NetApp, Inc. (NTAP) Earnings

Management highlights

### Core Strategic Positioning - NetApp's differentiated hybrid cloud intelligent data infrastructure platform is positioned as the foundation for enterprise AI transformations, leveraging the company's 30-year leadership in hybrid multi-cloud environments. - The company holds a competitive advantage from hosting a large share of global enterprise unstructured data, enabling secure zero-copy data activation for AI without costly data migration or duplication. - Expanded strategic partnerships with hyperscalers, NEO and sovereign cloud providers, including an expanded Google Cloud partnership for Google Distributed Cloud to serve regulated and government customers, and nearly 50 partner AI factories/labs to accelerate enterprise AI deployment. AI Business Growth & Innovation - Over 1,100 total AI and data preparation wins in FY26, with 500 wins in Q4 alone (up from ~400 total wins in FY25), spanning data preparation, LLM training/fine-tuning, and inferencing (roughly 50%/25%/25% split of use cases). - Launched next-generation AI-focused solutions including AFX all-flash storage and AI Data Engine (AIDE), which are already seeing strong early customer and partner momentum. - Notable large AI wins include a $20 million deal with a global financial leader for AI fraud detection and a European government agency AI situational awareness platform powered by NetApp AFX. Key Segment Momentum - Public cloud: First-party and marketplace cloud services grew 30% in FY26, with growing demand from customers extending NetApp capabilities deeper into cloud environments for AI workloads. - All-flash: 11% full-year growth driven by strong demand for AI-focused, high-performance, cyber-resilient storage, with multiple greenfield competitive displacement wins. - Keystone: 65% year-over-year growth reflects the broad market shift to consumption-based IT models, with customers adopting it for flexible, scalable AI infrastructure. Financial & Capital Allocation - Achieved the full-year target of 30% operating margin, demonstrating commitment to profitable growth alongside innovation. - Returned $1.36 billion to shareholders in FY26 via dividends and share repurchases, and announced a $1 billion increase to the existing share repurchase authorization during the Q4 call. - Remains committed to disciplined capital allocation, balancing innovation investment with shareholder returns.

Guidance

- **Fiscal Year 2027 Guidance**: Expects total revenue in the range of $7.325 billion to $7.575 billion, with a midpoint of $7.45 billion implying 8% year-over-year growth (an acceleration from FY26's 5% growth). Non-GAAP gross margin is expected to be 68.5% to 69.5%, operating margin 29.1% to 30.1%, effective tax rate 20% to 21%, and EPS in the range of $8.70 to $9.00 (midpoint of $8.85, 9% year-over-year growth). Management expects to return up to 100% of free cash flow to shareholders via dividends and share repurchases, and projects a low single-digit percentage year-over-year reduction in diluted share count. - **Q1 FY27 Guidance**: Q1 includes one extra week, which is expected to add ~$65 million in revenue (primarily to support and cloud segments) and $21 million in operating expenses. Expects total revenue in the range of $1.75 billion to $1.90 billion, with a midpoint of $1.825 billion implying 17% year-over-year growth. Non-GAAP gross margin is expected to be 69.1% to 70.1%, operating margin 28.4% to 29.4%, and EPS in the range of $2.05 to $2.15 (midpoint of $2.10). - **Key Outlook Assumptions**: Q1 FY27 is expected to be the trough for product gross margin, with gradual improvements expected throughout the rest of FY26 as previously implemented price adjustments to offset higher component costs flow through. The typical seasonal pattern of first half/second half revenue split is expected to hold after adjusting for the extra week in Q1. Product gross margin long-term target remains mid-50s to high 50%. Public cloud is expected to grow faster in FY27 than it did in FY26, maintaining strong gross margins in the 80-85% target range.

Segment performance

For Q4 FY26: - Total revenue: $1.95 billion, up 12% year-over-year (13% year-over-year excluding the divested Spot business) - Hybrid Cloud segment: Revenue of $1.77 billion, up 13% year-over-year. Within this, Product revenue was $966 million (up 14% year-over-year, 49.5% of total Q4 revenue), Support revenue was $688 million (up 10% year-over-year, 35.3% of total Q4 revenue), and Professional Services revenue was $112 million (up 14% year-over-year, 5.7% of total Q4 revenue). - Public Cloud segment: Q4 revenue of $182 million, up 11% year-over-year (18% year-over-year excluding Spot, 9.3% of total Q4 revenue). For full year FY26: - Total revenue: $6.93 billion, up 5% year-over-year (7% year-over-year excluding Spot) - Public Cloud revenue: $688 million, up 18% year-over-year (normalized for Spot divestiture), with first-party and marketplace cloud services growing 30% year-over-year. - All Flash revenue: $4.2 billion, up 11% year-over-year; Q4 All Flash revenue was $1.2 billion, up 18% year-over-year. - Keystone storage-as-a-service revenue: grew ~65% year-over-year from FY25. Profitability metrics (non-GAAP) for Q4 FY26: - Gross margin: 70.5%, up 100 bps year-over-year; gross profit $1.37 billion, up 14% year-over-year. - Hybrid Cloud gross margin: 69%; Product gross margin: 56.1%; Support gross margin: 93%; Professional Services gross margin: 32.1%; Public Cloud gross margin: 85.7%, up over 6 percentage points year-over-year. - Operating income: $624 million, up 26% year-over-year; operating margin 32%, up 340 bps year-over-year, both record highs. - Non-GAAP EPS: $2.43, up 26% year-over-year. - Cash flow from operations: $950 million; free cash flow: $900 million, both up over 40% year-over-year, record highs. For full year FY26: - Gross margin: 71.3%, up 20 bps year-over-year. - Operating margin: 30.2%, up 190 bps year-over-year, hitting the full-year 30% operating margin target. - Full year EPS: $8.13, up 12% year-over-year. - Operating cash flow: $2.07 billion; free cash flow: $1.87 billion, up ~40% year-over-year.

Risks & headwinds

- Rising memory and component (DRAM, NAND, HDD) costs create pressure on product gross margins, requiring ongoing price adjustments to balance growth and margin targets. - Potential for unexpected pull-forward of demand or accelerated customer purchasing can create uneven quarterly cadence and complicate forward forecasting. - Supply chain constraints outside of memory component costs, including potential HDD shortages, represent a potential operational risk. - Uncertainty around demand elasticity following price increases to offset component cost inflation, as the current pricing environment is unprecedented. - Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from projections, as disclosed in SEC filings.

Analyst Q&A

• Q: The analyst asks about the strength of all-flash demand in Q4, the impact of industry price changes on demand, and the cadence of demand for the coming full year. /

  A: George Kurian confirms broad strong momentum across all NetApp segments (cloud, flash, AI, Keystone) driven by enterprise AI readiness, noting that accelerated decision-making was minimal and Q4's results came from previously guided large deals. He states the company sees a strong full-year outlook driven by growing enterprise AI adoption. The follow-up question asks if product gross margin troughs in Q1 and stabilizes through the year. / A: Wissam Jabre confirms the analysis, noting Q1 is expected to be the trough with gradual product gross margin improvements throughout the year as previously implemented price adjustments to offset higher component costs take full effect.

• Q: The analyst asks how much of FY27 guidance is driven by secured/anticipated AI wins, what share of AI wins are on-prem versus public cloud, and asks about conservatism in gross margin guidance given current pricing uncertainty. /

  A: George Kurian confirms all 500 Q4 AI wins were on-prem (a mix of enterprise and NEO cloud), and the growth in AI demand is what gives the company confidence to guide for accelerating revenue growth in FY27. He notes broad-based momentum across segments and geographies, and the company has added additional sales resources to support this outlook. / A: Wissam Jabre explains the guidance is based on current component cost information; the company will take further action to mitigate margins if component costs change, and maintains its long-term product gross margin target of mid-50s to high 50%. He adds that growing share of higher-margin public cloud and Keystone provides a natural margin tailwind for the overall business.

• Q: The analyst asks if large deal pipeline strength will continue into FY27, how much Q4 upside came from demand pull-forward ahead of price increases, and what the cadence of future price increases will be. /

  A: George Kurian notes the large deal pipeline has a large share of AI-related projects, with significant new customer wins outside of NetApp's traditional install base demonstrating durable demand. He reaffirms that pull-forward demand had minimal impact on Q4's P&L, with Q4 results driven by previously guided large deals. He adds the company has factored current demand dynamics into FY27 guidance and will provide updates as the year progresses.

• Q: The analyst asks about the sustainability of public cloud growth in FY27 after the Spot divestiture, and if Keystone's strong growth is just a reaction to higher NAND pricing or a durable trend. /

  A: George Kurian confirms first-party and marketplace cloud services grew 30% year-over-year in FY26, and the company expects continued strong momentum with public cloud growing faster in FY27 than FY26 at strong gross margins, with emerging AI use cases in the cloud adding additional growth. For Keystone, he notes growth is driven by a broad, durable market shift to consumption-based IT, with only a small portion of growth tied to current cost dynamics. Wissam Jabre clarifies the Google Distributed Cloud deal is part of the hybrid cloud segment, not public cloud, and will drive ongoing hybrid cloud and support revenue growth.