow share within this expanding TAM, and where do you feel most comfortable? Is it on the flash side? Is it on the hybrid side? Is it on cloud storage? NetApp Keystone, which is Storage-as-a-Service. Where do you feel like you have the biggest opportunity to gain share in a growing TAM?
When we look at our numbers and how we're looking at sort of the next few quarters, basically, all parts of the business are doing well. In Q1, for instance, the all-flash array business grew by 47%.
In Q1 also, we saw a small uptick in the hybrid flash revenue year-on-year, which is the second quarter in a row we see that after many quarters of decline. We also saw some nice uptick on the public cloud business, as I mentioned earlier. The business, excluding the extra week, was up 19%. If you sort of dissect that and look at the first-party and marketplace within that revenue, it grew at a much faster pace than this. Just for reference, the first-party and marketplace portion of the public cloud business last year grew at around 31%, so there's really high growth there. When you look at the NetApp Keystone Storage-as-a-Service, in Q1, we experienced similar types of year-on-year growth as we've seen in Q4. It's still growing rapidly and expanding.
Right. You guys made a couple of acquisitions during the quarter, I think DataPelago and JetStream. Hope I'm pronouncing that correctly. Just, I think they're tuck-in acquisitions more than transformational. Just help us understand, what's the reasoning for these acquisitions? How do you think it's going to change? What attracted you to these acquisitions? Two in a quarter, could it be greater looking forward? Where are you guys focused on in terms of technology acquisitions?
Yeah. As you noted, both are tuck-in acquisitions. They are technology acquisitions to complement our portfolio. When you look at DataPelago is basically an extremely high-performance data processing software engine that is capable of processing, compute, and the CPU and GPU environments while basically keeping the data where it resides, meaning processing data at the storage layer at a very high speed and high performance, which provides typically lower cost and better performance for the customers. When you are able to process data where it resides, it also enhances security and data protection because you do not have to move the data from one place to other AI systems, basically other compute clusters for AI systems. That is the DataPelago, which is pretty much, think of it as an enhancement to potentially AIDE.
On the JetStream side, JetStream is very much a disaster recovery type of solution for VMware environment. That combines well with our public cloud business, where we could also be used for disaster recovery as a retention type of storage on the public cloud business. It gives us basically additional capability for the public cloud business. Both of these are small tuck-ins that are more technology oriented to help us complement our portfolio and basically be more competitive.
Okay. On the AI side, I know at the INSIGHT last year, and you have an INSIGHT day coming up again, AFX, AIDE, you talked a lot about that. Just help us understand, how is that differentiating you from some of your other competitors, whether they are compute and storage vendors who are selling full stack solutions or maybe just the only storage competitors that are out there, and especially we also have the neocloud storage providers, whether it is VAST Data or Weka. So where are you with your A FX, AIDE offerings, and how does that differentiate you relative to competitors?
Yeah, we have some customers that are in certification phase on AFX. AFX is our disaggregated architecture solution where customers can choose either to focus on performance or on capacity. When you think of AFX and AIDE, basically they are part of the NetApp platform, which is really the key differentiator for us because we provide unified solution, which would include things like AI data services and so on for our customers. It helps us be more competitive in terms of our portfolio offering as well.
Okay. Let's see. I am going to just ask if there is any questions here in the audience. If you do, please raise your hand. Yes. Public cloud. Sorry, did I miss any? Okay, public cloud grew, you just talked about it, 19%, ex the extra week. Which is pretty and the first-party obviously grew much faster than that. That is pretty nice growth relative to what you guys were experiencing. How sustainable is that? What could maybe drive further growth in that? Do you think this 19%, 20% growth is pretty sustainable? What should investors be looking for to see if that growth could accelerate here, especially as we are hearing about overall cloud growing pretty rapidly?
Yeah, look, the public cloud business is a very nice high-growth business for us. The high teens growth rate are sustainable. This is a business that is very differentiated. We continue to make investments in it and adding capabilities and features to ensure that it stays differentiated and it stays in sort of leadership place where it is. Overall, the first-party in marketplace is growing at a much faster pace, as you noted. So over time, that will continue to sort of also drive a nice growth, as you think of the sort of mix within the public cloud business. So the high teens percentage is a sustainable number for us.
Okay. I know you guys are exposed across various hyperscalers for their first-party. Was the growth pretty unanimous across or, I mean, similar across all the other hypers, or was there ones which were doing a little bit better?
They are all growing at a nice pace.
Okay.
Obviously, they're not all of equal size, but they're all-
Right.
... growing at a very nice pace, contributing to that high growth in the business.
Okay. Is there any way to carve out how much AI is contributing to that growth in the public cloud that you're experiencing?
Well, the way to think of our public cloud segment is that really our customers are really the three hyperscalers.
Right.
Microsoft, Google, and AWS. Then obviously we serve end customers. We know that there are AI workloads that happen within our public cloud environment, but the visibility isn't as great since obviously they are customer's customer. We get quite a bit of visibility, but it's not necessarily as great. But what we know is there are AI workloads that are basically taking place on that or run in that environment.
Have you had to make investments or change some of those product offerings? Is that how you kind of, I guess, get to some understanding that, okay, this could be AI-driven?
We continue to evolve the product offering. We continue to add capabilities to it, and we continue to enable sort of, and be able to sort of plug into the various AI capabilities that are offered by our partners.
Public cloud margins, they have continued to go higher. They're past, I think, a target range that was shared at your last investor event. At what point do you consider revisiting that margin framework for the public cloud?
Public cloud margins, to be precise, in Q1 were at 86%+.
Right.
The long-term range for us is 80%-85%.
Right.
We've been operating at that level for, I think, actually slightly higher than this for the last three quarters. We're comfortable with the range where it is now. We think there's potentially some upward bias, but we're comfortable with the range that it is now because we want to allow to continue to invest in the business and drive growth. That's really why I think at this point, we'll keep the range where it is.
Okay. Is the upside for this quarter just a scaling thing? As you start to see more growth, obviously you're scaling, and so you should drive better margins then.
Well, the one thing to keep in mind, Asiya, is that in Q1 we had an extra week, so that helped-
Of course, yeah.
... a little bit the margin, but it still would have rounded to 86% anyway.
Okay. Keystone, again, grew significantly last year. Where do you think Keystone could be for your business over the long term?
Keystone is another offering from our portfolio.
Yeah.
This is our Storage-as-a-Service.
Yeah.
It's been growing at a really nice pace. In Q1, it grew at the same pace as we saw more or less in Q4, so really high growth. It has really nice margins. It's accretive to our overall gross margin and operating margins. It is one of those elements of the business that we offer to our customers who are interested in basically doing Storage-as-a-Service. It is by itself, what we focus on with respect to working with our customers is to provide the best solution for them.
We don't necessarily push a Storage-as-a-Service solution versus an on-prem. We work with the customer to determine what is best for them in terms of the problem they're trying to solve and what infrastructure they're putting in place. I expect the business to continue to grow at a nice pace, continue to be as profitable and drive good profit growth for the company.
Okay. Is it a totally different set of customers that choose one, like public cloud versus Keystone, or do you see some customers maybe having both but just different workloads?
We see customers who could have the on-prem, for instance, solution and Keystone. It is not necessarily a specific type of customer. Sometimes it depends on their workloads, sometimes it depends on if they have any migration projects. It varies on their requirements, so this is why, what I mentioned earlier, we work with a customer to try to figure out what solution or what problem they are trying to solve.
Right.
We address it in the best way possible for them.
Okay. Keystone margins, public cloud margins? Obviously your public cloud business is bigger. The margin is fairly similar?
I think the public cloud margin has really phenomenal margins.
Okay.
When you get to that sort of 86%, I-
Okay. All right. Operating income guidance. You guys continue to manage OpEx extremely well. I think now the last few years you guys have shown that you can manage OpEx at, is it what, half the growth rates versus the revenue? How we should think about that going forward given complexity of offerings, AI, obviously you're making some technology acquisition. How does that kind of overall play into your OpEx guide?
Yeah, when you look at our operating margin guide, the latest we shared for the year with the increased guidance on the top line, we also increased the operating margin guidance at the midpoint by around 120 basis points.
Okay.
This shows the operating leverage that exists in the business and sort of demonstrates the earnings power there. Our focus is to balance between growth and margin. You grow the top line, we grow the gross profit, but also want to continue to see that operating margin leverage to some extent. Having said that, we also want to invest in the business, we want to invest in growth. Our approach is typically not to invest or not to have OpEx grow faster than half of the growth rate of the revenue.
If you sort of look at where we are for the fiscal 2027 guide, it sort of gives you a good idea that we're pretty much still living within that framework. But we still want to invest in the growth of the business. We think there's a lot of opportunities for us ahead, especially in AI data services. That's something we continue to focus on, as well as, of course, driving the revenue growth and operating margin.
Wissam, as you think about, obviously you guys generate quite a lot of cash. When you're thinking about deploying cash, you have these technology tuck-in acquisitions, you have capital returns, you obviously have to just lock in supply to some. You're sitting back here, how are you thinking about, have my objectives for deploying cash changed?
Our capital allocation approach has not changed. We still intend to return up to 100% of our free cash flow to our shareholders, either through dividends and buybacks. That hasn't changed. On the M&A side, you saw us do a couple of tuck-in acquisitions. We're a technology business. We want to make sure that we have a competitive portfolio that's second to none. We will continue to complement our portfolio as needed with these types of investments.
All right. Any questions here from the audience? With the rising component prices, and obviously it is reflecting through as you guys are passing through that, what are your customers saying? I know you talked a little bit about you have a full stack offerings. You can do anything. You can do it as a service, you can do public cloud, you can do hybrids. But at the end of the day, how are customers sort of adjusting their budgets, and where are they getting the incremental, given that storage is growing, where are they getting the incremental budgets to support compute spending going up, PC spending going up, storage spending going up? What are you hearing from your customer as they are adjusting their budgets to allow for the higher pricing that is flowing through?
Look, customers budget based on their business priorities. They also spend based on their budgets. In many cases, if they need to reprioritize what they buy, they would adjust it based on what the prices are and what they need to buy. But what is most important is they do budget based on their business priorities. If we fit within those priorities, obviously that is great for us. Obviously we are seeing some of that probably happening over the last quarter and for this year. So that is a positive.
All right. One of my last questions always is, what do you think investors are missing about the NetApp story?
Well, look, we have had a stellar start of the year. We had many records in Q1. We did exceed our guidance on all metrics. We did increase the outlook for the fiscal year for both, actually for all the revenue as well as operating margin and EPS. We continue to invest in the innovation and maintain that sort of innovative approach to the technology and driving a very strong portfolio. Later this month, we have INSIGHT, which is our customer conference, where we also showcase some of the great innovations that the team at NetApp has developed and is developing. So I encourage you to listen to that. We think we are in a nice period of growth that would help us to continue to drive sustainable growth, sustainable profitability, and cash flow, and drive value for our shareholders.
Thank you, Kris. Thank you, Wissam. Appreciate. I will see you at INSIGHT.
Thank you for having us.