NetApp, Inc. Q2 FY2026 earnings call

• Strong Q2 results: Revenue of $1.71 billion, up 3% year over year; excluding the divested spot business, total revenue was up 4%. Gross margin set a Q2 record and exceeded guidance range; operating margin and EPS marked all-time highs.
• Innovation in AI: Launched AFX, an ultra-scalable, extreme-performance disaggregated storage platform certified for NVIDIA SuperPOD, and the NetApp AI data engine (AIDE). Closed approximately 200 AI infrastructure and data lake modernization deals in Q2.
• Growth in key segments: All-flash array revenue grew 9% year over year to $1 billion in Q2, or an annualized run rate of $4.1 billion; first-party and marketplace cloud storage services revenue increased approximately 32% from Q2 a year ago.
• Cyber resilience: Enhanced the NetApp Data Platform's cyber resilience with the NetApp Ransomware Resilience Service; announced the latest version of StorageGRID with capabilities to enhance AI initiatives and modernize data infrastructure.

In Q2, Hybrid Cloud revenue was $1.53 billion, up 3% year over year, driven by product support and Keystone (Keystone grew 76% year over year). Public Cloud revenue was $171 million, up 2% year over year. Excluding spot, public cloud revenue was up 18% year over year, driven by strong demand in first-party and marketplace storage services. All flash and public cloud, which address growth markets and carry higher gross margins, made up 70% of Q2 revenue.

• Q3: Expect revenue of $1.69 billion, plus or minus $75 million (midpoint implies 3% y/y growth, 5% y/y ex-spot); Q3 gross margin 72.3% to 73.3%; operating margin 30.5% to 31.5%; EPS $2.01 to $2.11.
• Full year 2026: Continue to expect revenue between $6.625 billion and $6.875 billion (midpoint 3% y/y growth ex-spot); raised gross margin range to 71.7% to 72.7%, operating margin to 29.5% to 30.5%, and EPS range to $7.75 to $8.05.

• Component pricing volatility: Volatile component prices could impact product gross margin; supply chain team manages input costs but environment is uncertain.
• Macro environment uncertainties: Unsettled macro environment and near-term USPS headwinds pose risks, though management remains confident in outgrowing the market.

Q: As we think about the component environment, both from a potential pricing perspective as well as whether or not you might be seeing any kind of constraints. I'm curious to how the company is managing that. Have you leaned in on any kind of strategic purchases? And any thoughts on the duration of those strategic purchases as far as the next couple of quarters? How much visibility do you have on the pricing dynamics underpinning the gross margin outlook?

A: On the components, we know we did mention last quarter that we did lock in some prices. And based on that, we do have visibility for a couple more quarters, I would say, at least until the end of this fiscal year. When you look at where we are, obviously, Q2 product margin was slightly better than our long-term model, which is in the mid to high 50%. And then when we look at the rest of the year, we expect product margin or product gross margin to be relatively stable to where we ended in Q2. Looking ahead, if I think of the component pricing, look, this is an environment that could be volatile. And so we're not going to make a call on that. But what we do is we look at various scenarios. We have a very capable supply chain team that has been through many of these past cycles of tight supply and some of the commodities that we buy. With rising cost environments, for instance, we've been able to manage very efficiently over the years, in fact, while also in some cases, growing EPS. And so we will continue to manage our input cost and maintain our supply continuity. We haven't seen any disruptions so far. We heard of any as such. Now ultimately, our goal is really to focus on our total gross margin. And this comes down to the various components of our revenue and the mix. And so there's the rate there and the mix. If we continue to see current levels, let's say, of some of the commodities, in particular, let's say, I know you probably have in mind that one of the things, for instance, is NAND. We continue to see similar levels, we'll probably have a bit of headwind into fiscal 2027 from a product gross margin perspective. But when we look at the mix of the business, going forward, we continue to see high growth in the cloud business, which is now operating between 80-85%. I mean, Q2, it was at 83% gross margin. We continue to see good growth in Keystone. And so the mix is very much favorable to us. The couple of the last couple of points, I would say, as we think through all of this, we're focused on driving growth in gross profit dollars, which is foundational to the profitability engine of our business. And lastly, you know, if we are faced with higher commodity prices, relative to where we are today, we will always reconsider our pricing. Commodity prices are typically passed through for us, and we don't have an issue passing them through.

Q: Maybe I'm going to ask a similar question to Aaron. And Wassam, that is you're effectively at 60% product gross margins. I know you said we should expect them to be relatively unchanged through the rest of the year. First part of that is just, is this a function of, you know, mix to all flash? Is this still pricing tailwinds? Is this kind of bomb cost down? I'd love if you could just maybe contextualize what the real drivers are of that product gross margin expansion. And then second, I'll just ask both questions at once is, I realize you don't really need to talk to fiscal year 2027, it's too early in the commodity cost environment is quite volatile. But are we kind of at peak product gross margins? Can product gross margins expand from here? Like I just love to understand how you think about the sustainability of where we are even regardless of the memory cycle.

A: Yes. Thanks, Eric. Hey, look. What I said, yeah, for the rest of the year, we expect product gross margin to be more or less where we are now. We're in the 59%, I think, and change. When we think about the drivers, you know, it's a combination of things. If I sort of look at where we are year on year, for instance, cost is now roughly flattish. And so we are seeing differences mostly driven by mix and pricing. That's pretty much what drives the margin. And as sort of I look forward, obviously, as you mentioned, it's too early to talk about 2027. But I'm gonna talk about, theoretically, how we think of the long-term product margin of our business. You know, we are targeting mid to high 50% margin. And so that's really we are operating a little bit better than that now. But our target is a mid to high 50% because, ultimately, to drive better gross margins for the company, is the mix that's going to be also a tailwind as our fast-growing cloud business continues growing at the high and delivering higher gross margin than the corporate average. This should help us improve on our margins. I wouldn't put a cap on our product margin ultimately, we continue to be very operationally disciplined in how we conduct the business. But I hope this answers your question.