NetApp(NTAP) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q3 FY 2025, the company reported revenue of $1.64 billion, reflecting a 2% year-over-year growth, although it was $44 million below the midpoint of guidance [31] - Billings increased to $1.71 billion, also up 2% year-over-year, marking the fifth consecutive quarter of year-over-year growth [31] - Operating margin was reported at 30%, exceeding expectations, while EPS was $1.91, in line with guidance [36][37] - Operating cash flow decreased to $385 million from $484 million a year ago, and free cash flow was $338 million compared to $448 million a year ago [37] Business Line Data and Key Metrics Changes - Hybrid cloud revenue increased by 1% year-over-year, while the all-flash array business grew by 10%, reaching an annualized revenue run rate of $3.8 billion [10] - Support revenue declined by 2% year-over-year to $621 million, but was flat in constant currency [32] - Professional services revenue grew by 14% year-over-year, primarily driven by the Keystone Storage-as-a-Service offering, which saw nearly 60% growth [32] - Public cloud revenue increased by 15% year-over-year to $174 million, with first-party and marketplace storage services growing over 40% [20][32] Market Data and Key Metrics Changes - The company noted a cautious environment in European markets, particularly in France and Germany, and some caution in the US public sector [57] - The public cloud segment, excluding Spot by NetApp, grew 21% year-over-year, indicating a healthy demand environment [20][32] Company Strategy and Development Direction - The company is focused on enhancing its AI solutions and has seen significant demand for AI infrastructure and data lake modernization, with over 100 AI-related wins in Q3 [14] - The divestiture of Spot by NetApp is part of a strategy to streamline operations and focus on core offerings [18][41] - The company aims to maintain a strong operating margin and free cash flow generation while controlling expenses [30] Management's Comments on Operating Environment and Future Outlook - Management acknowledged that Q3 performance did not meet expectations but expressed confidence in returning to growth in Q4 due to improved sales execution [24] - The company expects a slight decrease in FY 2025 guidance due to the divestiture of Spot, foreign exchange impacts, and near-term headwinds in the public sector [25][41] - Management remains optimistic about achieving long-term financial goals set during the Investor Day [24][48] Other Important Information - The company returned over $300 million to shareholders through dividends and share repurchases, reducing the diluted share count by 3 million shares year-over-year [30] - The balance sheet remains healthy, with approximately $2.3 billion in cash and short-term investments against $2 billion in debt [40] Q&A Session Summary Question: Sales execution issues and rectification efforts - Management noted that several large deals slipped into Q4 due to procurement delays, but many have since closed, and tighter controls on deal progression are being implemented [51][53] Question: Public sector performance and caution - Management confirmed that there is caution in European markets and some in the US public sector, but overall performance in Q3 was as planned [57][58] Question: Competitive landscape and QLC mix - Management stated that the competitive landscape remains strong, with no significant changes, and highlighted the successful refresh of the product portfolio [62] Question: Product gross margins and future expectations - Management discussed expectations for product gross margins to stabilize and potentially improve as new products gain traction and costs decline [73] Question: Impact of divestiture of Spot on revenue - The divestiture is expected to have a neutral impact on EPS, with trailing cloud revenue from Spot being approximately $94 million [88][90] Question: AI in enterprise and storage grid enhancements - Management indicated that AI adoption is growing, with clients establishing AI centers of excellence, and enhancements to storage solutions are aimed at capitalizing on this trend [121][122] Question: Tariffs and supply chain flexibility - Management emphasized a flexible global supply chain that mitigates tariff impacts, particularly due to reduced dependency on China [128][130]