Release Date: August 28, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- NetApp Inc (NTAP, Financial) delivered 8% year-over-year revenue growth in Q1, setting records for first-quarter operating margin and EPS.
- The company experienced notable momentum across its flash block, cloud storage, and AI segments, with all-flash storage revenue run rate reaching $3.4 billion, up 21% year-over-year.
- NetApp Inc (NTAP) saw broad-based demand across its all-flash storage portfolio, with strong growth in both capacity flash and block-optimized all-flash array families.
- The company's Keystone storage-as-a-service offering grew over 60% year-over-year, providing operational agility and reduced financial risk for customers.
- NetApp Inc (NTAP) raised its FY 25 outlook for both revenue and profit, reflecting confidence in continued success and alignment with customer needs.
Negative Points
- The uncertain macroeconomic environment and geopolitical risks continue to pose challenges, particularly affecting the US public sector market.
- Despite strong performance, the company has not yet seen large-scale data center refreshes, indicating a broader economic recovery is still pending.
- Public cloud segment revenue growth was modest at 3% year-over-year, with subscription services still acting as a headwind.
- Operating cash flow decreased by 25% year-over-year, driven by higher payments for strategic asset purchases.
- The company expects product gross margins to come down slightly as it works through pre-buys, potentially impacting profitability in future quarters.
Q & A Highlights
Q: On the higher net pricing from a demand or top line standpoint, is that impacting the demand for all flash? And from a cost standpoint, how to think about its impact on gross margins?
A: (Michael Berry, CFO) We purchased a large majority of our demand forecast for fiscal 25, and we feel good about our position. The market hasn't changed much, so we are not seeing a significant change in demand based on pricing. We will keep an eye on the market and may decide to do more pre-buys if necessary.
Q: Can you update us on how the AFFA series product is performing? How is the order flow pipeline looking like?
A: (George Kurian, CEO) We have been very pleased with the introduction of the AFFA series. The adoption rate has been strong, and we are seeing all the right activities in terms of proof of concept, qualifications, and certifications. Both our capacity flash and block optimized all-flash array families exhibited strong growth year over year.
Q: How is the uncertain macro environment affecting storage demand?
A: (George Kurian, CEO) While the economy has progressed, there are still geopolitical risks and interest rate changes. We saw broad-based strength in our product lines and in the Asia Pac and European markets. Customers are prioritizing spend on strategic projects, but we haven't yet seen large-scale data center refreshes.
Q: How do you think about fiscal 25 in the context of AI workloads and hybrid cloud environments?
A: (George Kurian, CEO) The rate of innovation in AI software applications is high, particularly in the public cloud. We are seeing good momentum today with our AI business performing well ahead of our expectations. We expect to return to a pattern of consistent growth through the rest of the year.
Q: Can you provide some color around the sequential improvement in the public cloud this quarter?
A: (Michael Berry, CFO) We saw strong growth in our first-party and marketplace storage services, which grew 40% year over year. We expect cloud revenue to accelerate as we go through the year, driven by the strength of these products and lessening headwinds from subscription services.
Q: What are the competitive dynamics and where are you seeing the most gains?
A: (George Kurian, CEO) Our focus and execution continue to get better, and we made good progress. Our cloud storage portfolio continues to gain traction, and our flash portfolio showed strong results across the board. We are demonstrating price-performance leadership against competitors.
Q: What is driving the strength in the all-flash array side, and what is the durability of this growth?
A: (George Kurian, CEO) We are seeing a broad set of new to NetApp customers and new to NetApp flash customers. The total installed base of dedicated drives is enormous, and we are in the second inning of a nine-inning ballgame for us. The strength of our customer additions indicates continued momentum.
Q: How should we think about product gross margins for the rest of the fiscal year?
A: (Michael Berry, CFO) We expect product gross margins to come down a little as we work down pre-buys. We are still comfortable with upper 50s to 60% for the full year. Some competitors have taken pricing up, which is a leading indicator of broader industry actions.
Q: How should we think about the mix of QLC versus other technology in flash storage?
A: (George Kurian, CEO) QLC should grow as a percentage of our total mix. It's roughly half right now as a percentage of the flash business, and we expect it to grow as a percentage of the total flash business.
Q: What inning of AI adoption are we in, and what is the competitive landscape like?
A: (George Kurian, CEO) We are in the early innings of the AI landscape from a storage perspective. Many customers are getting their data ready for AI, which often involves creating data lakes. We hold a significant amount of the world's unstructured data, positioning us well for AI use cases.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
