NetApp(NTAP) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported Q2 revenue of $1.71 billion, up 3% year-over-year, and 4% excluding the divested Spot business [5][18] - Non-GAAP earnings per share (EPS) was $2.05, growing 10% year-over-year [20] - Gross margin for Q2 was 72.6%, above guidance, with operating margin at 31.1%, up 2.4 percentage points year-over-year [20][21] - Cash flow from operations was $127 million, and free cash flow was $78 million [21] Business Line Data and Key Metrics Changes - Hybrid cloud revenue was $1.53 billion, up 3% year-over-year, with Keystone showing 76% growth [18] - Public cloud revenue was $171 million, increasing by 2% year-over-year, and 18% excluding the Spot business [18] - All-flash array revenue grew 9% year-over-year to $1 billion, with an annualized run rate of $4.1 billion [14] Market Data and Key Metrics Changes - The company experienced strong demand for AI solutions and cloud storage services, with first-party and marketplace cloud storage services revenue increasing approximately 32% year-over-year [11][68] - Deferred revenue balance was $4.45 billion, up 8% year-over-year, indicating strong future revenue potential [19] Company Strategy and Development Direction - The company is focused on expanding its presence in AI, cloud, and all-flash markets, leveraging innovations like AFX and AIDE to enhance its offerings [7][9] - The strategy includes enhancing partnerships with hyperscalers and expanding capabilities in public cloud environments [10][11] - The company aims to capture market share by aligning with customer spending on AI and data infrastructure modernization [58] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to navigate macroeconomic challenges and expects a recovery in the U.S. public sector business [16][50] - The company anticipates continued growth in the second half of the fiscal year, driven by strong demand in non-U.S. public sector segments and AI projects [57][58] - Management highlighted the importance of operational discipline and innovation in maintaining competitive advantages [16][20] Other Important Information - The company launched the NetApp Ransomware Resilience Service to enhance cyber resilience capabilities [14] - The company is committed to maintaining a strong balance sheet and securing supply commitments to mitigate potential risks [59][75] 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 [27][28] Question: Drivers of product gross margin expansion - Management noted that product gross margin is driven by a mix of factors including pricing and product mix, with expectations for stability [39][41] Question: Trends in AI-related transactions - Management reported closing approximately 200 AI infrastructure deals, with a stable mix of transaction types [46][47] Question: Seasonal revenue guidance for Q3 - Management acknowledged potential headwinds in the U.S. public sector but views them as temporary [50] Question: Demand drivers and inventory management - Management expressed confidence in demand despite public sector challenges and indicated a proactive approach to securing supply [57][59] Question: Opportunities with Sovereign clouds - Management highlighted ongoing participation in Sovereign clouds and the introduction of AFX to enhance offerings [89][92] Question: Cash flow and pricing flexibility - Management noted seasonality in cash flow and emphasized the ability to adjust pricing based on commodity costs [125]