NetApp(NTAP) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported Q2 revenue of $1.71 billion, representing a 3% year-over-year increase. Excluding the divested Spot business, total revenue increased by 4% [4][15] - Non-GAAP earnings per share (EPS) was $2.05, reflecting a 10% year-over-year growth [17] - Gross margin for Q2 was 72.6%, exceeding guidance and up 1.5 percentage points sequentially [16][17] - Operating income was $530 million, up 12% compared to Q2 2025, with an operating margin of 31.1%, an increase of 2.4 percentage points year-over-year [17] Business Line Data and Key Metrics Changes - Hybrid cloud revenue reached $1.53 billion, up 3% year-over-year, driven by product, support, and Keystone services, which grew 76% year-over-year [15] - Public cloud revenue was $171 million, a 2% increase year-over-year, and up 18% excluding the Spot business [15][16] - All-flash array revenue grew 9% year-over-year to $1 billion, with an annualized run rate of $4.1 billion [12] Market Data and Key Metrics Changes - The company closed approximately 200 AI infrastructure and data lake modernization deals across various geographies and industries in Q2 [8] - The first-party and marketplace cloud storage services revenue increased approximately 32% year-over-year [10] Company Strategy and Development Direction - The company is focused on growing markets, particularly in all-flash, public cloud, and AI, which are expected to drive top-line growth [14] - Innovations such as AFX and AIDE are aimed at enhancing AI workload capabilities and improving data management [6][8] - The company is committed to leveraging its competitive advantages and aligning with customer data initiatives to capture additional market share [14][20] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate the uncertain macro environment and expected growth in non-U.S. public sector segments [14][33] - The company anticipates a slight decline in U.S. public sector revenue due to recent shutdowns but expects recovery in the long term [31][34] - Management raised guidance for gross margin, operating margin, and EPS for the fiscal year based on strong Q2 performance [19][20] Other Important Information - Cash flow from operations was $127 million, and free cash flow was $78 million [18] - The company returned $353 million to shareholders through share repurchases and dividends [18] Q&A Session Summary Question: Component environment and pricing dynamics - Management indicated they have locked in prices for components and have visibility for a couple more quarters [21] - They expect product gross margin to remain stable through the rest of the year despite potential volatility in component pricing [22][24] Question: Drivers of product gross margin expansion - Product gross margin expansion is driven by a combination of mix and pricing, with a focus on maintaining operational discipline [27][28] Question: Trends in AI-related transactions - The company reported a stable mix of AI transactions, with a significant increase in the number of deals closed [29][30] Question: Seasonal growth expectations - Management noted that the U.S. public sector business is expected to be slightly below seasonal trends due to recent shutdowns, but they view this as temporary [31] Question: Demand drivers for the second half of the year - Despite U.S. public sector headwinds, management sees acceleration in non-U.S. public sector segments and strong demand for AI projects [33] Question: AI deal sizes and customer feedback - Deal sizes vary widely, and while there is strong interest in the AFX platform, it is still early to assess its impact on results [36] Question: Cash flow and seasonality - Q2 cash flow is typically lower due to seasonality and tax payments, but management expects improvement in the second half [55]