Q2 2022 NetApp Inc Earnings Call
Good afternoon, ladies and gentlemen, welcome to the second quarter fiscal year 2022 earnings call.
Speaker 1: Good afternoon, ladies and gentlemen. Welcome to the NetApp second quarter fiscal year 2022 earnings call. At this time, all participants on...
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
Speaker 1: Later we will conduct a question and answer session and instructions will be given at that time.
I would now like to turn the call over to Kris Newton, Vice President Investor Relations.
Speaker 1: I would now like to turn the call over to Chris Newton, Vice President, Investor Relations.
Thank you for joining us with me today are CEO, George Kurian, and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at <unk> Dot com.
Speaker 2: Thank you for joining us. With me today are our CEO , George Kurian, and CFO , Mike Berry. This call is being webcast live and will be available for replay on our website at NEDAC.com. During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects, such as
During today's call, we will make forward looking statements and projections with respect to our financial outlook and future prospects such as.
Speaker 2: Our guidance for third quarter fiscal year 2022, our expectations regarding future revenue, profitability, and shareholder returns, the value we bring to customers, our ability to drive growth in our hybrid cloud segment and scale our public cloud segment, and our ability to manage through the current supply chain environment, all of which involve risk,
Our guidance for third quarter fiscal year 2022, our expectations regarding future revenue profitability and shareholder return the value we bring to customers our ability to drive growth in our hybrid cloud segment and scale or public cloud segment, and our ability to manage through the current supply chain environment.
All of which involve risks and uncertainty.
Speaker 2: We disclaim any obligation to update our forward-looking statements and projections.
We disclaim any obligation to update our forward looking statements and projections actual results may differ materially for a variety of reasons, including macroeconomic and market conditions, such as the continuing impact an uneven recovery as the COVID-19, pandemic, including resulting supply chain disruptions and the it capital spending environment.
Speaker 2: Actual results may differ materially for a variety of reasons, including macroeconomic and market conditions, such as the continuing impact and uneven recovery of the COVID-19 pandemic, including resulting supply chain disruptions and the IT capital spending environment, as well as our ability to gain share in the storage market, grow our cloud business, and generate greater cash flow.
As well as our ability to gain share in the storage market grow our cloud business and generate greater cash flow. Please also refer to the documents we file from time to time with the SEC and available on our website specifically, our most recent Form 10-Q, and 10-K, including in the management's discussion and analysis of financial condition and result.
Speaker 2: Please also refer to the documents we file from time to time with the SEC and available on our website, specifically our most recent Forms 10-Q and 10-K, including in the Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factor section.
Of operations and risk factors section.
Speaker 2: During the call, all financial measures presented will be non-GAAP unless otherwise indicated. Reconciliations of GAAP to non-GAAP estimates are posted on our website. I'll now turn the call over to George.
During the call all financial measures presented will be non-GAAP, unless otherwise indicated reconciliations of GAAP to non-GAAP estimates are posted on our website I will now turn the call over to George Thanks, Chris and welcome everyone to our Q2 fiscal year 'twenty two earnings call. We delivered another strong quarter with result.
Speaker 3: Thanks, Chris, and welcome everyone to our Q2 fiscal year 22 earnings call. We delivered another strong quarter with results all at the high end or above our guidance.
<unk> all at the high end or above our guidance building on the momentum of last year and the previous quarter revenue grew 11% year over year with public cloud segment revenue growth of 85% and hybrid cloud segment revenue growth of 8%.
Speaker 3: Building on the momentum of last year and the previous quarter, revenue grew 11% year over year with public cloud segment revenue growth of 85% and hybrid cloud segment revenue growth of 8%.
Product revenue grew 9% year over year, the third consecutive quarter of year over year growth.
Speaker 3: product revenue grew 9% year over year, the third consecutive quarter of year over year growth. Gross margin, operating margin and earnings per share are all at record highs for the first half of the fiscal year. Our performance reflects continued broad-based customer demand created by the sizable and long-term trends of cloud and data-driven digital transformation.
Gross margin operating margin and earnings per share are all at record highs for the first half of the fiscal year.
Our performance reflects continued broad based customer demand created by the sizable and long term trends of cloud and data driven digital transformation, where netapp is playing an increasingly important role in helping customers achieve their business and hybrid cloud.
Speaker 3: where NetApp is playing an increasingly important role in helping customers achieve their business and hybrid cloud transformation goals.
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Speaker 3: NetApp is uniquely positioned to solve organizations' most significant challenges in both modern and traditional applications, on-premises, and in hybrid multi-cloud environments.
<unk> is uniquely positioned to solve organizations most significant challenges.
In both modern and traditional applications on premises and in hybrid multi cloud environments.
Speaker 3: As I've said many times, our public cloud services not only allow us to participate in the rapidly growing cloud market, but they also make us a more strategic data center partner to our enterprise customers, driving share gains in our hybrid cloud business.
As I've said many times, our public cloud services, not only allow us to participate in the rapidly growing cloud market, but they also make us a more strategic data center partner to our enterprise customers driving share gains in our hybrid cloud business.
Speaker 3: We are seeing this play out in the strong results from both our public cloud and hybrid cloud segments. In Q2, we had a number of announcements that further solidify our leadership position as we continue to drive growth in our hybrid cloud segment while scaling our public cloud segment.
We are seeing display out in the strong results from both our public cloud and hybrid cloud segments. In Q2, we had a number of announcements that further solidify our leadership position as we continue to drive growth in our hybrid cloud segment, while scaling our public cloud.
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Speaker 3: Public cloud revenue grew 85% year over year, driven by Azure NetApp Files, Cloud Insights, and Spot by NetApp.
Public cloud revenue grew 85% year over year, driven by Azure Netapp files cloud insights and sparked by net app.
Speaker 3: Public cloud ARR grew to $388 million, an increase of 80% year-over-year, and public cloud dollar-based net revenue retention rate remains healthy at 179%.
Public cloud <unk> grew to $388 million, an increase of 80% year over year and public cloud dollar based net revenue retention rate remains healthy at 179%.
Speaker 3: During Q2, we advanced our cloud agenda significantly, and we remain confident in our ability to achieve our goal of reaching $1 billion ARR in fiscal year 25 with a gross margin profile that is accretive to the corporate average.
During Q2, we advanced our cloud agenda significantly and we remain confident in our ability to achieve our goal of reaching $1 billion.
In fiscal year 'twenty five with a gross margin profile that is accretive to the corporate average.
Speaker 3: In Q2, Amazon Web Services, AWS, announced the general availability of Amazon FSx for NetApp ONTAP, a native, fully managed AWS storage service powered by ONTAP.
In Q2, Amazon Web services, AWS announced the general availability of Amazon FSX for Netapp on tap a native fully managed AWS storage service powered by on tap.
Speaker 3: This new first-party product is fully integrated into the AWS console, and it's sold, supported, run, and built by AWS, making it easy and cost-effective for customers to take advantage of NetApp's suite of enterprise-grade data services while running in an AWS native experience.
This new first party product is fully integrated into the AWS console and its sold supported run and built by AWS.
Making it easy and cost effective for customers to take advantage of Netapp suite of enterprise grade data services.
While running in an AWS native experience as.
Speaker 3: As we saw with Azure NetApp Files, it will take time for FSx for NetApp ONTAP to ramp, but we are extraordinarily pleased with the early indicators and the number of customers piloting this service.
As we saw with Azure Netapp files, it will take time for FX for Netapp on depth Ram.
But we are extraordinarily pleased with the early indicators and the number of customers piloting the service.
Additionally, Google cloud announced that Netapp will provide storage infrastructure for its Google distributed cloud hosted where data resides in customer owned data centers and colocation facilities.
Speaker 3: Additionally, Google Cloud announced that NetApp will provide storage infrastructure for its Google Distributed Cloud hosted where data resides in customer-owned data centers and co-location facilities.
Speaker 3: Google is previewing the integration of Google Cloud VMware Engine with NetApp Cloud Volume Service, a fully managed service that helps organizations meet their needs for storage and disaster recovery.
Google is previewing the integration of Google Cloud Vmware engine with Netapp cloud volumes service, a fully managed service that helps organizations meet their needs for storage and disaster recovery.
We also expanded availability of cloud volume service in the Google Cloud.
Speaker 3: We also expanded availability of Cloud Volume Service in the Google Cloud.
Speaker 3: much like any other Google Cloud native service.
Much like any other glu cloud native service.
Cloud volumes service can be provisioned.
Speaker 3: Cloud volume service can be provisioned and consumed against existing Google Cloud agreements, making it easier for customers to expand their cloud engagements with both Google and NetApp.
And consume.
Against existing Google cloud agreements, making it easier for customers to expand their cloud engagements with both Google and net app.
Speaker 3: Finally, Microsoft announced that whitelisting has been removed from Azure NetApp Files. Azure NetApp Files has been generally available since May 2019, with customers around the world relying on it to run their most demanding enterprise workloads in the Azure cloud. Now customers can instantaneously leverage Azure NetApp Files to accelerate the deployment of mission-critical applications to Azure.
Finally, Microsoft announced that White listing has been removed from Azure Netapp files.
As an in App files has been generally available since may 2019 with customers around the world relying on it to run their most demanding enterprise workloads in the Azure cloud.
Now customers can instantaneously leverage Azure netapp files to accelerate the deployment of mission critical applications to Azure and.
Speaker 3: Additionally, we expanded the backup restore service and cross-region replication capabilities for Azure NetApp files.
Additionally, we expanded the backup restore service and cross region replication capabilities for Azure Netapp files.
We now have fully integrated services with all the major public cloud providers to give organizations the benefits of our storage and data management expertise and experience no matter, which cloud they choose.
Speaker 3: We now have fully integrated services with all the major public cloud providers to give organizations the benefits of our storage and data management expertise and experience, no matter which cloud they choose.
We have deepened each partnership and coins neared services directly with the cloud providers, enabling their customers to buy directly from them.
Speaker 3: We have deepened each partnership and co-engineered services directly with the cloud providers, enabling their customers to buy directly from them.
This level of integration streamlined purchasing billing operations and support and eliminates the complexity of additional contracts product installations or patching.
Speaker 3: This level of integration streamlines purchasing, billing, operations, and support, and eliminates the complexity of additional contracts, product installations, or patching.
Speaker 3: Importantly for NetApp, these partnerships create a new and massive go-to-market growth engine as three of the largest and most innovative companies in the world are reselling our technology.
Importantly for net up these partnerships create a new and massive go to market growth engine as three of the largest and most innovative companies in the world are reselling our technology.
Speaker 3: Each of these announcements represent years of hard work, partnership, and continuous innovation, bringing ONTAP to the cloud at cloud speed and represent the opportunity for continued expansion.
Each of these announcements represent years of hard work.
Gartner ship and continuous innovation, bringing on tap to the cloud at cloud speed and represent the opportunity for continued expansion.
Speaker 3: We're now the first and only storage environment that's natively integrated into each of the major public cloud providers.
We're now the first and only storage environment that natively integrated into each of the major public cloud providers.
Speaker 3: We also made significant enhancements to the Spot portfolio. We introduced Spot Security, a new product designed to keep cloud infrastructure secure. Delivering continuous automated AI-based security, Spot Security analyzes, detects, and prioritizes threats to surface the most critical vulnerabilities and provides actionable compliance, remediation, and prevention.
We also made significant enhancements to the spot portfolio.
We introduced spots security, our new product designed to keep cloud infrastructure secure.
Delivering continuous automated AI based security.
<unk> security analyzes detects and prioritizes threats to surface. The most critical vulnerabilities and provides actionable compliance remediation and prevention. We also released intelligent traffic flow and new functionality to spot elastic group, which further and answers.
Speaker 3: We also released Intelligent Traffic Flow, a new functionality to spot ElastiGroup, which further enhances our customers' ability to optimize their applications by intelligently managing and controlling incoming network traffic for optimal instance utilization and high performance.
Our customers ability to optimize their applications by intelligently, managing and controlling incoming network traffic for optimal instance, utilization and high performance. Additionally.
Speaker 3: Additionally, we announced Spot PC, a fully managed, secured, and continuously optimized desktop service built together with Microsoft to provide a complete solution for Windows 365 and Azure Virtual Desktop.
Additionally, we announced spot Tc a fully managed and secured and continuously optimize desktop service built together with Microsoft to provide a complete solution for windows 365, and Azure virtual desktop.
Speaker 3: At the beginning of Q3, we closed the acquisition of CloudChecker, whose industry-leading cloud billing analytics and cloud configuration management, monitoring, and assessment solutions will augment the full suite of Spark services.
At the beginning of Q3, we closed the acquisition of cloud Checker, who has industry, leading cloud billing analytics and cloud configuration management monitoring and assessment solutions will augment the full suite of spot services. In addition to being a solid technology acquisition clock.
Speaker 3: In addition to being a solid technology acquisition, CloudChecker will enhance our partner strategy for cloud. And we will leverage the CloudChecker platform to build and extend distributor and partner businesses in both the private and public sector.
Checker will enhance our partner strategy for cloud.
And we will leverage the cloud checkup platform to build and extend distributor and partner businesses in both the private and public sectors.
Speaker 3: Also in Q2, we held our annual flagship customer event, Insight, with more than 10,000 attendees, and we introduced NetApp TV to stay engaged with customers throughout the year. At Insight, we announced enhancements to our hybrid cloud portfolio with the latest version of ONTAP that delivers even better performance for SAN and modern workloads like AI and analytics.
Also in Q2, we held our annual flagship customer event insight with more than 10000 attendees and we introduced netapp TV to stay engaged with customers throughout the year.
At insight, we announced enhancements to our hybrid cloud portfolio with the latest version of on tap the delivers even better performance for San and modern workloads like AI and analytics expanded capabilities for object storage increasingly automated storage system management.
Speaker 3: expanded capabilities for object storage, increasingly automated storage system management, and autonomous ransomware protection based on machine learning.
And autonomous Ransomware protection based on machine learning.
Speaker 3: The strength of our storage offerings was recognized by Gartner, which named NetApp once again as a leader in the 2021 Magic Quadrant for primary storage.
The strength of our storage offerings was recognized by Gartner, which named net App once again as a leader in the 2021 magic quadrant for primary storage.
Gartner called out our robust product and cloud services portfolio as well as Keystone Flex subscription are comprehensive and flexible storage as a service offering.
Speaker 3: Gartner called out our robust product and cloud service portfolio, as well as Keystone Flex subscription, our comprehensive and flexible storage as a service offering.
Speaker 3: We were also recognized among this year's top vendor solutions, evaluated in the 2021 Gartner critical capabilities for primary storage across all use cases.
We were also recognized among this year's top vendor solutions evaluated in the 2021 Gartner critical capabilities for primary storage across all use cases.
Speaker 3: Growth in our hybrid cloud segment was driven by strength in object storage for the rapidly growing unstructured data and analytics use cases and our all-flash array portfolio. In Q2, our all-flash array business reached a record high annualized run rate of $3.1 billion, an increase of 22% year on year.
Growth in our hybrid cloud segment was driven by strength in object storage for the rapidly growing unstructured data and analytics use cases, and our all flash array portfolio.
In Q2, our all flash array business reached a record high annualized run rate of $3.1 billion, an increase of 22% year on year.
All flash arrays now composed 30%.
Speaker 3: All flash arrays now compose 30% of our install-based systems.
Our installed base systems, we see substantial headroom to continue to help existing and new customers modernize their storage environments.
Speaker 3: we see substantial headroom to continue to help existing and new customers modernize their storage environment.
Speaker 3: Based on our continued strong revenue growth, I am confident that we, once again, gain share in the enterprise storage and all-flash array market.
Based on our continued strong revenue growth I am confident that we once again gained share in the enterprise storage and all flash array market.
Speaker 3: Like everyone in our industry, we are faced with a challenging supply environment.
Like everyone in our industry, we are faced with a challenging supply environment.
While the situation is dynamic and continues to evolve we are doing everything we can to mitigate the supply chain headwinds.
Speaker 3: While the situation is dynamic and continues to evolve, we are doing everything we can to mitigate the supply chain headwinds. We believe that we can continue to manage through them and address the substantial customer demand.
We believe that we can continue to manage through them and address the substantial customer demand.
Speaker 3: As Mike will explain, we have factored the ongoing supply chain uncertainty into our guidance for Q3 and the full year. I am pleased with how we have navigated these challenges and want to thank our suppliers for their support and the NetApp team for their hard work in this environment.
As Mike will explain we have factored the ongoing supply chain uncertainty into our guidance for Q3 and the full year I am pleased with how we have navigated these challenges.
And want to thank our suppliers for their support and the Netapp team for their hard work in this environment.
Speaker 3: In summary, our Q2 results reflect healthy momentum, a clear vision, and exceptional execution across our business.
In summary, our Q2 results reflect healthy momentum a clear vision and exceptional execution across our business.
Speaker 3: As we close the first half of fiscal year 22, I'm proud of our team and what we have accomplished.
As we closed the first half of fiscal year 'twenty, two I'm proud of our team and what we have accomplished.
Speaker 3: We continue to bring industry-leading capabilities to market, further enhancing our differentiated position in cloud and software. As our customers accelerate their digital transformation and their adoption of hybrid cloud and hybrid work strategy, we believe we are well-positioned to capture the sizable opportunity ahead.
We continue to bring industry, leading capabilities to market further enhancing our differentiated position in cloud and software.
As our customers accelerate their digital transformation and their adoption of hybrid cloud and hybrid work strategy. We believe we are well positioned to capture the sizable opportunity ahead.
Before I turn the call over to Mike I want to invite you all to join US for our Investor Day on March 22nd 2022. Please.
Speaker 3: Before I turn the call over to Mike, I want to invite you all to join us for our Investor Day on March 22nd, 2022. Please mark your calendars and stay tuned for more information. I'll now turn it over to Mike.
Please mark your calendars and stay tuned for more information I'll now turn it over to Mike.
Speaker 4: Thank you, George. Good afternoon, everyone, and thank you for joining us. As a reminder, I'll be referring to non-GAAP numbers unless otherwise noted.
Thank you George Good afternoon, everyone and thank you for joining us as a reminder, I'll be referring to non-GAAP numbers unless otherwise noted.
Before we go through the financial details I think it would be valuable to walk you through the key themes for today's discussion.
Speaker 4: Before we go through the financial details, I think it would be valuable to walk you through the key themes for today's discussion.
Number one Q2 was another strong quarter with results at the high end or above our guidance.
Speaker 4: Number one, Q2 was another strong quarter, with results at the high end or above our guidance.
Number two our business model continues to show significant operating leverage as we grow our operating profitability and margins.
Speaker 4: Number two, our business model continues to show significant operating leverage as we grow our operating profitability and margin.
Speaker 4: Number three, our cloud business had another outstanding quarter as we marched towards the $1 billion ARR target. And number four, we are increasing our full year guidance for revenue, EPS, and public cloud ARR, driven by the outperformance in Q2, the addition of CloudChecker, and a healthy demand pipeline for the second half of our fiscal year.
Number three our cloud business had another outstanding quarter as we March towards the 1 billion dollar ALR target.
And number four we are increasing our full year guidance for revenue EPS and public cloud are are driven by the outperformance in Q2. The addition of cloud checker and a healthy demand pipeline for the second half of our fiscal year.
Now to the details.
Speaker 4: In fiscal Q2, we delivered strong revenue, gross margin, and operating leverage across the entire business.
In fiscal Q2, we delivered strong revenue gross margin and operating leverage across the entire business outstanding execution by the Netapp team yielded Q2 billings of $1.55 billion up 7% year over year revenue came in at 1.57 billion.
Speaker 4: Outstanding execution by the NetApp team yielded Q2 billings of $1.55 billion, up 7% year-over-year. Revenue came in at $1.57 billion, up 11% year-over-year. Our solid Q2 results were driven by healthy demand across both our hybrid cloud and public cloud segments.
<unk> up 11% year over year, our solid Q2 results were driven by healthy demand across both our hybrid cloud and public cloud segments.
Speaker 4: Gross Margin, Operating Margin, and EPS all came in above the high end of guidelines.
Gross margin operating margin and EPS all came in above the high end of guidance.
Total hybrid cloud segment revenue of $1.48 billion was up 8% year over year.
Speaker 4: Total hybrid cloud segment revenue of 1.48 billion dollars was up 8% year over year. Within hybrid cloud, we deliver product revenue growth for the 3rd consecutive quarter and expect this momentum to continue throughout fiscal 22.
Within hybrid cloud, we delivered product revenue growth for the third consecutive quarter and expect this momentum to continue throughout fiscal 'twenty two.
Product revenue of $814 million increased 9% year over year consistent with the trends we've seen over the last year software product revenue of $475 million increased 14% year over year, driven by the continued mix shift towards our all flash portfolio.
Speaker 4: Product revenue of $814 million increased 9% year over year. Consistent with the trends we've seen over the last year, software product revenue of $475 million increased 14% year over year, driven by the continued makeshift towards our All-Flash portfolio.
Speaker 4: Total Q2 recurring support revenue of $590 million increased 7% year over year.
Total Q2 recurring support revenue of $590 million increased 7% year over year.
Speaker 4: As George highlighted, our all-flash revenue run rate, which includes both product and support revenue, eclipsed $3 billion for the first time in the company's history and was up 22% year over year.
As George highlighted our all flash revenue run rate, which includes both product and support revenue eclipsed $3 billion for the first time in the company's history and was up 22% year over year.
Speaker 4: Public Cloud ARR exited Q2 at $388 million, up 80% year over year, and 15% sequentially, driven by strong growth in Azure NetApp Files, Spot, and Cloud Insights.
Public cloud they are exited Q2 at $388 million up 80% year over year, and 15% sequentially driven by strong growth in Azure Netapp files spot and cloud insights public.
Speaker 4: Public cloud revenue recognized in the quarter was $87 million, up 85% year over year.
Public cloud revenue recognized in the quarter was $87 million up 85% year over year.
Speaker 4: The growing scale of our public cloud platform continues to positively impact the overall growth profile of NetApp, delivering three of the 11 points in revenue growth.
The growing scale of our public cloud platform continues to positively impact the overall growth profile of net app.
Levering three of the 11 points in revenue growth.
Recurring support and public cloud revenue of $677 million was up 13% year over year constituting 43% of total revenue.
Speaker 4: Recurring support and public cloud revenue of $677 million was up 13% year over year, constituting 43% of total revenue.
Speaker 4: When combined, software product revenue, recurring support, and public cloud revenue totaled $1.2 billion and increased 13% year over year, representing 74% of total revenue, up from 72% in Q2 21.
When combined software product revenue recurring support and public cloud revenue totaled $1.2 billion and increased 13% year over year, representing 74% of total revenue up from 72% in Q2 'twenty one.
We ended Q2 with $3.9 billion in differed revenue an increase of 6% year over year.
Speaker 4: We ended Q2 with $3.9 billion in deferred revenue, an increase of 6% year over year.
Q2 marks the 15th consecutive quarter of year over year deferred revenue growth, which is the best leading indicator for continued recurring revenue growth.
Speaker 4: Q2 marks the 15th consecutive quarter of year-over-year deferred revenue growth, which is the best leading indicator for continued recurring revenue growth.
Total gross margin was 68%, reflecting the value of our software portfolio and public cloud platform.
Speaker 4: Total gross margin was 68%, reflecting the value of our software portfolio and public cloud platform.
Speaker 4: Total hybrid cloud gross margin was also 68% in Q2. Within our hybrid cloud segment, product gross margin was 55% and benefited from the continued mix shift towards software-rich all-flash systems.
Total hybrid cloud gross margin was also 68% in Q2.
Within our hybrid cloud segment product gross margin was 55% and benefited from the continued mix shift towards software rich all flash systems are recurring support business continues to be very profitable with gross margin of 92%.
Speaker 4: Our recurring support business continues to be very profitable, with gross margin of 92%.
Speaker 4: Public cloud gross margin of 71% was accretive to the overall corporate average.
Public cloud gross margin of 71% was accretive to the overall corporate average.
Speaker 4: We expect public cloud gross margins to continue to trend towards our long term goal of 75 to 80% as an increasing percentage of our public cloud business will be built on software only solution.
We expect public cloud gross margins to continue to trend towards our long term goal of 75% to 80% as an increasing percentage of our public cloud business will be built on software only solutions.
We recently introduced a new F S expert on tap product with AWS and also close the cloud Checker acquisition.
Speaker 4: We recently introduced the new FSX for ONTAP product with AWS and also closed the cloud checker acquisition.
Both our software only offerings and support our long term margin goal.
Speaker 4: Q2 highlighted the tremendous leverage in our operating model, with operating margin of 24%, an all-time company high.
Q2 highlighted the tremendous leverage in our operating model with operating margin of 24%, an all time company high.
Speaker 4: EPS of $1.28 was up 22% year over year, and also represented a new quarterly record for the company.
EPS of $1 28 was up 22% year over year and also represented a new quarterly record for the company.
Cash flow from operations was $298 million and free cash flow was $252 million.
Speaker 4: Cash flow from operations was $298 million, and free cash flow was $252 million.
Speaker 4: DSO and Q2 was an impressive 38 days, highlighting a strong collections process and healthy linearity throughout the quarter.
DSO in Q2 was an impressive 38 days, highlighting our strong collections process and healthy linearity throughout the quarter year.
Speaker 4: Year-to-date free cash flow of $443 million is up 43% year over year.
Year to date free cash flow of $443 million is up 43% year over year.
Speaker 4: During Q2, we repurchased $125 million in stock and paid out $112 million in cash dividends.
During Q2, we repurchased $125 million in stock and paid out $112 million in cash dividends.
Speaker 4: In total, we returned $237 million to shareholders, representing 94% of free cash.
In total we returned $237 million to shareholders, representing 94% of free cash flow.
We closed Q2 with $4 $5 billion in cash and short term investments.
Speaker 4: We closed Q2 with $4.5 billion in cash and short-term investment.
Speaker 4: As you all know, the dynamic supply chain headwinds have intensified recently.
As you all know the dynamic supply chain headwinds have intensified recently are excellent supply chain and procurement team continues to work closely with our partner ecosystem with the goal of meeting as much customer demand as possible.
Speaker 4: Our excellent supply chain and procurement team continues to work closely with our partner ecosystem with the goal of meeting as much customer demand as possible.
Speaker 4: Towards this goal, we will continue to invest incremental dollars in the inventory and longer-term commitments.
Towards this goal, we will continue to invest incremental dollars in the inventory and longer term commitments that said, we do anticipate the supply chain challenges facing the overall technology industry to impact our product revenue and product gross margins in the second half of fiscal 'twenty two.
Speaker 4: That said, we do anticipate the supply chain challenges facing the overall technology industry to impact our product revenue and product gross margins in the second half of fiscal 22.
The supply chain headwinds and our ongoing actions to mitigate them have been factored into our Q3 and updated full year guidance.
Speaker 4: The supply chain headwinds and our ongoing actions to mitigate them have been factored into our Q3 and updated full year guidance.
Speaker 4: With our strong execution in Q2, the addition of CloudChecker, and a healthy demand pipeline for the second half of our fiscal year, we are raising our fiscal 22 revenue guidance.
With our strong execution in Q2. The addition of cloud checker.
And a healthy demand pipeline for the second half of our fiscal year, we are raising our fiscal 'twenty two revenue guidance.
We now expect revenues to grow 9% to 10% year over year, even with the challenging supply chain environment.
Speaker 4: We now expect revenues to grow 9% to 10% year over year, even with the challenging supply chain environment.
Speaker 4: We also have growing confidence in our expanding public cloud opportunity, driven by enhanced go-to-market activities, deeper and broader cloud partnerships, and continued product innovation.
We also have growing confidence in our expanding public cloud opportunity driven by enhanced go to market activities deeper and broader cloud partnerships and continued product innovation.
Speaker 4: As a result, we are raising the guidance on our Organic Public Cloud ARR with a new range of $475 to $500 million.
As a result, we are raising the guidance on our organic public cloud <unk> with a new range of $475 million to $500 million.
As you know we closed the cloud Checker acquisition early in Q3, we anticipate cloud checker to contribute an additional $35 million to $40 million in public cloud <unk> exiting the year.
Speaker 4: As you know, we closed the cloud checker acquisition early in Q3.
Speaker 4: We anticipate CloudChecker to contribute an additional $35 to $40 million in public cloud ARR exiting the year.
Speaker 4: In total, our new guidance for exit fiscal 22 public cloud ARR is $510 to $540 million, which at the midpoint implies a 74% increase year over year.
In total our new guidance for exit fiscal 'twenty, two public cloud <unk> is $510 million to $540 million.
Which at the midpoint implies a 74% increase year over year.
Speaker 4: For fiscal 22, we continue to forecast total gross margin to be approximately 68%.
For fiscal 'twenty, two we continue to forecast total gross margin to be approximately 68% how.
However, the current supply chain challenges.
Speaker 4: However, the current supply chain challenges with temporarily higher freight and expedite charges will pressure product margins in Q3 and Q4. We now anticipate product margins to be approximately 54% for the full year.
With temporarily higher freight and expedite charges.
Pressure product margins in Q3 and Q4.
We now anticipate product margins to be approximately 54% for the full year.
We are reaffirming our full year operating margin guidance of 23% to 24%.
Speaker 4: We are reaffirming our full year operating margin guidance of 23 to 24%.
We are forecasting operating expenses to range between 2.795.
$2.815 billion driven by investment in revenue generating activities.
Including expanding our public cloud portfolio and investments in both our cloud and customer success sales teams.
Speaker 4: Our new OPEX guidance also includes $10 million per quarter from cloud.
Our new Opex guidance also includes $10 million per quarter from cloud checker.
As we discussed at our Investor Day last September we remain committed to growing revenue faster than operating expenses.
Speaker 4: As we discussed at our investor day last September , we remain committed to growing revenue faster than operating expenses.
We are raising our fiscal 'twenty to EPS guidance, we now expect EPS to range between $4 90.
Speaker 4: We are raising our fiscal 22 EPS guidance.
Speaker 4: We now expect EPS to range between $4.90 and $5.10, representing 23% year-over-year growth at the midpoint.
And $5 10, representing.
Representing 23% year over year growth at the midpoint.
Speaker 4: Implied in this guidance is our expectation that other income and expense will be a negative $60 million, and our effective tax rate will remain at 19%.
Implied in this guidance is our expectation that other income and expense will be a negative $60 million and our effective tax rate will remain at 19%.
We remain committed to delivering more than $1 $2 billion in free cash flow in fiscal 'twenty two as our hybrid cloud business continues to fund the growth in our public cloud platform.
Speaker 4: We remain committed to delivering more than $1.2 billion in free cash flow in fiscal 22 as our hybrid cloud business continues to fund the growth in our public cloud platform.
Now onto Q3 guidance.
We expect Q3 net revenues to range between 1525.
Speaker 4: We expect Q3 net revenues to range between 1.525 and 1.675 billion dollars, which at the midpoint implies a 9% increase year over year.
And 1.6 $75 billion, which at the midpoint implies a 9% increase year over year.
Speaker 4: We anticipate consolidated gross margin to range between 67 and 68% and operating margin to be approximately 23%.
We anticipate consolidated gross margin to range between 67, and 68% and operating margin to be approximately 23%.
Assumed in this guidance, our Q3 operating expenses of $705 million to $715 million, which includes cloud checker.
Speaker 4: Assumed in this guidance are Q3 operating expenses of $705 to $715 million, which includes cloud checks.
Speaker 4: We expect earnings per share for Q3 to range between $1.21 and $1.31 per share.
We expect earnings per share for Q3 to range between $1 21.
$1.31 cents per share.
Speaker 4: Assumed in our Q3 guidance is our expectation that other income and expense will be a negative 15 million dollars and our tax rate will be approximately 19 percent.
Assumed in our Q3 guidance is our expectation that other income and expense will be a negative $15 million and our tax rate will be approximately 19%.
In closing I want to thank the entire Netapp team for the outstanding execution in the first half of our fiscal year.
Speaker 4: In closing, I want to thank the entire NetApp team for the outstanding execution in the first half of our fiscal year.
Speaker 4: The team stayed focused on our core priorities and were not distracted by external events out of their control. We are excited to build on that momentum as we continue to scale a truly differentiated public cloud platform while maintaining an unwavering focus on the hybrid cloud business.
The team stayed focused on our core priorities and we're not distracted by external events out of their control.
We are excited to build on that momentum as we continue to scale a truly differentiated public cloud platform, while maintaining an unwavering focus on the hybrid cloud business.
Speaker 4: As George mentioned, we plan to host an Investor Day in the spring, where we will further discuss the long-term value drivers for our shareholders, customers, and partners.
As George mentioned, we plan to host an Investor day in the spring, where we will further discuss the long term value drivers for our shareholders customers and partners.
Speaker 4: I'll now hand it back to Chris to open the call for Q&A. Chris?
I'll now hand, it back to Chris to open the call for Q&A Kris.
Speaker 2: Thanks, Mike. Let's open the call for Q&A. Please keep to just one question so we can get to as many people as possible. Operator?
Thanks, Mike, Let's open the call for Q&A. Please keep to just one question. So we can get to as many people as possible operator.
Speaker 1: Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster.
Thank you, ladies and gentlemen, as a reminder to ask the question do we need to press Star then one on your telephone to withdraw your question press the pound key.
Again, Thats star one to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Jason Ader with William Blair. Your line is open.
Speaker 1: Our first question comes from the line of Jason Adder with Wim Blair. Your line is open.
Speaker 5: Yeah, thanks. Hey, guys. My question for you, George, is as we think about the cloud services business,
Yeah, Thanks, Hi, guys.
I guess my question for you George is as we think about the cloud services business.
Speaker 5: There's a lot of different elements within there. You had just announced the FSx for NetApp ONTAP.
There's a lot of different <unk>.
Elements within there.
<unk> announced the FSX Fernandez on tap.
Speaker 5: Obviously, Azure NavFiles is going well, you have the whole Spot business and now CloudChecker. I guess it's hard to figure out from our perspective, I think, which are going to be the most important, let's call it.
Obviously azure Netapp files is going well you have a whole spot business and now cloud checker.
I guess, it's hard to figure out from our perspective, I think what youre going to be the most important let's call. It.
Speaker 5: you know, three to five years from now, how would you help us think about that just in terms of magnitude? And in particular, I'm curious about the FSX business. I mean, how should we be thinking about how important that particular service will be to your cloud services ARR over time?
Three to five years from now how would you help us think about that just in terms of magnitude and in particular I'm curious about the <unk> business I mean, how should we be thinking about how important that particular service will be to your cloud services <unk> overtime.
I think first of all we saw strong performance this past quarter from all three important pieces of our cloud portfolio cloud volumes, which is cloud storage services.
Speaker 3: I think first of all, we saw strong performance this past quarter from all three important pieces of our cloud portfolio, cloud volumes, which is cloud storage services.
Speaker 3: Cloud Insights, which is monitoring, and our Spark portfolio, which is dynamic optimization of compute and storage in the cloud. All of them have really strong quarters and we're really pleased. In terms of FSx for ONTAP, I will just say that it's very early days.
Loud insights which is monitoring.
And our spot portfolio, which is dynamic optimization of compute and storage in the cloud all of them had really strong quarters and were really pleased in terms of FSX four on tap I will just say that it's very early days.
Speaker 3: But we are extraordinarily pleased. Listen, if you look at the cloud file storage market, the public data suggests that Amazon Web Services is the dominant player in that market.
But we are extraordinarily pleased listen if you look at the cloud file storage market.
Data suggest that Amazon web services is the dominant player in that market and having a needed first party on tap enterprise file storage service in the Amazon cloud is an enormous opportunity.
Speaker 3: and having a native first-party on-tap enterprise file storage service in the Amazon cloud is an enormous opportunity.
Speaker 3: We are doing the innovation and the enablement work to scale that business. We're really pleased with the early results, but we have a long, you know, kind of, uh,
We're doing the innovation in the enablement work to scale that business. We're really pleased with the early results, but we have a long you know kind of.
We'll see that play out over the next several quarters right just like Microsoft Azure Netapp files is now really stellar product for us.
Speaker 6: we'll see that play out over the next several quarters, right? Just like Microsoft Azure NetApp Files is now a really stellar product for us.
Thanks.
Okay.
Thank you.
Our next question comes from the line of Katy Huberty with Morgan Stanley. Your line is open.
Speaker 1: Our next question comes from the line of Katie Huberty with Morgan Stanley . Your line is open.
Speaker 7: Yes, thank you, Mike. You size the profit impact of the supply chain constraints, but what is the impact to product revenue in the back half and should we think of any shortfall in revenue just contributing to fiscal 23 growth?
Yes. Thank you Mike inside the profit impact of the supply chain constraints, but what what is the impact to product revenue in the back half and should we think of.
Any shortfall in revenue just contributing to fiscal 'twenty three growth.
Sure. Thanks for the question Katie So hey, let's put it in context, a little bit as we did the guidance for the full year, we feel really good about how Q3 and the full fiscal year shaping up coming off a really strong Q2.
Speaker 4: Sure. Thanks for the question, Katie. So, hey, let's put it in context a little bit as we did the guidance for the full year. We feel really good about how Q3 and the fiscal year shaping up. Coming off a really strong Q2, we've raised the revenue growth, even with the tougher supply chain situation.
The revenue growth, even with the tougher supply chain situation and we're calling for growth across both product and cloud as we said in the prepared remarks, we've baked all of that into our guidance.
Speaker 4: We're calling for growth across both product and cloud. As we said in the prepared remarks, we've baked all of that into our guidance.
Speaker 4: We'll work very diligently with our supply chain team, our customers, our partners to make sure we're able to fulfill as much as we can. But we're not going to break out, hey, what was the implication of supply chain? Candidly, we don't want to have two guidance numbers. We fully baked that in. You know, as it relates to fiscal 23, we'll have to see how the second half goes really in terms of does it continue into our fiscal 23 at what level? And how does it work its way through the rest of this?
Work very diligently with our supply chain team our customers our partners to make sure we're able to fulfill as much as we can but we're not going to break out what was the implication of supply chain candidly, we don't want to have two guidance numbers, we've fully baked that in.
As it relates to fiscal 'twenty three we'll have to see how the second half goes really in terms of does it continue into our fiscal 'twenty three at what level and how does it work its way through the rest of this fiscal year.
Speaker 6: I think, broadly speaking, our team has managed the environment really well. And I think if you look at the second half guidance, my expectation is you should see a continued progression of the first half trends with product and cloud services growing quickly and our services business growing a little bit slower than that in the overall revenue mix.
I think broadly speaking our team has managed the environment really well and I think if you look at the second half guidance. My expectation is you should see a continued progression of the first half trends with product and cloud services growing quickly and.
Our services business growing a little bit slower than that in the overall revenue mix.
Thank you.
Thank you.
Our next question comes from the line of Rod Hall with Goldman Sachs. Your line is open.
Speaker 1: Our next question comes from the line of Rod Hall with Goldman Sachs, your line is open.
Okay, great. Thanks for the question I wanted to dig back into the cloud services, George a little bit a couple of questions for me one thing we've seen in the industry kind of emerging is direct hardware sales into some application in hyperscale or.
Speaker 8: Yeah, great. Thanks for the question. I wanted to dig back into the cloud services, George, a little bit. A couple of questions for me. One thing we've seen in the industry kind of emerging is direct
Speaker 8: hardware sales into some application in hyperscalers for low-cost flash storage.
For low cost flash storage and I wonder if I know that you're amortizing hardware as a service sort of in some of these instances, but I wonder if you see an opportunity and maybe directly so hardware into some of these things for specific applications and I'm also curious just strategically I know that.
Speaker 8: And I wonder if, I know that you're amortizing hardware, you know, as a service, sort of, in some of these instances, but I wonder if you see an opportunity to maybe directly sell hardware into some of these things for specific applications.
Speaker 8: And I'm also curious just strategically, I know the question was asked earlier, you know, what are these three services are going to be bigger, but where do you take this strategically? Can you, you know, can you give us some way to think about, you know, kind of where you're taking the as-a-service part of the business?
<unk> was asked earlier what are these three services are going to be bigger, but where do you take this strategically can you can.
Can you give us some way to think about kind of where you are taking out of the service part of the business where the opportunities lie.
Speaker 8: where the opportunities lie, where you think the most opportunity is. Thanks.
Or do you think the most opportunity is thanks.
Listen I think with regard to our approach to serve customers together with the cloud providers. We look at a broad range of opportunities I think they don't exist solely in the public cloud I think you could see for example, the in my prepared remarks, the commentary on <unk>.
Speaker 6: Listen, I think with regard to our approach to serve customers.
Speaker 6: together with the cloud providers, we look at a broad range of opportunities. I think they don't exist solely in the public cloud. I think you could see, for example, the in my prepared remarks, the commentary on working with Google around a distributed cloud platform. And so so you'll see us continue to broaden the range of innovation opportunities that we deliver with the hyperscalers.
Working with Google around distributed cloud platform and so so you'll see us continue to broaden the range of innovation opportunities that we deliver.
Hyper scaler, so that we can truly build a hybrid multi cloud.
Speaker 9: so that we can truly build a hybrid multi-cloud.
Speaker 6: data management and infrastructure services management platform with them, I think within the public cloud, there are going to be continued opportunities for substantial growth. I think, as I said, you know, we feel really, really good about the progress towards the billion-dollar ARR targets that we had laid out. We will share more about the specific, you know, updates to our long-term plans at our analyst conference, right? But let me just say...
Data management and infrastructure services management platform with them I think within the public cloud there are going to be continued opportunities for substantial growth I think as I said, we feel really really good about the progress towards the $1 billion of IRR targets that we had laid out.
We will share more about the specifics.
Updates to our long term plans at our analyst conference right, but let me just say.
Speaker 6: cloud storage is a massive opportunity. Cloud file storage alone is a very rapidly growing multi billion dollar opportunity. And we are positioned at the sweet spot of that alongside
Storage is a massive opportunity cloud file storage alone is a very rapidly growing multibillion dollar opportunity and we are positioned at the sweet spot of that alongside the biggest three cloud providers in the world second cloud.
Speaker 3: the biggest three cloud providers in the world. Second.
Speaker 3: Cloud Compute Management and Cloud Cost Management is another massively important customer priority. And Spot plus CloudChecker gives us a differentiated platform to go after that set of use cases. And we see more and more types of workloads collapsing onto these two important elements of infrastructure as a service.
Compute management and cloud cost management is another massively important customer priority and spot plus cloud Shekhar gives us a differentiated platform to go after that set of use cases.
And we see more and more types of workloads collapsing onto these two important elements of infrastructure as a service and cloud insights our monitoring platform helps customers not only deploy those infrastructure services, but also monitor them. So I feel really really really good.
Speaker 9: And Cloud Insights, our monitoring platform, helps customers not only deploy those infrastructure services, but also monitor them. So I feel really, really, really good about our cloud progress.
Cloud progress.
Great. Thank you.
Thank you.
Our next question comes from the line of Carl Ackerman with Cowen Your line is open.
Speaker 1: Our next question comes from the line of Carl Ackerman with Cohen. Your line is open.
Speaker 10: Yes, thank you. I was hoping you could discuss how you plan to integrate CloudChecker into your Cloud Insights and Spot portfolio.
Yes. Thank you.
I was hoping you could discuss how you plan to integrate cloud checker into your cloud insights and spot portfolio.
Speaker 10: And as you address that question, you know, as you grow the cloud business toward this billion dollar target and drive gross margins in the high 70s, should we expect a cloud business can achieve operating margins maybe in line with the corporate average? Or could that actually happen earlier given the go-to-market appears to be shifting to your cloud partners rather than relying simply on your own sales force? Thanks. Listen, I think with regard...
And as you address that question.
As you grow the cloud business toward this billion dollar target and drive gross margins in the high <unk> should we expect the cloud business can achieve operating margins maybe in line with corporate average or could that actually happen earlier given the go to market appears to be shifting to your cloud partners rather than relying simply on your own salesforce.
<unk>.
Listen I think with regard to cloud checker.
Speaker 6: What Spot allows customers to do is to optimize their cloud spend by dynamically deploying cloud computing and storage environments on the most efficient platform available, right? So we address about 70% of the customer's spend using the Spot technology.
What sparked allows customers to do is to optimize their cloud spend by dynamically deploy cloud computing and storage environments on the most efficient platform available right. So we addressed about 70% of the customer spend.
Using the using the spot technology.
Speaker 6: What CloudChecker allows customers to do is to first be able to analyze and prioritize.
What cloud Checker allows customers to do is to first be able to analyze and prioritize which of those the environment. They should move to spot first and most quickly so that they can get the best saving and then subsequently also gives them an integrated bill for their entire <unk>.
Speaker 6: which of those environments they should move to spot first and most quickly so that they can get the best savings.
Speaker 3: and then subsequently also gives them an integrated build for their entire environment, now optimized with Spot. So we're excited about what CloudChecker brings from a technology perspective. From a route-to-market perspective, it has a strong footprint in the public sector.
<unk> now optimized with spot. So we're excited about what cloud checkup briefs from US technology perspective from a route to market perspective. It has a strong footprint in public sector and in managed service providers who use it.
Speaker 9: and in managed service providers who use it as an integrated billing and analytics platform for all of their downstream customers and so it expands our reach into the marketplace.
The integrated billing and analytics platform for all of their downstream customers and so it expands our reach into the marketplace with regard to cloud operating margin today, we don't break out operating margins I would just tell you that we are a highly leveraged opt.
Speaker 9: With regard to cloud operating margins, today we don't break out operating margins. I would just tell you that we are a highly leveraged operating model for the company. If you look at the first half of this year, more than 50 percent of total revenue growth fell to the bottom.
<unk> model for the company. If you look at the first half of this year more than 50% of total revenue growth fell to the bottom line, we see the opportunity in cloud to be a fast growing high gross margin opportunity and we are going to invest to capture that but we are doing.
Speaker 3: We see the opportunity in cloud to be a fast-growing, high gross margin opportunity, and we are going to invest to capture that, but we are doing so.
No.
While continuing to drive the operating margin profile of the total company. So I'm excited about the possibilities ahead and the continued increase in margin rich software and cloud services in our portfolio. Mike you have anything else yeah. Thanks, George Karl I would just add a couple of things to what George said, we do benefit in a couple of ways as it relates to the cloud.
Speaker 9: while continuing to drive the operating margin profile of the total company.
Speaker 3: So I'm excited about the possibilities ahead and the continued increase in margin rich software and cloud services in our portfolio.
Speaker 4: Mike, do you have anything else? Yeah, thanks, George. Carl, I would just add a couple of things to what George said. We do benefit in a couple of ways as it relates to the cloud business. One is there's a lot of synergies in R&D, because as you know, ONTAP goes across both of those. So that will help, as you called it, the operating margin, even though we don't break it out. The other thing we've talked about is, yes, the route to market and the hyperscaler sales channel certainly helps. We also have our own sales team as well. They will get more and more efficient, especially as we build up that customer success team. So as we look at that billion dollar target.
One is theres a lot of synergies in R&D, because as you know on tap goes across both of those so that will help as you call. It the operating margin, even though we don't break it out the other thing we've talked about is yes, the route to market and the Hyperscale or sales channels. Certainly helps we also have our own sales team as well they will get more and more.
Especially as we build up that customer success team. So as we look at that $1 billion target as we've talked about you look at the comps did have about $1 billion of IRR and certainly those operating margins are very near our corporate average today.
Speaker 4: As we've talked about, you look at the comps that have about a billion dollars of ARR, and certainly those operating margins are very near our corporate average today.
Thank you.
Thank you.
Speaker 1: Our next question is from the line of Stephen Fox with Fox Advisors. Your line is open.
Our next question is from the line of Steven Fox with Fox Advisors. Your line is open.
Hi.
Good afternoon, just one more cloud question for you George you talked about how you've now have fully integrated services with all the cloud service providers.
Speaker 11: Good afternoon. Just one more cloud question for you. George, you talked about how you now have fully integrated services with all the cloud service providers. How do you think you start to leverage that? Can you sort of give us a roadmap for how that builds upon itself and where you would see initial success from having that full portfolio and then maybe later success? Thanks.
How do you think you start to leverage that can you sort of give us a roadmap for how that builds upon itself.
And where you would see initial success from having that full portfolio and then maybe later success. Thanks.
Yes, certainly you know we have three ways that we drive success in the cloud business. The first is technology certification and workload expansion. So we worked with the cloud providers to qualify more and more and more workloads that.
Speaker 9: Yes, certainly. You know, we have three ways that we drive success in the cloud business. The first is technology certification and workload expansion. So we.
Speaker 9: work with the cloud providers to qualify more and more and more workloads.
Speaker 9: that can be best served using our technology. An example that I cited.
Can be best served using our technology. An example that I cited recently is the Vmware cloud in Google now being certified to use Netapp cloud volumes as the prime as a primary data store, which has enormous benefits to vmware customers.
Speaker 9: recently is the VMware, you know, cloud in Google.
Speaker 9: now being certified to use NetApp Cloud Volumes as a primary data store.
Speaker 6: which has enormous benefits to VMware customers of NetApp and VMware to be able to now expand to the cloud.
Net app and Vmware to be able to now expand to the cloud as well as new customers that wanted to deploy mission critical environments on the Vmware cloud right. So that's one workload certifications and expansion the second is additional regions.
Speaker 3: as well as new customers that want to deploy mission critical environments on the VMware clouds, right? So that's one workload certifications and expansions. The second is additional
Speaker 6: You know an enablement for the go to market engines. You've seen us grow the Azure NetApp files business.
And enablement for.
The go to market engines, you've seen us grow the Azure Netapp files business steadily and very successfully over a period of time.
Speaker 9: steadily and very successfully over a period of time.
Speaker 9: You know, Amazon and Google are behind that, but we know the recipe and we're working to scale that. And then finally, you know, cross-selling and upselling a customer once they get on our service. Dollar-based net retention rate is a very healthy 179 percent.
Amazon and Google are behind that but we know the recipe and but working to scale that and then finally.
Ross selling in Upselling, our customer once they get on their service dollar based net retention rate is a very healthy 179%.
Speaker 9: It's early days in our customer base, so over time that should come down, but it shows that once a customer uses one of our services, they expand dramatically, and then we get to sell them a portfolio of more services. So lots of ways to grow our cloud business ahead. We're super excited, and we worked really, really hard to get here, and we're going to capitalize on the opportunity. Thanks for that.
Early days in our customer base, so over time that should come down but it shows that once a customer uses one of our services. They expand dramatically and then we get to sell them a portfolio of more services. So lots of ways to grow our cloud business ahead, we're super excited and we've worked really.
Really hard to get here and we're going to capitalize on the opportunity.
Thanks for that that's very helpful.
Thank you.
Our next question comes from the line of Simon Leopold with Raymond James Your line is open.
Speaker 1: Our next question comes from the line of Simon Leopold with Raymond James. Your line is open.
Thanks for taking the question I wanted to see if you could maybe unpack a little bit of the trend youre seeing in the traditional storage market in particular, we're seeing very strong growth from your all flash business, which would imply that there are aspects that are declining.
Speaker 12: Thanks for taking the question. I want to see if you could maybe unpack a little bit of the trend you're seeing in the traditional storage market. In particular, we're seeing very strong growth from your all-flash business, which would imply that there are aspects that are declining, and at least one of your competitors seems to be suffering some steep declines at the high end.
And at least one of your competitors seems to be suffering some steep declines at the high end I'm wondering if maybe mid range and flash its encroaching on more high end performance and how you see the sub segments trending for data. Thank you.
Speaker 12: I'm wondering if maybe mid-range and flash is encroaching on more high-end performance and how you see the subsegments trending for NetApp. Thank you.
Yeah, absolutely I think we have said for a long time that midrange systems with clustering software.
Speaker 9: Yeah, absolutely. I think we have said for a long time that mid range systems with clustering software will cannibalize the high end frame array business of some of our competitors. And you are seeing that play out the mid range systems.
Cannibalize the high end frame marine business of some of our competitors and you're seeing that play out the midrange systems offer the sweet spot from a price performance standpoint for our customers and with clustering you can build enormously large environments to consolidate.
Speaker 9: Offer the sweet spot from a price performance standpoint
Speaker 9: for customers and with clustering you can build enormously large environments.
Speaker 9: to consolidate a range of different workloads and we
A range of different workloads.
Speaker 6: expect that trend to continue going forward. You know, the days of the frame array are over to be completely transparent. And so we'll continue to see that trend going on over time. With regard to how these, you know, within our business.
Expect that trend to continue going forward.
Days of the framerate or over to be completely transparent and so we'll continue to see that trend going on over time with regard to how these.
You know within our business.
Speaker 9: All flash arrays will have an important and growing part of the customer's data center.
All flash arrays will have an important and growing part of the customer's data center.
Speaker 9: hybrid flash arrays will continue to have a long term position in the data center. So today in our install base, for example, all flashes about a 30% of the install base, we expect, you know, as more flash technologies come to play that number to grow to about 70% over time.
Hybrid flash arrays will continue to have a long term position in the data center. So today in our installed base. For example, all flash is about 30% of the installed base. We expect you know as more flash technologies come to play that number to grow to.
About 70% over time.
Speaker 9: I think, however, we do not subscribe to the theory that hard disk drives no longer have value. They will have enduring value for certain sets of workloads that they are built for. Capacity-oriented workloads, you know, backup and archival, media retention, images, things like that. So, we feel good about our position in the market. We're going to stay focused and continue to execute against our all-flash array business and our object storage business as priorities for the enterprise storage environment.
I think however, we do not subscribe to the theory that hard disk drives no longer have value. They will have enduring value for certain types of workloads that they are built for capacity oriented workloads back.
Backup and archival media retention images things like that so we feel good about our position in the market, we're going to stay focused and continue to execute against our all flash array business and our object storage business as priorities for the enterprise storage environment.
Thank you.
Thanks.
Speaker 13: Thank you.
Thank you.
The next question comes from the line of Nick <unk> with Longbow Research. Your line is open.
Speaker 1: Our next question comes from the line of Nick Dodaro with Longbow Research. Your line is open.
Yeah, Thanks, and congrats on another great quarter.
Speaker 14: Yeah, thanks and congrats on another great quarter. Another question on the hybrid cloud side. It sounds to me that you're seeing accelerating demand there. So the question is, given the supply chain challenges, how much visibility do you have from a pipeline perspective? I think you talked about
Another question on the hybrid cloud side. It sounds to me that you are seeing accelerating demand there.
So the question is given the supply chain.
Challenges how much visibility do you have from a pipeline perspective, I think you talked about seeing very strong second half also are you seeing any.
Speaker 14: seeing a very strong second half. Also, are you seeing any abnormal backlog at this point? And what kind of impact do you think that could have on your model in the second half and forward?
Normal backlog at this point and what kind of impact do you think that could have on your own or in your own model Y in the second half and forward. Thanks.
Hey, Nick it's Mike. Thanks for the question, Yes, we feel very good about the demand environment as we look at the second half, we certainly have a much better view at this point in our pipeline going into the second half and as we've talked about a lot of whats baked into the guidance is really in it.
Speaker 4: Hey, Nick, it's Mike. Thanks for the question. Yeah, we we feel very good about the demand environment. As we look at the second half. We certainly have a much better view at this point now of pipeline going into the second half.
Speaker 4: And as we've talked about, a lot of what's baked into the guidance is really a result of supply chain. Again, we feel really good about the overall demand environment.
A result of supply chain again, we feel really good about the overall demand environment. There is as we look at backlog Theres really been no significant shift there and I do also want to make sure no. We haven't seen any what I would call unusual Poland's either as it relates to purchasing behavior on a quarterly basis.
Speaker 4: There is as we look at backlog, there's really been no significant shift there. And I do also want to make sure and note, we haven't seen, you know, any what I would call unusual pull-ins either as it relates to purchasing behavior. On a quarterly basis, there's always pull-ins and push-outs. We haven't seen anything unusual there either. So going into the second half, feel really good about what the pipeline looks like in the buying behavior of our customers. And hopefully that continues as we go forward into next year. Sounds great.
As always pull ins and push outs, we haven't seen anything unusual there either so going into second half feel really good about what the pipeline looks like and the buying behavior of our customers.
And hopefully that continues as we go forward into next year.
Sounds great. Thanks, guys. Good luck.
Thank you.
Speaker 1: Our next question comes from the line of Jim Suva with Citigroup. Your line is open.
Our next question comes from the line of Jim Suva with Citigroup. Your line is open.
Speaker 5: Thank you. George and Mike, now is hopefully society is getting back to a little bit of more normalcy post the pandemic, hopefully.
Thank you George and Mike now is hopefully society is getting back to a little bit of more normalcy post the pandemic hopefully can you compare and contrast, like the purchasing trends that youre seeing pre versus post is it longer lead times because of the supply chain do you think that might be here.
Speaker 5: Can you compare and contrast the purchasing trends that you're seeing pre versus post? Is it longer lead times because of supply chain? You think that might be here for good or more of a push to cloud or all flash away? I'm just trying to compare and contrast of what you saw maybe pre-pandemic versus now in the discussions you're having with customers. Thank you.
For good or more of a push to cloud or all flash array I'm, just kind of compare and contrast of what you saw maybe pre pandemic versus now and the discussions youre, having with customers. Thank you.
Speaker 9: We see continuing trends for digital transformation, hybrid work and hybrid IT. Those have been our long-term perspective on how business architectures and technology architectures evolve. That has certainly come sharper into focus with COVID, but they have always been part of the long-term roadmap of our customers.
We see continuing trends for digital transformation hybrid work and hybrid it.
Those have been our long term perspective on how business architectures that are technology architectures evolve.
That has certainly come sharper into focus with COVID-19, but they have always been part of the long term roadmap of our customers.
Speaker 9: We have seen the acceleration of, you know, cloud-based environments for certain workloads, especially workloads like virtual desktops or, you know, in schools for the ability for teachers to be able to use cloud-based environments.
We have seen the acceleration of cloud.
Cloud based environment for certain workloads, especially workloads like virtual desktops or you know in schools for the ability for teachers to be able to use cloud based environment to conduct classrooms, and we think those will continue and then you're going forward as the future of <unk>.
Speaker 9: to conduct classrooms and we think those will continue and endure going forward as the future of work remains hybrid. Within the enterprise storage and
<unk> hybrid.
Within the enterprise storage environments.
Speaker 9: We've always believed that flash will have a growing part of the customer data center as the economics of flash and the ability to consolidate and simplify your data center environment grows.
<unk> always believed that flash will have a growing part of the customer data center as the economics of flash and the ability to consolidate and simplify your data center environment growth that being said there are workloads like I've mentioned earlier in the call that we will continue to stay on hard drives.
Speaker 6: That being said, there are workloads like I've mentioned earlier in the call that will continue to stay on hard drives. And I think the big early draft to flash is now sort of stabilizing and people understand what flash is going to be used for and understand what HDDs are going to be used for. And so we see a more steady pattern there. With regard to.
And I think the big early drafts to flash is now sort of stabilizing and people understand what flash is going to be used for and understand what the HDD is gonna be used for and so we see a more steady pattern there with regard to.
Speaker 9: you know, lead times and transactions and things like that. As Mike mentioned, we didn't see anything unusual. We have been able to meet customers through a variety of mechanisms, digital conferences, you know, using video conferencing mechanisms.
Lead times and transactions and things like that as Mike mentioned, we didn't see anything unusual we have been able to meet customers through a variety of mechanisms digital conferences.
Using video conferencing mechanisms.
Speaker 5: as well as now starting to meet some customers in person. And so we expect that to continue going forward for a period of time at least. Thank you so much and congratulations.
As well as now starting to meet some customers in person and so we expect that to continue going forward for a period of time at least.
Thank you so much and congratulations to you and your teams.
Thank you.
Speaker 1: Our next question comes from the line of Kim Long with Barclays, your line is open.
Our next question comes from the line of Tim Long with Barclays. Your line is open.
Thank you.
Speaker 15: Thank you. I was hoping you could talk a little bit about the pricing environment and strategy given commodity moving prices and obviously inflation that you're facing on the supply chain side. Can you talk a little bit about how you see that kind of flowing through the model over the next few quarters here and what do you think competitors will be doing and will there be any differentiation in how
I was hoping you could talk a little bit.
About the pricing.
Environment and strategy, given commodity moving prices and obviously inflation that you're facing on the supply chain side.
Could you talk a little bit about how you see that kind of flowing through.
The model over the next few quarters here and what do you think competitors will be doing and will will there be any differentiation in how.
Speaker 15: NetApp and some of your peer companies are going to tackle these challenges in a market where sometimes pricing is somewhat of a factor.
Some some net app and some of the other.
Peer companies are going to tackle these challenges in a market, where sometimes pricing is somewhat of a factor. Thank you.
Hey, Tim it's Mike So yes. So thanks for the question, we have not seen much of a change in the pricing environment as we've talked about before.
Speaker 4: Hey, Tim, it's Mike. So yeah, so thanks for the question. We have not seen much of a change in the pricing environment, as we've talked about before. It's a it's still relatively rational market. Every once in a while somebody does something to grab a customer or keep one, but that's going to certainly be an unusual event. As we've looked forward. I won't speak for any of our competitors. I think everybody's looking at their business saying, hey
It's still a relatively rational market every once in a while somebody does something to grab a customer or keep one but that's going to certainly be an unusual event as we've looked forward look I won't speak for any of our competitors I think everybody's looking at their business, saying, hey costs have gone up across the board, especially in freight.
Speaker 4: Costs have gone up across the board, especially in freight component costs.
Component cost.
Speaker 4: We're all dealing with that, so I do expect that you'll continue to hear folks talk about doing price increases.
All dealing with that so I do expect that you'll continue to hear folks talk about doing price increases I think a lot of this depends on how long we're in this situation.
Speaker 4: I think a lot of this depends on how long we're in this situation. Again, from a NetApp perspective, we've looked at that. We have implemented a price increase, so we do expect that to start to have an impact later in our fiscal year. I would expect to continue to see that across our competitors, but again, I don't want to speak for them. I think a lot of this depends on how long this supply chain shortage lasts.
Again from a net out perspective.
Looked at that we have implemented.
Price increase so we do expect that to start to have an impact later in our fiscal year I would expect to continue to see that across our competitors, but again I don't want to speak for them to take a lot of this depends on how long this short supply chain shortage last and as well our component manufacturers, how they approach the market as well.
Speaker 16: and as well our component manufacturers how they approach the market as well.
Okay. Thank you.
Thank you.
Thank you.
Speaker 1: Our next question comes from the line of Sidney Hull with Dutcher Bank, your line is open.
Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Thanks for taking my question I have a question on the free cash flow.
Speaker 17: Thanks for taking my question. I have a question on the free cash.
Speaker 17: So, based on your four-year guidance, it would imply about 60% of the four-year free cash flow will happen in the second half of the fiscal year. That's below the five-year average of about 70%, it's definitely the lowest since maybe 2015. First of all, is my math right? Second, if so, anything you would highlight that may change this cash flow seasonality and particularly, do you expect supply constraint being a factor in terms of cash flow generation? Thanks.
So based on your full year guidance it would imply about 60% of the full year free cash cash flow will happen in the second half of the fiscal year. That's below the five year average call. It about 70% of its definitely lowest since maybe 2015 first of all is my math right second if sell anything you would highlight that may change. This.
<unk> seasonality and particularly do you expect supply constrained being a factor in terms of cash flow generation.
Speaker 4: Hey, awesome. Thanks for the cash flow question. So yeah, let's talk about it. And hey, let's start at the top. We did guide for free cash flow $1.2 billion or greater. So let's do operating cash first. That would imply for your operating cash of call it 1.425 billion. To your point, we've already generated 540 million.
Alright, Hey, awesome. Thanks for the cash flow question.
So, yes, let's talk about it.
Hey, let's start at the top we did guide for free cash flow $1 $2 billion or greater so, let's do operating cash one that would imply full year operating cash I'll call. It one $4 billion to $5 billion to your point, we've already generated 540 million. So.
Speaker 4: So what you saw in Q2 was a record for us low DSOs. We had a great collections quarter in Q2. That did pull forward some collections into Q2. So as we look at the second half of 22, you should expect to see the seasonality, as you called it, be a little bit lower in the second half because of the really strong Q2. Still getting to at least that 1.4 billion operating cash number.
What you saw in Q2 was really a re.
Record for us low DSO, we had a great collections quarter in Q2 that did pull forward. Some collections into Q2. So as we look at the second half of 2022 you should expect to see the seasonality as you call they'd be a little bit lower in the second half because of the really strong Q2 still.
Getting to at least that that $1 4 billion operating cash number.
Speaker 4: As on your question about supply chain, we have baked in an assumption that we'll continue to invest in inventory. You saw that our inventory turns went from 17 in Q1 to 13 in Q2. That was planned. We talked about that with you folks as well for the last couple of quarters.
On your question about supply chain, we have baked in an assumption that we will continue to invest in inventory you saw that our inventory turns went from 17 in Q1 to 13 in Q2 that was planned we talked about that with you folks as well for the last couple of quarters. So we have baked that into our assumption.
Speaker 16: So we have baked that into our assumption. Going forward, I think you should expect to see the seasonal averages return. Again, it was just in a very, very good Q2 from a collections perspective, and I wouldn't expect that to continue into the future. So again, thanks for that question. Hopefully, that answers your question.
Going forward I think you should expect to see kind of the seasonal averages return again. It was just in a very very good Q2 from a collections perspective, and I wouldn't expect that to continue into the future. So again. Thanks for that question hopefully that answers your question.
It does thank you.
Thank you.
Speaker 18: Our next question comes from the line of Nehal Chokshi with Northland Capital. Your line is open. Yeah, thanks. And congrats on the strong public cloud services. That's great to see. On the overall business, billings did decelerate pretty materially on a year-over-year basis. Can you talk to what were the dynamics behind that? And then why do you say you feel good about the pipeline given the billings?
Our next question comes from the line of Neil Joshi with Northland Capital. Your line is open.
Yeah, Thanks, and congrats on a strong public cloud services Thats great to see.
On the overall business billings did decelerate pretty materially on a year over year basis.
Can you talk to what were the dynamics behind that and then why do you say you feel good about the pipeline, giving given the billings.
Sure. So thanks for that and so as we talked about in Q1 billings grew by about 20% in Q2 billings grew by about 7% keep in mind.
Speaker 4: Sure. So thanks for that Nahal. So as we talked about in Q1, billings grew by about 20%. In Q2, billings grew by about 7%. Keep in mind that so on a fully on a year to day basis, right around 12 to 13% growth, that number is going to jump around a little bit each quarter, based on the dynamics of deferred revenue, as well as as FX as well. So we calculate billings as
So on a fully on a year to date basis right around 12% to 13% growth that number is going to jump around a little bit each quarter based on the dynamics of deferred revenue as well as FX as well so we calculate billings as net revenue in the quarter and then corridor.
Speaker 4: net revenue in the quarter and then quarter over quarter change in deferred excluding the impact of FX on in deferred so that's going to move the numbers a little bit there's a little bit of seasonality to that.
Over quarter change in deferred excluding the impact of FX and deferred so that's going to move the numbers a little bit there was a little bit of seasonality to that so looking forward. We would expect to continue to see billings overall grow at or above the revenue number and again I would encourage you to take a look.
Speaker 4: So looking forward, we would expect to continue to see billings overall grow at or above the revenue number. And again, I would encourage you to take a look at the year to date number or the trailing 12 months.
At the year to date number or the trailing 12 months billings will jump around a little bit based on the components of our of our billings mix matters as well as seasonality.
Speaker 4: Billings will jump around a little bit based on the components of our of our billings, mixed matters as well as seasonality. Okay.
Got it great. Thank you.
Thank you. Thank you.
Our next question comes from the line of Ramsey Mohawk with Bank of America. Your line is open.
Speaker 1: Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is open.
Speaker 11: When you guide for Q3 and Q4, maybe you can express this a little differently on the puts and takes from Q3 to Q4 trajectory. Are you expecting component issues to be resolved through Q3 and that drives better seasonality Q3 to Q4? Or is there something else, like a better pipeline, or for Q4, Mike, you also mentioned increased pricing as well. So maybe you could bridge Q3 to Q4, that'd be helpful.
Yes. Thank you.
On your guide for Q3, and Q4, maybe you can asbestos a little differently on the puts and takes from Q3 to Q4 trajectory are you expecting component issues to be resolved through Q3 and that that drives better seasonality compared to Q4 or is there something else like a better pipeline.
Q4, Mike you also mentioned increased pricing as well so maybe you could bridge Q3 to Q4.
<unk> be helpful.
Speaker 6: You know, Q4 is the finish of our fiscal year. As you might know, we run a semi-annual plan. And so, you know, we had a strong Q2 and we'll have a strong Q4. So that reflects the seasonality in our business.
Q4 is the finish of our fiscal year as you might know we run a semiannual plan and so you know.
We had a strong Q2 and we'll have a strong Q4, so that reflects the seasonality in our business driven by our compensation planning as well as customer bye.
Speaker 9: driven by our compensation planning as well as customer buying.
Speaker 9: uh, through the year. I think with regard to margins, I'll have Mike cover that in terms of
Through the year I think with regard to margins I'll have Mike cover that in terms of.
Speaker 9: you know, the supply chain and the margin profile, I would just tell you, we do not expect a near term resolution of the supply situation.
The supply chain and the margin profile I would just tell you we do not expect a near term resolution of the supply situation. What we have seen through excellent execution with our teams and our partners is that component costs for the full year are largely flat year on year there are some.
Speaker 9: What we have seen through excellent execution with our teams and our partners is that component cost.
Speaker 9: for the full year are largely flat year on year. You know, there are some elements of the components that are up year on year and others that are down year on year. But as we have said before, component costs are largely
So the components that are up year on year, and others that are down year on year, but as we've said before component costs are largely.
Speaker 9: you know, flagged on a year-on-year basis.
Flat on a year on year basis, I think what we see is really the expedite and freight costs that are you know at.
Speaker 9: I think what we see is really the expedite and freight costs that are
Speaker 9: you know, at a premium now. And, you know, that is reflected in the pricing lift.
At a premium now and.
That is reflected in the pricing lift that we have implemented at the start of November and which will take some time to flow through our system I'll, let Mike characterized right.
Speaker 3: that we have implemented at the start of November , and which will take some time to flow through our systems. I'll let Mike characterize.
Speaker 4: Great. Thank you, George. And just to add to that, on this specific question, Wamsi, if you go from Q3 to Q4, a couple of things to keep in mind. One is, hey, the services revenue will continue to grow. You're going to see cloud support, hopefully professional services. That adds to that quarter on quarter growth.
Great. Thank you George and just add to that.
On your specific question was if you go from Q3 to Q4, a couple of things that keep in mind. One is hey, the services revenue will continue to grow youre going to see cloud support hopefully professional services that adds to that quarter on quarter growth as we look at Q4 versus Q3 to Georges point always want our seasonally high quarter, we're doing.
Speaker 4: As we look at Q4 versus Q3, to Georgia's point, always want our seasonally high quarter.
Speaker 4: we're doing a lot of work not only in supply chain but in engineering and other things to make sure that we can deliver as much as we can in Q4. And then certainly the price increase, it'll take a little bit of time to work its way through the system. So add all those together and that's what added up into our guidance, our implied guide for Q3 and Q4.
Lot of work not only in supply chain, but in engineering and other things to make sure that we can deliver as much as we can in Q4, and then certainly the price increase that will take a little bit of time to work its way through the system. So add all those together and that's what it added up into our our guidance our implied guide for Q3 and Q4.
Thank you.
Thank you.
Thank you.
Our next question comes from the line of Amy.
Speaker 1: Our next question comes from the line of Amit Daryani with Abicor. Your line is open.
<unk> <unk> with Evercore Your line is open.
Speaker 19: Perfect. Thank you and thanks for taking my question. I guess my question is around the cloud services business. George, I was just wondering how, when you think of the AWS partnership, and I know it's somewhat in the early stages, how would you stack that up against Azure at this time? Just anything in terms of...
Perfect. Thank you and thanks for taking my question I guess, the question's around the cloud services business. Jonathan I was just wondering how when you think of the AWS partnership.
We're in the early stages, how would you stack that up against the Euro at this time just any anything in terms of number of pilots are the workloads that you're doing with AWS right now versus what you did with Azure and then really when I think about the $1 billion roadmap that you'd given US you know a while back you.
Speaker 19: number of pilots, or the workload that you're doing with AWS right now versus what you're doing with Azure. And then, really, when I think about this billion-dollar roadmap that you had given us, you know, a while back.
Speaker 19: Did you envision an AWS partnership, especially how fully integrated NetApp is on the console and the fact that AWS is...
Did you envision that AWS partnership, especially how fully integrated and that App is on the console and the fact that AWS is going to be selling that off.
Speaker 19: who are actually selling that app. Did you envision all this in the billion dollar roadmap or is this incremental to that narrative?
The oldest and $1 billion roadmap or is this incremental to that narrative.
Speaker 9: Listen, I think first of all, AWS and Azure have enormous scale and reach into the customer base.
Listen I think first of all AWS and Azure have enormous scale and reach into the customer base.
Speaker 9: These are trillion-dollar corporations with enormous impact on the IT market, and we are honored to work with both of them. They have different approaches to the customer base, and different ways, and different strengths, and so we're excited to work with Amazon and Microsoft. I think the overall opportunity set reflects their scale in the market. Amazon has massive.
These are trillion dollar corporations with enormous impact on the market and we are honored to work with both of them. They have different approaches to their customer base and different ways and different strengths and so we're excited to work with.
Amazon and Microsoft I think the overall opportunity set.
Flex their scale in the market right. So Amazon has massive.
Market presence and market share I think in the final stage. They are a very large part of the files market. So the fact that we have a play with them gives us enormous scale into the file storage market.
You know we are.
Speaker 6: From an execution standpoint, listen, we've learned a lot over the last few years. We know what it takes to scale a business, and we've done that in partnership with Microsoft. We continue to scale that with innovation and co-engineering and, you know, go-to-market. But we are also taking some of those lessons learned into how we can scale other services more quickly. With regard to the billion-dollar plan, listen,
From a execution standpoint listen we've learned a lot over the last few years, we know what it takes to scale a business.
And we've done that in partnership with Microsoft We continue to scale back with innovation in co engineering and go to market, but we're also taking some of those lessons learned into how we can scale. Other services more quickly with regards to the billion dollar plan listen we.
Speaker 6: We always believed that we would, you know, be working with multiple hyperscalers.
<unk> always believed that we would be.
Working with multiple Hyperscale.
Speaker 9: You know, I don't think you should assume that we were cocky enough to say that we had that in the bag, but we had that as part of our roadmap. And we're honored to have the partnership with AWS. I think, you know, as I said, I feel very, very good about where we are in our roadmap to a billion dollars. We'll tell you more about the timing and the mix and all of that when we get to analyst day, right, but I feel really good about where we are.
I don't think you should assume that we.
We're causing enough to say that we have that in the bag, but we had data as part of our road map and we're honored to have the partnership with AWS.
<unk>.
I said I feel very very good about where we are in that road map to $1 billion. We'll tell you more about the timing and the mix and all of that when we get to analyst day, right, but I feel really good about where we are.
Thank you.
Our next question comes from the line of Ananda Baruah with loop capital. Your line is open.
Speaker 1: Our next question comes from the line of Nanda Barah with Luke's Capital. Your line is open.
Hey, good afternoon, guys. Thanks for taking the question.
Speaker 17: Hey, good afternoon, guys. Thanks for taking the question. Yeah, George and Mike, I guess.
Yeah, George and Mike I guess.
All lines on the business model, how do you guys think about the interplay and the.
Speaker 17: Mine's on the business model. How do you guys think about the interplay or the trade-off maybe, interplay slash trade-off?
Tradeoff Navy interplay flash tradeoff.
Now that the margins continue to expand I think you guys are actually absorbing like hundreds of feeling good data points of op margin.
Speaker 17: you know, now that the margins continue to expand, I think you guys are actually absorbing like 100 to 200 basis points of off-margin.
Speaker 20: you know, sort of expense, supply chain, you know, kind of components, et cetera, which really has the margins already be in the mid 20%, and of course, 25, 25% or so. How do you guys think about the interplay between investing in growth, investing in M&A, as the margins continue to go up, you know, seemingly towards 30%? Appreciate it, thanks.
So to sort of expand supply chain, yes.
Tenants et cetera, which really has the margins already in the mid 20%.
25, 25% or so how do you guys think about the interplay between investing in growth investing in M&A as the margins continue to go up seemingly towards 30% I appreciate it. Thanks.
Sure, So hey, great great questions. So as we've talked about.
Speaker 4: Sure. So a great, great question. So as we talked about, for the last couple of years is, our goal is to continue to invest in the business to drive growth.
For the last couple of years as our goal is to continue to invest in the business to drive growth.
Speaker 4: being fully cognizant of, of investing in operating expense and COGS at a lower rate than revenue to drive up margins. You saw an incredible really operating leverage so far this year. And if you take the midpoint of the guide
Being fully cognizant of it.
Investing in operating expense and Cogs at a at a lower rate than revenue to drive up margins you saw an incredible really operating leverage so far this year and if you take the midpoint of the guide revenues up almost $550 million year over year on a 118 or 120 pick your favorite number opex.
Speaker 4: Revenue is up almost $550 million year-over-year.
Speaker 4: on 118 or 120 pick your favorite number, OpEx number. So we're continuing to drive really good scale while investing in the business. We will continue to do that going forward.
So we're continuing to drive really good scale, while investing in the business. We will continue to do that going forward very much focused not only on where we need to invest but what is that return. That's why we're so focused on cloud as well as incremental sales and product development. So you should expect to see us continue.
Speaker 4: very much focused not only on where we need to invest, but what is that return? That's why we're so focused on cloud as well as incremental sales and product development. So you should expect to see us continue to invest going forward. Now, outside of
To invest going forward now outside of Opex, we've talked about it before we will continue to be active in M&A and we're still allocating at least 30% of our free cash flow plus we have a very nice cash balance and a lot of flexibility on the balance sheet to fund acquisitions. So yeah, you should expect to see us continue.
Speaker 4: We've talked about it before we will continue to be active in M&A and we're still allocating at least 30% of our free cash flow plus we have a very nice cash balance and a lot of flexibility on the balance sheet to fund acquisitions. So yeah, you should expect to see us continue
To increase Opex to drive growth as well as be active in the M&A market.
Speaker 4: increase OpEx to drive growth, as well as be active in the M&A market.
So it sounds like opportunity to keep accelerating revenue growth expanding margins and get bigger in M&A in the free cash flow goes up like.
Speaker 20: So it sounds like opportunity to keep accelerating revenue growth, expanding margins, and get bigger in M&A as the pre-cash flow goes up, Mike.
And doesn't that sound like fun, that's exactly what we're focused on.
Speaker 21: And doesn't that sound like fun? That's exactly what we're focused on. Thank you guys. Thank you.
Thanks, guys.
Thank you.
Thank you.
Speaker 1: Our final question comes from the line of Samik Chatterjee with J.P. Morgan. Your line is open.
Our final question comes from the line up for <unk> with J P. Morgan Your line is open.
Speaker 22: Hi, thanks for taking my question. I guess my question was just following up on the pricing discussion earlier. You mentioned you've taken some pricing.
Hi, Thanks for taking my question I guess my question was just following up on the pricing discussion earlier, you mentioned, you've taken some pricing and the flow through would take a bit of time just.
Speaker 22: and the flow-through would take a bit of time, just how should we think about the stickiness of those price increases? Are they, as supply chain kind of eases, do those price increases get competed away? And I'm just trying to think how much of a benefit can they be
How should we think about the stickiness of those price increases.
The supply chain kind of eases.
Pricing because we have competed away.
I'm trying to think how much of a full benefit can be.
Speaker 22: like the next fiscal year as they take time to flow into the P&L or how sticky can they
Like the next fiscal year as they take time to flow into the P&L or how sticky can be thank you.
Yes, great Great question. So as you look at the rest of this fiscal year and I'll work. It into next year, you shouldn't really expect to see much of a benefit in Q3.
A lot of a lot of cold chain fly it takes a while for that to take effect. So.
Speaker 4: So we expect to start to see some of that in Q4. Hey, as we roll into 23, I think it depends on a lot of things. The earlier question on what are your competitors doing? What's the overall pricing environment? What happens with component cost and freight? I think there's a lot in that for us to be able to say, hey, we think X amount stick.
Expect to start to see some of that in Q4 as we roll into 'twenty three I think it depends on a lot of things. They earlier question on what are your competitors doing what's the overall pricing environment, what happens with component costs and freight I think theres a lot in that for us to be able to say hey, we think X amount sticks, certainly we are very disciplined around our <unk>.
Speaker 16: Certainly, we are very disciplined around our pricing. And we want to ensure that we are doing the right things for our customers while we are taking care of covering our costs as well. So we'll be very focused on it. We'll talk to you as we guide the next year on the impact of that. But I did want to be clear just on the impact of 22.
And we want to ensure that we are doing the right things for our customers. While we are taking care of covering our cost as well so we'll be very focused on it.
I'll talk to you as we guide to next year on the impact of that but I did want to be clear just on the impact of 'twenty two.
Thank you.
Thank you.
Thank you.
We have delivered a solid first half with great operating leverage in our business model as we grow revenues and margins.
Speaker 6: We have delivered a solid first half with great operating leverage in our business model as we grow revenues and margins.
We're gaining share in the key markets of all flash and object storage, while rapidly scaling our public cloud business the.
Speaker 3: We're gaining share in the key markets of all flash and object storage while rapidly scaling our public cloud business.
Speaker 3: The innovation we bring to market and our unique and deep cloud partnerships position as well to execute against the significant opportunity ahead.
The innovation, we bring to market and our unique and deep cloud partnerships.
<unk> well to execute against the significant opportunity ahead.
Speaker 1: We increased our full-year guidance for revenue, EPS, and public cloud ARR, driven by the outperformance in Q2, the addition of CloudChecker, and a healthy demand pipeline for the second half of our fiscal year. Thank you. I look forward to speaking with you all again next quarter and at our upcoming Investor Day in March. Ladies and gentlemen, this concludes today's conference.
We increased our full year guidance for revenue EPS.
And public cloud.
Driven by the outperformance in Q2.
The addition of cloud checker.
LTE demand pipeline for the second half of our fiscal year.
Thank you I look forward to speaking with you all again next quarter.
At our upcoming Investor day in March.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].
Okay.
[music].
Speaker 23: Yeah.
Speaker 21: ?Outro Music?
[music].
Speaker 21: I.
[music].
Good afternoon, ladies and gentlemen, welcome to the net at second quarter fiscal year 2022 earnings call.
Speaker 1: Good afternoon, ladies and gentlemen. Welcome to the NetApp second quarter fiscal year 2022 earnings call. At this time, all participants on.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
I would now like to turn the call over to Kris Newton, Vice President Investor Relations.
Speaker 1: I would now like to turn the call over to Chris Newton, Vice President, Investor Relations.
Speaker 2: Thank you for joining us. With me today are our CEO , George Kurian, and CFO , Mike Barry. This call is being webcast live and will be available for replay on our website at nevac.com.
Thank you for joining us with me today are CEO, George Kurian, and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at <unk> Dot com.
Speaker 2: During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects, such as
During today's call, we will make forward looking statements and projections with respect to our financial outlook and future prospects such as.
Speaker 2: Our guidance for 3rd quarter fiscal year 2022, our expectations regarding future revenue, profitability and shareholder returns, the value we bring to customers, our ability to drive growth in our hybrid cloud segment and scale our public cloud segment, and our ability to manage through the current supply chain environment, all of which involve risk management.
Our guidance for third quarter fiscal year 2022, our expectations regarding future revenue profitability and shareholder returns the value we bring to customers our ability to drive growth in our hybrid cloud segment and scale, our public cloud segment and our ability to manage through the current supply chain environment.
All of which involve risks and uncertainty.
We disclaim any obligation to update our forward looking statements and projections actual results may differ materially for a variety of reasons, including macroeconomic and market conditions, such as the continuing impact an uneven recovery as the COVID-19, pandemic, including resulting supply chain disruption and the capital spending environment.
Speaker 2: We disclaim any obligation to update our forward-looking statements and projections.
Speaker 2: Actual results may differ materially for a variety of reasons, including macroeconomic and market conditions, such as the continuing impact and uneven recovery of the COVID-19 pandemic, including resulting supply chain disruptions and the IT capital spending environment, as well as our ability to gain share in the storage market, grow our cloud business, and generate greater cash flow.
As well as our ability to gain share in the storage market grow our cloud business and generate greater cash flow. Please also refer to the documents we file from time to time with the SEC and available on our website specifically, our most recent Form 10-Q, and 10-K, including in the management's discussion and analysis of financial condition and result.
Speaker 2: Please also refer to the documents we file from time to time with the SEC and available on our website, specifically our most recent Forms 10-Q and 10-K, including in the Management's Discussion and Analysis of Financial Condition and Results of Operations and Risk Factor section.
[noise] of operations and risk factors section.
Speaker 2: During the call, all financial measures presented will be non-GAAP unless otherwise indicated. Reconciliations of GAAP to non-GAAP estimates are posted on our website. I'll now turn the call over to George.
During the call all financial measures presented will be non-GAAP, unless otherwise indicated reconciliations of GAAP to non-GAAP estimates are posted on our website I will now turn the call over to George Thanks, Chris and welcome everyone to our Q2 fiscal year 'twenty two earnings call. We delivered another strong quarter with result.
Speaker 3: Thanks, Chris, and welcome everyone to our Q2 Fiscal Year 22 earnings call. We delivered another strong quarter with results all at the high end or above our guidance.
<unk> all at the high end or above our guidance building on the momentum of last year and the previous quarter revenue grew 11% year over year with public cloud segment revenue growth of 85% and hybrid cloud segment revenue growth of 8%.
Speaker 3: Building on the momentum of last year and the previous quarter, revenue grew 11% year over year with public cloud segment revenue growth of 85% and hybrid cloud segment revenue growth of 8%.
Speaker 3: Product revenue grew 9% year-over-year, the third consecutive quarter of year-over-year growth.
Product revenue grew 9% year over year, the third consecutive quarter of year over year growth.
Gross margin operating margin and earnings per share are all at record highs for the first half of the fiscal year.
Speaker 3: gross margin, operating margin, and earnings per share are all at record highs for the first half of the fiscal year.
Our performance reflects continued broad based customer demand created by the sizable and long term trends of cloud and data driven digital transformation, where netapp is playing an increasingly important role in helping customers achieve their business and hybrid cloud.
Speaker 3: Our performance reflects continued broad-based customer demand created by the sizable and long-term trends of cloud and data-driven digital transformation.
Speaker 3: where NetApp is playing an increasingly important role in helping customers achieve their business and hybrid cloud transformation goals.
<unk> goals.
Speaker 3: NetApp is uniquely positioned to solve organizations' most significant challenges in both modern and traditional applications, on-premises, and in hybrid multi-cloud environments.
<unk> is uniquely positioned to solve organizations most significant challenges.
In both modern and traditional applications on premises and in hybrid multi cloud environments.
As I've said many times, our public cloud services, not only allow us to participate in the rapidly growing cloud market, but they also make us a more strategic data center partner to our enterprise customers driving share gains in our hybrid cloud business.
Speaker 3: As I've said many times, our public cloud services not only allow us to participate in the rapidly growing cloud market, but they also make us a more strategic data center partner to our enterprise customers, driving share gains in our hybrid cloud business.
Speaker 3: We are seeing this play out in the strong results from both our public cloud and hybrid cloud segments. In Q2, we had a number of announcements that further solidify our leadership position as we continue to drive growth in our hybrid cloud segment while scaling our public cloud segment.
We are seeing this play out in the strong results from both our public cloud and hybrid cloud segments. In Q2, we had a number of announcements that further solidify our leadership position as we continue to drive growth in our hybrid cloud segment, while scaling our public cloud.
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Public cloud revenue grew 85% year over year, driven by Azure Netapp files cloud insights and sparked by net app.
Speaker 3: Public cloud revenue grew 85% year over year, driven by Azure NetApp Files, Cloud Insights, and Spot by NetApp.
Public cloud <unk> grew to $388 million, an increase of 80% year over year and public cloud dollar based net revenue retention rate remains healthy at 179%.
Speaker 3: public cloud ARR grew to 388 million, an increase of 80% year over year, and public cloud dollar-based net revenue retention rate remains healthy at 179%.
Speaker 3: During Q2, we advanced our cloud agenda significantly and we remain confident in our ability to achieve our goal of reaching $1 billion ARR in fiscal year 25 with a gross margin profile that is accretive to the corporate average.
During Q2, we advanced our cloud agenda is significantly and we remain confident in our ability to achieve our goal of reaching $1 billion.
In fiscal year 'twenty five with a gross margin profile that is accretive to the corporate average.
In Q2, Amazon Web services, AWS announced the general availability of Amazon FSX for Netapp on tap a native fully managed AWS storage service powered by on cap.
Speaker 3: In Q2, Amazon Web Services, AWS, announced the general availability of Amazon FSx for NetApp ONTAP, a native, fully managed AWS storage service powered by ONTAP.
This new first party product is fully integrated into the AWS console and its sold some.
Speaker 3: This new first-party product is fully integrated into the AWS console, and it's sold, supported, run, and built by AWS, making it easy and cost-effective for customers to take advantage of NetApp's suite of enterprise-grade data services while running in an AWS native experience.
Ported run and built by AWS.
Making it easy and cost effective for customers to take advantage of Netapp suite of enterprise grade data services.
While running in an AWS native experience as.
Speaker 3: As we saw with Azure NetApp Files, it will take time for FSx for NetApp ONTAP to ramp, but we are extraordinarily pleased with the early indicators and the number of customers piloting this service.
As we saw with Azure Netapp files, it will take time for FX for net up on tap the ramp.
But we are extraordinarily pleased with the early indicators and the number of customers piloting the service.
Speaker 3: Additionally, Google Cloud announced that NetApp will provide storage infrastructure for its Google Distributed Cloud hosted where data resides in customer-owned data centers and co-location facilities.
Additionally, Google cloud announced that Netapp will provide storage infrastructure for its Google distributed cloud hosted where data resides in customer owned data centers and colocation facilities.
Google is previewing the integration of Google Cloud Vmware engine with Netapp cloud volumes service of <unk>.
Speaker 3: Google is previewing the integration of Google Cloud VMware Engine with NetApp Cloud Volume Service, a fully managed service that helps organizations meet their needs for storage and disaster recovery.
Fully managed service that helps organizations meet their needs for storage and disaster recovery.
Speaker 3: We also expanded availability of Cloud Volume Service in the Google Cloud.
We also expanded availability of cloud volume service in the Google Cloud.
Much like any other Google cloud Native service.
Speaker 3: much like any other Google Cloud native service.
Speaker 3: Cloud Volume Service can be provisioned and consumed against existing Google Cloud agreements, making it easier for customers to expand their cloud engagements with both Google and NetApp.
Cloud volumes service can be provisioned and consume.
Against existing Google cloud agreements, making it easier for customers to expand their cloud engagements with both Google and net app.
Finally, Microsoft announced that White listing has been removed from Azure Netapp files.
Speaker 3: Finally, Microsoft announced that whitelisting has been removed from Azure NetApp Files. Azure NetApp Files has been generally available since May 2019, with customers around the world relying on it to run their most demanding enterprise workloads in the Azure cloud. Now customers can instantaneously leverage Azure NetApp Files to accelerate the deployment of mission-critical applications to Azure.
As in App files has been generally available since may 2019 with customers around the world relying on it to run their most demanding enterprise workloads in the Azure cloud.
Now customers can instantaneously leverage Azure netapp files to accelerate the deployment of mission critical applications to Azure.
Speaker 3: Additionally, we expanded the backup restore service and cross region replication capabilities for Azure NetApp file.
Additionally, we expanded the backup restore service and cross region replication capabilities for Azure Netapp files.
Speaker 3: We now have fully integrated services with all the major public cloud providers to give organizations the benefits of our storage and data management expertise and experience, no matter which cloud they choose.
We now have fully integrated services with all the major public cloud providers to give organizations the benefits of our storage and data management expertise and experience no matter, which cloud they choose.
Speaker 3: We have deepened each partnership and co-engineered services directly with the cloud providers, enabling their customers to buy directly from them.
We have deepened each partnership and co engineered services directly with the cloud providers, enabling their customers to buy directly from them.
Speaker 3: This level of integration streamlines purchasing, billing, operations, and support, and eliminates the complexity of additional contracts, product installations, or patching.
This level of integration streamlined purchasing billing operations and support and eliminates the complexity of additional contracts product installations or patching.
Importantly for net up these partnerships create a new and massive go to market growth engine as three of the largest and most innovative companies in the world are reselling our technology.
Speaker 3: Importantly for NetApp, these partnerships create a new and massive go-to-market growth engine as three of the largest and most innovative companies in the world are reselling our technology.
Each of these announcements represent years of hard work.
Speaker 3: Each of these announcements represent years of hard work, partnership, and continuous innovation, bringing ONTAP to the cloud at cloud speed and represent the opportunity for continued expansion.
Partnership and continuous innovation, bringing on tap to the cloud at cloud speed and represents the opportunity for continued expansion.
Speaker 3: We're now the first and only storage environment that's natively integrated into each of the major public cloud providers.
Now the first and only storage environment.
Natively integrated into each of the major public cloud providers.
We also made significant enhancements to the spark portfolio, we introduced spot security, our new product designed to keep cloud infrastructure secure delivering.
Speaker 3: We also made significant enhancements to the SPARC portfolio. We introduced SPARC Security, a new product designed to keep cloud infrastructure secure. Delivering continuous automated AI-based security, SPARC Security analyzes, detects, and prioritizes threats to surface the most critical vulnerabilities and provides actionable compliance, remediation, and prevention.
Continuous automated AI based security.
<unk> security analyzes detects and prioritizes threat to <unk>.
Surface. The most critical vulnerabilities and provides actionable compliance remediation and prevention. We also released intelligent traffic flow and new functionality to spot elastic group, which further enhances our customers' ability to optimize their applications by intelligence.
Speaker 3: We also released Intelligent Traffic Flow, a new functionality to spot ElastiGroup, which further enhances our customers' ability to optimize their applications by intelligently managing and controlling incoming network traffic for optimal instance utilization and high performance.
<unk>, managing and controlling incoming network traffic for optimal instance, utilization and high performance.
Additionally, we announced spot TC a fully managed secured and continuously optimize desktop service built together with Microsoft to provide a complete solution for windows 365, and Azure virtual desktop.
Speaker 3: Additionally, we announced Spot PC, a fully managed, secured, and continuously optimized desktop service built together with Microsoft to provide a complete solution for Windows 365 and Azure Virtual Desktop.
Speaker 3: At the beginning of Q3, we closed the acquisition of CloudChecker, whose industry-leading cloud billing analytics and cloud configuration management, monitoring and assessment solutions will augment the full suite of Spark services.
At the beginning of Q3, we closed the acquisition of cloud Checker, who has industry, leading cloud billing analytics and cloud configuration management monitoring and assessment solutions will augment the full suite of spot services. In addition to being a solid technology acquisition.
Speaker 3: In addition to being a solid technology acquisition, CloudChecker will enhance our partner strategy for cloud. And we will leverage the CloudChecker platform to build and extend distributor and partner businesses in both the private and public sector.
Checker will enhance our partner strategy for cloud.
And we will leverage the cloud check a platform to build and extend distributor and partner businesses in both the private and public sectors.
Speaker 3: Also in Q2, we held our annual flagship customer event, Insight, with more than 10,000 attendees. And we introduced NetApp TV to stay engaged with customers throughout the year. At Insight, we announced enhancements to our hybrid cloud portfolio with the latest version of ONTAP that delivers even better performance for SAN and modern workloads like AI and analytics.
Also in Q2, we held our annual flagship customer event insight with more than 10000 attendees and we introduced netapp TV to stay engaged with customers throughout the year at.
That insight, we announced enhancements to our hybrid cloud portfolio with the latest version of on tap that delivers even better performance for Sam and modern workloads like AI and analytics.
Speaker 3: expanded capabilities for object storage, increasingly automated storage system management, and autonomous ransomware protection based on machine learning.
Standard capabilities for object storage increasingly automated storage system management and autonomous Ransomware protection based on machine learning.
Speaker 9: The strength of our storage offerings was recognized by Gartner, which named NetApp once again as a leader in the 2021 Magic Quadrant for primary storage.
The strength of our storage offerings was recognized by Gartner, which named net App once again as a leader in the 2021 magic quadrant for primary storage.
Speaker 3: Gartner called out our robust product and cloud service portfolio, as well as Keystone Flex subscription, our comprehensive and flexible storage as a service offering.
Gartner called out our robust product and cloud services portfolio as well as Keystone Flex subscription are comprehensive and flexible storage as a service offering.
Speaker 3: We were also recognized among this year's top vendor solutions, evaluated in the 2021 Gartner critical capabilities for primary storage across all use cases.
We were also recognized among this year's top vendor solutions evaluated in the 2021 Gartner critical capabilities for primary storage across all use cases.
Growth in our hybrid cloud segment was driven by strength in object storage for the rapidly growing unstructured data and analytics use cases, and our all flash array portfolio.
Speaker 3: Growth in our hybrid cloud segment was driven by strength in object storage for the rapidly growing unstructured data and analytics use cases and our all-flash array portfolio. In Q2, our all-flash array business reached a record high annualized run rate of $3.1 billion, an increase of 22% year on year.
In Q2, our all flash array business reached a record high annualized run rate of three $1 billion, an increase of 22% year on year.
Speaker 3: All flash arrays now compose 30% of our install-based systems.
All flash arrays now composed 30%.
Our installed base systems, we see substantial headroom to continue to help existing and new customers modernize their storage environments.
Speaker 3: we see substantial headroom to continue to help existing and new customers modernize their storage environment.
Based on our continued strong revenue growth I am confident that we once again gained share in the enterprise storage and all flash array market.
Speaker 3: Based on our continued strong revenue growth, I am confident that we, once again, gain share in the enterprise storage and all FlashArray markets.
Speaker 3: Like everyone in our industry, we are faced with a challenging supply environment.
Like everyone in our industry, we are faced with a challenging supply environment.
Speaker 3: While the situation is dynamic and continues to evolve, we are doing everything we can to mitigate the supply chain headwinds. We believe that we can continue to manage through them and address the substantial customer demand.
The situation is dynamic and continues to evolve.
We are doing everything we can to mitigate the supply chain headwinds. We believe that we can continue to manage through them and address the substantial customer demand as.
Speaker 3: As Mike will explain, we have factored the ongoing supply chain uncertainty into our guidance for Q3 and the full year. I am pleased with how we have navigated these challenges and want to thank our suppliers for their support and the NetApp team for their hard work in this environment.
As Mike will explain we have factored the ongoing supply chain uncertainty into our guidance for Q3 and the full year I am pleased with how we have navigated these challenges and want to thank our suppliers for their support and the Netapp team for their hard work in this environment.
In summary, our Q2 results reflect healthy momentum a clear vision and exceptional execution across our business.
Speaker 3: In summary, our Q2 results reflect healthy momentum, a clear vision, and exceptional execution across our business.
As we closed the first half of fiscal year 'twenty, two I'm proud of our team and what we have accomplished.
Speaker 3: As we close the first half of fiscal year 22, I'm proud of our team and what we have accomplished.
Speaker 3: We continue to bring industry-leading capabilities to market, further enhancing our differentiated position in cloud and software. As our customers accelerate their digital transformation and their adoption of hybrid cloud and hybrid work strategies, we believe we are well-positioned to capture the sizable opportunity ahead.
We continue to bring industry, leading capabilities to market further enhancing our differentiated position in cloud and software.
As our customers accelerate their digital transformation and their adoption of hybrid cloud and hybrid work strategy.
We believe we are well positioned to capture the sizable opportunity ahead.
Speaker 3: Before I turn the call over to Mike, I want to invite you all to join us for our Investor Day on March 22nd, 2022. Please mark your calendars and stay tuned for more information. I'll now turn it over to Mike.
Before I turn the call over to Mike.
I want to invite you all to join US for our Investor Day on March 20.
2022 please.
Please mark your calendars and stay tuned for more information I'll now turn it over to Mike.
Speaker 4: Thank you, George. Good afternoon, everyone, and thank you for joining us. As a reminder, I'll be referring to non-GAAP numbers unless otherwise noted.
Thank you George Good afternoon, everyone and thank you for joining us as a reminder, I'll be referring to non-GAAP numbers unless otherwise noted.
Speaker 4: Before we go through the financial details, I think it would be valuable to walk you through the key themes for today's discussion.
Before we go through the financial details I think it would be valuable to walk you through the key themes for today's discussion.
Speaker 4: Number one, Q2 was another strong quarter, with results at the high end or above our guidance.
Number one Q2 was another strong quarter with results at the high end or above our guidance.
Speaker 4: Number two, our business model continues to show significant operating leverage as we grow our operating profitability and margins.
Number two our business model continues to show significant operating leverage as we grow our operating profitability and margins.
Speaker 4: Number three, our cloud business had another outstanding quarter as we marched towards the $1 billion ARR target. And number four, we are increasing our full year guidance for revenue, EPS, and public cloud ARR, driven by the outperformance in Q2, the addition of CloudChecker, and a healthy demand pipeline for the second half of our fiscal year.
Number three our cloud business had another outstanding quarter as we March towards the $1 billion target.
And number four we are increasing our full year guidance for revenue EPS and public cloud are driven by the outperformance in Q2. The addition of cloud checker and a healthy demand pipeline for the second half of our fiscal year.
Now to the details.
In fiscal Q2, we delivered strong revenue gross margin and operating leverage across the entire business outstanding execution by the Netapp team yielded Q2 billings of 1.55 billion up 7% year over year revenue came in at 1.5 dollars 7 billion.
Speaker 4: In fiscal Q2, we delivered strong revenue, gross margin, and operating leverage across the entire business.
Speaker 4: Outstanding execution by the NetApp team yielded Q2 billings of $1.55 billion, up 7% year-over-year. Revenue came in at $1.57 billion, up 11% year-over-year. Our solid Q2 results were driven by healthy demand across both our hybrid cloud and public cloud segment.
Up 11% year over year, our solid Q2 results were driven by healthy demand across both our hybrid cloud and public cloud segments.
Gross margin operating margin and EPS all came in above the high end of guidance.
Speaker 4: Gross Margin, Operating Margin, and EPS all came in above the high end of guidance.
Speaker 4: Total hybrid cloud segment revenue of $1.48 billion was up 8% year over year. Within hybrid cloud, we delivered product revenue growth for the third consecutive quarter and expect this momentum to continue throughout fiscal 22.
Total hybrid cloud segment revenue of $1.48 billion was up 8% year over year.
Hybrid cloud, we delivered product revenue growth for the third consecutive quarter and expect this momentum to continue throughout fiscal 'twenty two.
Speaker 4: Product revenue of $814 million increased 9% year over year. Consistent with the trends we've seen over the last year, software product revenue of $475 million increased 14% year over year, driven by the continued makeshift towards our All-Flash portfolio.
Product revenue of $814 million increased 9% year over year consistent with the trends we've seen over the last year software product revenue of $475 million increased 14% year over year, driven by the continued mix shift towards our all flash portfolio.
Speaker 4: Total Q2 recurring support revenue of $590 million increased 7% year over year.
Total Q2 recurring support revenue of $590 million increased 7% year over year.
Speaker 4: As George highlighted, our all-flash revenue run rate, which includes both product and support revenue, eclipsed $3 billion for the first time in the company's history and was up 22% year-over-year.
As George highlighted our all flash revenue run rate, which includes both product and support revenue eclipsed $3 billion for the first time in the company's history and was up 22% year over year.
Speaker 4: Public Cloud ARR exited Q2 at $388 million, up 80% year over year, and 15% sequentially, driven by strong growth in Azure NetApp Files, Spot, and Cloud Insights.
Public cloud they are exited Q2 at $388 million up 80% year over year, and 15% sequentially driven by strong growth in Azure Netapp files spot and cloud insights.
Public cloud revenue recognized in the quarter was $87 million up 85% year over year.
Speaker 4: Public cloud revenue recognized in the quarter was $87 million, up 85% year over year.
The growing scale of our public cloud platform continues to positively impact the overall growth profile of net app.
Speaker 4: The growing scale of our public cloud platform continues to positively impact the overall growth profile of NetApp, delivering three of the 11 points in revenue growth.
Levering three of the 11 points in revenue growth.
Speaker 4: Recurring support and public cloud revenue of $677 million was up 13% year over year, constituting 43% of total revenue.
Recurring support and public cloud revenue of $677 million was up 13% year over year constituting 43% of total revenue.
Speaker 4: When combined, software product revenue, recurring support, and public cloud revenue totaled $1.2 billion and increased 13% year over year, representing 74% of total revenue, up from 72% in Q2 21.
When combined software product revenue recurring support and public cloud revenue totaled $1 2 billion and increased 13% year over year, representing 74% of total revenue up from 72% in Q2 'twenty one.
We ended Q2 with $3 $9 billion in differed revenue an increase of 6% year over year.
Speaker 4: We ended Q2 with $3.9 billion in deferred revenue, an increase of 6% year over year.
Speaker 4: Q2 marks the 15th consecutive quarter of year-over-year deferred revenue growth, which is the best leading indicator for continued recurring revenue growth.
Q2 marks the 15th consecutive quarter of year over year deferred revenue growth, which is the best leading indicator for continued recurring revenue growth.
Total gross margin was 68%, reflecting the value of our software portfolio and public cloud platform.
Speaker 4: Total gross margin was 68%, reflecting the value of our software portfolio and public cloud platform.
Speaker 4: Total hybrid cloud gross margin was also 68% in Q2. Within our hybrid cloud segment, product gross margin was 55% and benefited from the continued mix shift towards software-rich all-flash systems.
Total hybrid cloud gross margin was also 68% in Q2.
Our hybrid cloud segment product gross margin was 55% and benefited from the continued mix shift towards software rich all flash systems are recurring support business continues to be very profitable with gross margin of 92%.
Speaker 4: Our recurring support business continues to be very profitable, with gross margin of 92%.
Public cloud gross margin of 71% was accretive to the overall corporate average.
Speaker 4: Public cloud gross margin of 71% was accretive to the overall corporate average.
Speaker 4: We expect public cloud gross margins to continue to trend towards our long term goal of 75 to 80% as an increasing percentage of our public cloud business will be built on software only solution.
<unk> public cloud gross margins to continue to trend towards our long term goal of 75% to 80% as an increasing percentage of our public cloud business will be built on software only solutions.
Speaker 4: We recently introduced the new FSX for ONTAP product with AWS and also closed the cloud checker acquisition.
We recently introduced a new F S expert on tap product with AWS and also close the cloud Checker acquisition.
Speaker 4: Both are software-only offerings and support our long-term margin goal.
Both our software only offerings and support our long term margin goal.
Q2 highlighted the tremendous leverage in our operating model with operating margin of 24%, an all time company high.
Speaker 4: Q2 highlighted the tremendous leverage in our operating model, with operating margin of 24% in all-time company high.
EPS of $1 28 was up 22% year over year and also represented a new quarterly record for the company.
Speaker 4: EPS of $1.28 was up 22% year over year, and also represented a new quarterly record for the company.
Cash flow from operations was $298 million and free cash flow was $252 million.
Speaker 4: Cash flow from operations was $298 million, and free cash flow was $252 million.
Speaker 4: DSO in Q2 was an impressive 38 days, highlighting a strong collections process and healthy linearity throughout the quarter.
DSO in Q2 was an impressive 38 days, highlighting our strong collections process and healthy linearity throughout the quarter year.
Speaker 4: Year-to-date free cash flow of $443 million is up 43% year over year.
Year to date free cash flow of $443 million is up 43% year over year.
During Q2, we repurchased $125 million in stock and paid out $112 million in cash dividends.
Speaker 4: During Q2, we repurchased $125 million in stock and paid out $112 million in cash dividends.
Speaker 4: In total, we returned $237 million to shareholders, representing 94% of free cash.
In total we returned $237 million to shareholders, representing 94% of free cash flow.
Speaker 4: We close Q2 with $4.5 billion in cash and short-term investment.
We closed Q2 with $4 $5 billion in cash and short term investments.
As you all know the dynamic supply chain headwinds have intensified recently are excellent supply chain and procurement team continues to work closely with our partner ecosystem with the goal of meeting as much customer demand as possible.
Speaker 4: As you all know, the dynamic supply chain headwinds have intensified recently.
Speaker 4: Our excellent supply chain and procurement team continues to work closely with our partner ecosystem with the goal of meeting as much customer demand as possible.
Towards this goal, we will continue to invest incremental dollars and the inventory and longer term commitments that said, we do anticipate the supply chain challenges facing the overall technology industry to impact our product revenue and product gross margins in the second half of fiscal 'twenty two.
Speaker 4: Towards this goal, we will continue to invest incremental dollars into inventory and longer-term commitment.
Speaker 4: That said, we do anticipate the supply chain challenges facing the overall technology industry to impact our product revenue and product growth margins in the second half of fiscal 22.
Speaker 4: The supply chain headwinds and our ongoing actions to mitigate them have been factored into our Q3 and updated full year guidance.
The supply chain headwinds and our ongoing actions to mitigate them have been factored into our Q3 and updated full year guidance.
Speaker 4: With our strong execution in Q2, the addition of CloudChecker, and a healthy demand pipeline for the second half of our fiscal year, we are raising our fiscal 22 revenue guidance.
With our strong execution in Q2. The addition of cloud checker.
And a healthy demand pipeline for the second half of our fiscal year, we are raising our fiscal 'twenty two revenue guidance.
Speaker 4: We now expect revenues to grow 9% to 10% year-over-year, even with the challenging supply chain environment.
We now expect revenues to grow 9% to 10% year over year, even with the challenging supply chain environment.
Speaker 4: We also have growing confidence in our expanding public cloud opportunity, driven by enhanced go-to-market activities, deeper and broader cloud partnerships, and continued product innovation.
We also have growing confidence in our expanding public cloud opportunity driven by enhanced go to market activities deeper and broader cloud partnerships and continued product innovation.
Speaker 4: As a result, we are raising the guidance on our Organic Public Cloud ARR with a new range of $475 to $500 million.
As a result, we are raising the guidance on our organic public cloud <unk> with a new range of $475 million to $500 million.
As you know we closed the cloud Checker acquisition early in Q3, we anticipate cloud checker to contribute an additional $35 million to $40 million in public cloud.
Speaker 4: As you know, we closed the cloud checker acquisition early in Q3.
Speaker 4: We anticipate Cloud Checker to contribute an additional $35 to $40 million in public cloud ARR exiting the year.
Exiting the year in total our new guidance for exit fiscal 'twenty, two public cloud <unk> is $510 million to $540 million.
Which at the midpoint implies a 74% increase year over year.
Speaker 4: For fiscal 22, we continue to forecast total gross margin to be approximately 68%.
For fiscal 'twenty, two we continue to forecast total gross margin to be approximately 68% how.
Speaker 4: However, the current supply chain challenges with temporarily higher freight and expedite charges will pressure product margins in Q3 and Q4. We now anticipate product margins to be approximately 54% for the full year.
However, the current supply chain challenges.
With temporarily higher freight and expedite charges.
Pressure product margins in Q3 and Q4.
We now anticipate product margins to be approximately 54% for the full year.
Speaker 4: We are reaffirming our full-year operating margin guidance of 23 to 24 percent.
We are reaffirming our full year operating margin guidance of 23% to 24%.
We are forecasting operating expenses to range between $2 795.
Speaker 4: We are forecasting operating expenses to range between $2.795 and $2.815 billion driven by investment in revenue-generating activities, including expanding our public cloud portfolio and investments in both our cloud and customer success sales plans.
281, $5 billion driven by investment in revenue generating activities.
Including expanding our public cloud portfolio and investments in both our cloud and customer success sales teams.
Our new Opex guidance also includes $10 million per quarter from cloud checker.
Speaker 4: Our new OPEX guidance also includes $10 million per quarter from cloud.
Speaker 4: As we discussed at our investor day last September , we remain committed to growing revenue faster than operating expenses.
As we discussed at our Investor Day last September we remain committed to growing revenue faster than operating expenses.
Speaker 4: We are raising our fiscal 22 EPS guidance.
We are raising our fiscal 'twenty to EPS guidance, we now expect EPS to range between $4 90.
Speaker 4: We now expect EPS to range between $4.90 and $5.10, representing 23% year-over-year growth at the midpoint.
And $5 10.
Representing 23% year over year growth at the midpoint.
Speaker 4: Implied in this guidance is our expectation that other income and expense will be a negative $60 million, and our effective tax rate will remain at 19%.
Implied in this guidance is our expectation that other income and expense will be a negative $60 million and our effective tax rate will remain at 19%.
Speaker 4: We remain committed to delivering more than $1.2 billion in free cash flow in fiscal 22 as our hybrid cloud business continues to fund the growth in our public cloud platform.
We remain committed to delivering more than $1 2 billion and free cash flow in fiscal 'twenty two as our hybrid cloud business continues to fund the growth in our public cloud platform.
Now onto Q3 guidance.
Speaker 4: We expect Q3 net revenues to range between 1.525 and $1.675 billion, which at the midpoint implies a 9% increase year over year.
We expect Q3 net revenues to range between 1525.
And one 675 billion, which at the midpoint implies a 9% increase year over year.
Speaker 4: We anticipate consolidated gross margin to range between 67% and 68%, and operating margin to be approximately 23%.
We anticipate consolidated gross margin to range between 67, and 68% and operating margin to be approximately 23%.
Speaker 4: Assumed in this guidance are Q3 operating expenses of $705 to $715 million, which includes cloud checks.
Assumed in this guidance, our Q3 operating expenses of $705 million to $715 million, which includes cloud checker.
Speaker 4: We expect earnings per share for Q3 to range between $1.21 and $1.31 per share.
We expect earnings per share for Q3 to range between $1 21.
$1 31 per share.
Speaker 4: Assumed in our Q3 guidance is our expectation that other income and expense will be a negative $15 million, and our tax rate will be approximately 19%.
Assumed in our Q3 guidance is our expectation that other income and expense will be a negative $15 million and our tax rate will be approximately 19%.
In closing I want to thank the entire net app team for the outstanding execution in the first half of our fiscal year.
Speaker 4: In closing, I want to thank the entire NetApp team for the outstanding execution in the first half of our fiscal year.
The team stayed focused on our core priorities and we're not distracted by external events out of their control.
Speaker 4: The team stayed focused on our core priorities and were not distracted by external events out of their control. We are excited to build on that momentum as we continue to scale a truly differentiated public cloud platform while maintaining an unwavering focus on the hybrid cloud business.
We are excited to build on that momentum as we continue to scale a truly differentiated public cloud platform, while maintaining an unwavering focus on the hybrid cloud business.
As George mentioned, we plan to host an Investor day in the spring, where we will further discuss the long term value drivers for our shareholders customers and partners.
Speaker 4: As George mentioned, we plan to host an investor day in the spring, where we will further discuss the long-term value drivers for our shareholders, customers, and partners.
I'll now hand, it back to Chris to open the call for Q&A Kris.
Speaker 2: Thanks, Mike. Let's open the call for Q&A. Please keep to just one question so we can get to as many people as possible. Operator?
Thanks, Mike, Let's open the call for Q&A. Please keep to just one question. So we can get to as many people as possible operator.
Thank you, ladies and gentlemen, as a reminder to ask the question do we need to press Star then one on your telephone to withdraw your question press the pound key.
Speaker 1: Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask the question. Please stand by while we compile the Q&A roster.
Again, Thats star one to ask a question. Please standby, while we compile the Q&A roster.
Speaker 1: Our first question comes from the line of Jason Adder with Wim Blair. Your line is open.
Our first question comes from the line of Jason Ader with William Blair. Your line is open.
Yeah, Thanks, Hi, guys.
Speaker 5: Yeah, thanks. Hey, guys. My question for you, George, is as we think about the cloud services business.
I guess my question for you George as we think about the cloud services business.
Speaker 5: There's a lot of different elements within there. You had just announced the FSx for NetApp ONTAP.
There's a lot of different <unk>.
Elements within there.
Just announced the FSX freenet up on tap.
Speaker 5: Obviously, Azure Nav Files is going well. You have the whole Spot business, and now CloudChecker. I guess it's hard to figure out, from our perspective, I think, which are going to be the most important. Let's call it.
Obviously azure files is going well you have the whole spot business and now cloud checker.
I guess, it's hard to figure out from our perspective, I think what youre going to be the most important let's call. It.
Three to five years from now how would you help us think about that just in terms of magnitude and in particular I'm curious about the <unk> business I mean, how should we be thinking about how important that particular service will be to your cloud services <unk> over time.
Speaker 5: you know, three to five years from now, how would you help us think about that just in terms of magnitude? And in particular, I'm curious about the FSX business, I mean, how should we be thinking about how important that particular service will be to your cloud services ARR over time?
I think first of all we saw strong performance this past quarter from all three important pieces of our cloud portfolio cloud volumes, which is cloud storage services.
Speaker 9: I think first of all, we saw strong performance this past quarter from all three important pieces of our cloud portfolio, cloud volumes, which is cloud storage services.
Speaker 9: Cloud Insights, which is monitoring, and our Spark portfolio, which is dynamic optimization of compute and storage in the cloud. All of them have really strong quarters and we're really pleased. In terms of FSx for ONTAP, I will just say that it's very early days.
<unk> insights, which is monitoring.
And our spot portfolio, which is dynamic optimization of compute and storage in the cloud all of them had really strong quarters and we're really pleased.
In terms of FSX four on tap I will just say that it's very early days.
Speaker 3: But we are extraordinarily pleased. Listen, if you look at the cloud file storage market, the public data suggests that Amazon Web Services is the dominant player in that market.
But we are extraordinarily pleased listen if you look at the cloud file storage market.
<unk> data suggests that Amazon web services is the dominant player in that market and having a needed first party on tap enterprise file storage service in the Amazon cloud is an enormous opportunity.
Speaker 6: and having a native first party on tap enterprise file storage service in the Amazon cloud is an enormous opportunity.
Speaker 9: We are doing the innovation and the enablement work to scale that business. We're really pleased with the early results, but we have a long, you know, kind of, uh,
We're doing the innovation in the enablement work to scale that business. We're really pleased with the early results, but we have a long kind of.
We'll see that play out over the next several quarters right just like Microsoft Azure Netapp files is now a really stellar product for us.
Speaker 9: we'll see that play out over the next several quarters, right? Just like Microsoft Azure NetApp Files is now a really stellar product for us.
Thanks.
Thank you.
Speaker 1: Our next question comes from the line of Katie Huberty with Morgan Stanley . Your line is open.
Our next question comes from the line of Katy Huberty with Morgan Stanley. Your line is open.
Yes. Thank you Mike you sized the profit impact of the supply chain constraints, but what what is the impact to product revenue in the back half and should we think of.
Speaker 7: Yes, thank you, Mike. You size the profit impact of the supply chain constraints, but what is the impact to product revenue in the back half and should we think of any shortfall on revenue just contributing to fiscal 23 growth?
Any shortfall in revenue just contributing to fiscal 'twenty three growth.
Speaker 4: Sure. Thanks for the question, Katie. So, hey, let's put it in context a little bit as we did the guidance for the full year. We feel really good about how Q3 and the fiscal year shaping up. Coming off a really strong Q2, we've raised the revenue growth, even with the tougher supply chain situation.
Sure. Thanks for the question Katie So hey, let's put it in context, a little bit as we did the guidance for the full year, we feel really good about how Q3 dollars a foot in the fiscal year shaping up coming off a really strong Q2.
The revenue growth even with the.
The tougher supply chain situation.
We're calling for growth across both product and cloud as we said in the prepared remarks, we've baked all of that into our guidance. We will work very diligently with our supply chain team our customers our partners to make sure we're able to fulfill as much as we can but we're not going to break out what was the application of <unk>.
Speaker 4: We're calling for growth across both product and cloud. As we said in the prepared remarks, we've baked all of that into our guidance.
Speaker 4: We'll work very diligently with our supply chain team, our customers, our partners to make sure we're able to fulfill as much as we can. But we're not going to break out, hey, what was the implication of supply chain? Candidly, we don't want to have two guidance numbers. We fully bake that in. You know, as it relates to fiscal 23, we'll have to see how the second half goes really in terms of does it continue into our fiscal 23 at what level and how does it work its way through the rest of this.
Fly chain candidly, we don't want to have two guidance numbers, we've fully baked that in.
As it relates to fiscal 'twenty, three we will have to see how the second half goes really in terms of does it continue into our fiscal 'twenty three at what level and how does it work its way through the rest of this fiscal year.
I think broadly speaking our team has managed the environment really well and I think if you look at the second half guidance. My expectation you should see a continued progression of the first half trends with product and cloud services growing quickly and our services business growing a little bit.
Speaker 9: I think, broadly speaking, our team has managed the environment really well and I think if you look at the second half guidance, my expectation is you should see a continued progression of the first half trends with product and cloud services growing quickly and our services business growing a little bit slower than that in the overall revenue mix.
Slower than that in the overall revenue mix.
Thank you.
Thank you.
Speaker 1: Our next question comes from the line of Rod Hall with Goldman Sachs, your line is open.
Our next question comes from the line of Rod Hall with Goldman Sachs. Your line is open.
Okay, great. Thanks for the question.
Speaker 8: Yeah, great. Thanks for the question. I wanted to dig back into the cloud services, George, a little bit. A couple of questions for me. One thing we've seen in the industry kind of emerging is direct
Wanted to dig back into the cloud services, George a little bit.
Questions for me one thing we've seen in the industry kind of emerging is direct hardware sales into some application in hyperscale or <unk>.
Speaker 8: hardware sales into some application and hyperscalers for low-cost flash storage.
For low cost flash storage and I Wonder if I know that you are amortizing hardware as a service sort of in some of these instances, but I wonder if you see an opportunity to maybe directly so hardware into some of these things for specific applications and I'm also curious just strategically I know that.
Speaker 8: And I wonder if – I know that you're amortizing hardware, you know, as a service sort of in some of these instances, but I wonder if you see an opportunity to maybe directly sell hardware into some of these things for specific applications.
Speaker 8: And I'm also curious just strategically, I know the question was asked earlier, you know, what if these three services are going to be bigger, but where do you take this strategically? Can you, you know, can you give us some way to think about, you know, kind of where you're taking the as-a-service part of the business?
Question was asked earlier what are these three services are going to be bigger, but where do you take this strategically can you can.
Can you give us some way to think about kind of where you are taking out of the service part of the business where the opportunities lie.
Speaker 8: where the opportunities lie, you know, where you think the most opportunity is.
Or do you think the most opportunity is thanks.
Speaker 6: Listen, I think with regard to our approach to serve customers.
Listen I think with regard to our approach to serve customers together with the cloud providers. We look at a broad range of opportunities I think they don't exist solely in the public cloud I think you could see for example, the in my prepared remarks, the commentary on <unk>.
Speaker 9: together with the cloud providers, we look at a broad range of opportunities. I think they don't exist solely in the public cloud. I think you could see, for example, the in my prepared remarks, the commentary on working with Google around a distributed cloud platform. And so so you'll see us continue to broaden the range of innovation opportunities that we deliver with the hyperscalers.
Working with Google around distributed cloud platform and so so you'll see us continue to broaden the range of innovation opportunities that we deliver.
Hyper scaler, so that we can truly build a hybrid multi cloud.
Speaker 9: so that we can truly build a hybrid multi-cloud.
Speaker 6: data management and infrastructure services management platform with them. I think within the public cloud, there are gonna be continued opportunities for substantial growth. I think, as I said, you know, we feel really, really good about the progress towards the billion dollar ARR targets that we had laid out. We will share more about the specific, you know, updates to our long-term plans at our analyst conference, right? But let me just say.
Data management and infrastructure services management platform with them I think within the public cloud there are going to be continued opportunities for substantial growth I think as I said, we feel really really good about the progress towards the $1 billion of IRR targets that we had laid out.
We will share more about the specifics.
Updates to our long term plans at our analyst conference right, but let me just say.
Speaker 6: cloud storage is a massive opportunity. Cloud file storage alone is a very rapidly growing multi billion dollar opportunity. And we are positioned at the sweet spot of that alongside
Storage is a massive opportunity cloud file storage alone is a very rapidly growing multibillion dollar opportunity and we are positioned at the sweet spot of that alongside the biggest three cloud providers in the world second cloud.
Speaker 6: the biggest three cloud providers in the world. Second.
Speaker 6: Cloud Compute Management and Cloud Cost Management is another massively important customer priority. And Spot plus CloudChecker gives us a differentiated platform to go after that set of use cases. And we see more and more types of workloads collapsing onto these two important elements of infrastructure as a service.
Compute management and cloud cost management is another massively important customer priority and Sparks plus cloud Shekhar gives us a differentiated platform to go after that set of use cases.
And we see more and more types of workloads collapsing onto these two important elements of infrastructure as a service and cloud insights our monitoring platform helps customers not only deploy those infrastructure services, but also monitor them. So I feel really really really good.
Speaker 6: and Cloud Insights, our monitoring platform, helps customers not only deploy those infrastructure services but also monitor them. So I feel really, really, really good about our Cloud progress.
Cloud progress.
Great. Thank you.
Thank you.
Speaker 1: Our next question comes from the line of Carl Ackerman with Cohen. Your line is open.
Our next question comes from the line of Carl Ackerman with Cowen Your line is open.
Yes. Thank you.
Speaker 10: I was hoping you could discuss how you plan to integrate CloudChecker into your Cloud Insights and Spot portfolio.
I was hoping you could discuss how you plan to integrate cloud checker into your cloud insights and spot portfolio.
Speaker 10: And as you address that question, you know, as you grow the cloud business toward this billion dollar target and drive gross margins in the high 70s, should we expect the cloud business can achieve operating margins maybe in line with the corporate average? Or could that actually happen earlier given the go-to-market appears to be shifting to your cloud partners rather than relying simply on your own sales force? Thanks. Listen, I think what's a good
And as you address that question.
As you grow the cloud business towards this $1 billion target and drive gross margins into the high <unk> should we expect the cloud business can achieve operating margins maybe in line with corporate average or could that actually happen earlier given the go to market appears to be shifting to your cloud partners rather than relying simply on your own salesforce.
Sure.
Listen I think with regard to cloud checker.
Speaker 6: What Spot allows customers to do is to optimize their cloud spend by dynamically deploying cloud computing and storage environments on the most efficient platform available, right? So we address about 70% of the customer spend using the Spot technology.
What sparked allows customers to do is to optimize their cloud spend by.
Italy deploy cloud computing and storage environments on the most efficient platform available right. So we addressed about 70% of the customers spend using the using the spot technology.
Speaker 6: What CloudChecker allows customers to do is to first be able to analyze and prioritize.
What cloud checkout allows customers to do is to first be able to analyze and prioritize which of those the environment. This should move to spot first and most quickly so that they can get the best <unk> and then subsequently also gives them an integrated bill for their entire life.
Speaker 6: which of those environments they should move to spot first and most quickly so that they can get the best thing.
Speaker 6: and then subsequently also gives them an integrated bill for their entire environment, now optimized with Spot. So we're excited about what CloudShekel brings from a technology perspective. From a route-to-market perspective, it has a strong footprint in the public sector.
<unk> now optimized with spot. So we're excited about what cloud checkup brings from a technology perspective from a route to market perspective. It has a strong footprint in public sector and in managed service providers who use it.
Speaker 6: and in managed service providers who use it as an integrated billing and analytics platform for all of their downstream customers and so it expands our reach into the marketplace.
The integrated billing and analytics platform for all of their downstream customers and so it expands our reach into the marketplace with regard to cloud operating margin today, we don't break out operating margins I would just tell you that we are a highly leveraged.
Speaker 6: With regard to cloud operating margins, today we don't break out operating margins. I would just tell you that we are a highly leveraged operating model for the company. If you look at the first half of this year, more than 50 percent of total revenue growth fell to the bottom.
Operating model for the company. If you look at the first half of this year more than 50% of total revenue growth fell to the bottom line, we see the opportunity in cloud to be a fast growing high gross margin opportunity and we are going to invest to capture that but we are doing.
Speaker 6: We see the opportunity in cloud to be a fast-growing, high gross margin opportunity, and we are going to invest to capture that, but we are doing so
No.
Speaker 6: while continuing to drive the operating margin profile of the total company.
While continuing to drive the operating margin profile of the total company. So I'm excited about the possibilities ahead and the continued increase in margin rich software and cloud services in our portfolio, Mike do you have anything else.
Speaker 6: So I'm excited about the possibilities ahead and the continued increase in margin-rich software and cloud services in our portfolio.
Speaker 4: Mike, you have anything else? Yeah, thanks, George. Carl, I would just add a couple of things to what George said. We do benefit in a couple of ways as it relates to the cloud business. One is there's a lot of synergies in R&D, because as you know, ONTAP goes across both of those. So that will help, as you called it, the operating margin, even though we don't break it out. The other thing we've talked about is, yes, the route to market and the hyperscaler sales channel certainly helps. We also have our own sales team as well. They will get more and more efficient, especially as we build up that customer success team.
Yes, Thanks, George Karl I would just add a couple of things to what George said, we do benefit in a couple of ways as it relates to the cloud business. One is theres a lot of synergies in R&D because as you know on tap goes across both of those so that will help as you call. It the operating margin, even though we don't break it out the other thing we've talked about is yes, the route to market.
And the hyper scaler sales channel certainly helps we also have our own sales team as well they will get more and more efficient, especially as we build up that customer success team. So as we look at that $1 billion target as we've talked about you look at the comps did have about $1 billion of IRR and certainly those operating margins are very.
Speaker 4: So as we look at that billion dollar target.
Speaker 4: As we've talked about, you look at the comps that have about a billion dollars of ARR, and certainly those operating margins are very near our corporate average today.
Near our corporate average today.
Thank you.
Thank you.
Our next question is from the line of Steven Fox with Fox Advisors. Your line is open.
Speaker 1: Our next question is from the line of Stephen Fox with Fox Advisors. Your line is open.
Hi.
Speaker 11: Good afternoon. Just one more cloud question for you. George, you talked about how you now have fully integrated services with all the cloud service providers. How do you think you start to leverage that? Can you sort of give us a roadmap for how that builds upon itself and where you would see initial success from having that full portfolio and then maybe later success? Thanks.
Good afternoon, just one more cloud question for you George you talked about how you now have fully integrated services with all the cloud service providers. How do you think you start to leverage that can you sort of give us a roadmap for how that builds upon itself.
And where you would see initial success from having that full portfolio and then maybe later success. Thanks.
Yes, certainly we have three ways that we drive success in the cloud business.
Speaker 6: Yes, certainly. You know, we have three ways that we drive success in the cloud business. The first is technology certification and workload expansion. So we
First is technology certification and workload expansion. So we worked with the cloud providers to qualify more and more and more workloads that can be best served using our technology. An example that I cited recently is the Vmware cloud.
Speaker 6: work with the cloud providers to qualify more and more and more workloads.
Speaker 6: that can be best served using our technology. An example that I cited.
Speaker 6: recently is the VMware cloud in Google now being certified to use NetApp Cloud Volumes as a primary data store, which has enormous benefits to VMware customers of NetApp and VMware to be able to now expand to the cloud, as well as new customers that want to deploy mission-critical environments on the VMware cloud, right? So that's one, workload certifications and expansions. The second is additional...
<unk> in Google now being certified to use Netapp cloud volumes as the prime as a primary data store, which has enormous benefits to vmware customers.
Net app and Vmware to be able to now expand to the cloud as well as new customers that wanted to deploy mission critical environments on the Vmware cloud right. So that's one.
Cloud certifications and expansion.
Is additional regions.
Speaker 6: You know an enablement for the go to market engines. You've seen us grow the Azure NetApp files business.
And enablement for.
The go to market engine, you've seen us grow the Azure Netapp files business steadily and very successfully over a period of time.
Speaker 6: steadily and very successfully over a period of time.
Speaker 6: You know, Amazon and Google are behind that, but we know the recipe and we're working to scale that. And then finally, you know, cross-selling and upselling a customer once they get on our service. Dollar-based net retention rate is a very healthy 179 percent.
Amazon and Google are behind that but we know the recipe and but working to scale that and then finally.
Cross selling and Upselling, our customer once they get on their service dollar based net retention rate is a very healthy 179%.
Speaker 6: It's early days in our customer base, so over time that should come down, but it shows that once a customer uses one of our services, they expand dramatically, and then we get to sell them a portfolio of more services. So lots of ways to grow our cloud business ahead. We're super excited, and we worked really, really hard to get here, and we're going to capitalize on the opportunity. Thanks for that.
It's early days in our customer base, so over time that should come down but it shows that once a customer uses one of our services. They expand dramatically and then we get to sell them a portfolio of more services. So lots of ways to grow our cloud business ahead with Super excited and we've worked real.
Really hard to get here and we're going to capitalize on the opportunity.
Thanks for that that's very helpful.
Thank you.
Speaker 1: Our next question comes from the line of Simon Leopold with Raymond James. Your line is open.
Our next question comes from the line of Simon Leopold with Raymond James Your line is open.
Thanks for taking the question I wanted to see if you could maybe unpack a little bit of the trend youre seeing in the traditional storage market.
Speaker 12: Thanks for taking the question. I want to see if you could maybe unpack a little bit of the trend you're seeing in the traditional storage market. In particular, we're seeing very strong growth from your all-flash business, which would imply that there are aspects that are declining, and at least one of your competitors seems to be suffering some steep declines at the high end.
Particular.
Seeing very strong growth from your all flash business, which would imply that there are aspects that are declining and at least one of your competitors seems to be suffering some steep declines at the high end I'm wondering if maybe mid range and flash is encroaching on more high end performance and how you see that sub segment.
Speaker 12: I'm wondering if maybe mid-range and flash is encroaching on more high-end performance and how you see the subsegments trending for NetApp. Thank you.
It's trending for net App. Thank you.
Yeah, absolutely I think we have said for a long time that midrange systems with clustering software will cannibalize the high end frame array business of some of our competitors and you're seeing that play out the mid range systems.
Speaker 6: Yeah, absolutely. I think we have said for a long time that mid range systems with clustering software will cannibalize the high end frame array business of some of our competitors. And you are seeing that play out the mid range systems.
Speaker 6: Offer the sweet spot from a price performance standpoint
Offered the sweet spot from a price performance standpoint.
Customers and with clustering you can build enormously large environments to consolidate a range of different workloads.
Speaker 6: for customers and with clustering you can build enormously large environments.
Speaker 6: to consolidate a range of different workloads and we
Speaker 6: expect that trend to continue going forward, you know, the days of the frame array are over to be completely transparent. And so we'll continue to see that trend going on over time. With regard to how these, you know, within our business.
Expect that trend to continue going forward.
Days of the frame array or over to be completely transparent and so we'll continue to see that trend going on over time with regard to how these.
Within our business.
All flash arrays will have an important and growing part of the customer's data center type.
Speaker 6: All flash arrays will have an important and growing part of the customer's data center.
Hybrid flash arrays will continue to have a long term position in the data center. So today in our installed base. For example, all flash is about a 30% of the installed base we expect.
Speaker 6: hybrid flash arrays will continue to have a long term position in the data center. So today, in our install base, for example, all flashes about a 30% of the installed base. We expect, you know, as more flash technologies come to play that number to grow to about 70% over time.
As more flash technologies come to play that number to grow to about 70% over time.
Speaker 6: I think, however, we do not subscribe to the theory that hard disk drives no longer have value. They will have enduring value for certain sets of workloads that they are built for. Capacity-oriented workloads, you know, backup and archival, media retention, images, things like that. So we feel good about our position in the market. We're going to stay focused and continue to execute against our all-flash array business and our object storage business as priorities for the enterprise storage environment.
I think however, we do not subscribe to the theory that hard disk drives no longer have value. They will have enduring value for certain types of workloads that they are built for capacity oriented workloads.
Back up and archival media retention images and things like that so we feel good about our position in the market, we're going to stay focused and continue to execute against our all flash array business and our object storage business as priorities for the enterprise storage environment.
Thank you.
Thank you.
Speaker 24: Thank you.
Speaker 1: Our next question comes from the line of Nick Dodoro with Longbow Research. Your line is open.
Our next question comes from the line of Nick <unk> with Longbow Research. Your line is open.
Yes, thanks, and congrats on another great quarter.
Speaker 14: Thanks and congrats on another great quarter. Another question on the hybrid cloud side. It sounds to me that you're seeing accelerated demand there. The question is, given the supply chain challenges, how much visibility do you have from a pipeline perspective? I think you talked
Another question on the hybrid cloud side. It sounds to me that you are seeing accelerating demand there.
So the question is given the supply chain.
Challenges how much visibility do you have from a pipeline perspective, I think you talked about seeing very strong second half also are you seeing any.
Speaker 14: seeing this very strong second half. Also, are you seeing any abnormal backlog at this point and what kind of impact do you think that could have on your model in the second half and forward?
Normal backlog at this point and what kind of impact do you think that could have on your own or in your model in the second half going forward. Thanks.
Speaker 4: Hey, Nick, it's Mike. Thanks for the question. Yeah, we we feel very good about the demand environment. As we look at the second half. We certainly have a much better view at this point now of pipeline going into the second half.
Hey, Nick it's Mike. Thanks for the question, Yes, we feel very good about the demand environment as we look at the second half, we certainly have a much better view at this point now a pipeline going into the second half and as we've talked about a lot of whats baked into the guidance is really in it.
Speaker 4: And as we've talked about, a lot of what's baked into the guidance is really a result of supply chain. Again, we feel really good about the overall demand environment.
A result of supply chain again, we feel really good about the overall demand environment. There is as we look at backlog Theres really been no significant shift there.
Speaker 4: There is, as we look at backlog, there's really been no significant shift there and I do also want to make sure and note, we haven't seen, you know, any what I would call unusual pull-ins either as it relates to purchasing behavior. On a quarterly basis, there's always pull-ins and push-outs. We haven't seen anything unusual there either. So
Also want to make sure no we haven't seen any what I would call unusual Poland's either as it relates to purchasing behavior on a quarterly basis, there's always pull ins and push outs, we haven't seen anything unusual there either so going into second half feel really good about what the pipeline looks like and the buying behavior of our customers.
Speaker 4: Going into the second half, I feel really good about what the pipeline looks like and the buying behavior of our customers, and hopefully that continues as we go forward into next year. Sounds great.
And hopefully that continues as we go forward into next year.
Sounds great. Thanks, guys. Good luck.
Thank you.
Our next question comes from the line of Jim Suva with Citigroup. Your line is open.
Speaker 1: Our next question comes from the line of Jim Suva with Citigroup. Your line is open.
Thank you George and Mike now is hopefully society is getting back to a little bit of more normalcy post the pandemic hopefully can you compare and contrast, like the purchasing trends that youre seeing pre versus post is it longer lead times because of the supply chain do you think that might be here.
Speaker 5: Thank you. George and Mike, now is hopefully society is getting back to a little bit of more normalcy post the pandemic, hopefully.
Speaker 5: Can you compare and contrast like the purchasing trends that you're seeing, you know, pre versus post? Is it longer lead times because of supply chain? You think that might be here for good or more of a push to cloud or all flash away? I'm just trying to compare and contrast of what you saw maybe pre-pandemic versus now in the discussions you're having with customers. Thank you.
For good or more of a push to cloud our all flash array Im just kind of compare and contrast of what you saw maybe pre pandemic versus now and the discussions youre, having with customers. Thank you.
We see continuing trends for digital transformation hybrid work and hybrid it those have been our long term perspective on how business architecture and technology architectures evolve that has certainly come sharper into focus with COVID-19.
Speaker 3: We see continuing trends for digital transformation, hybrid work and hybrid IT. Those have been our long-term perspective on how business architectures and technology architectures evolve. That has certainly come sharper into focus with COVID, but they have always been part of the long-term roadmap of our customers.
But they have always been part of the long term roadmap of our customers.
Speaker 9: We have seen the acceleration of, you know, cloud-based environments for certain workloads, especially workloads like virtual desktops or, you know, in schools for the ability for teachers to be able to use cloud-based environments.
We have seen the acceleration of.
Cloud based environment for certain workloads, especially workloads like virtual desktops or.
<unk> calls for the ability for teachers to be able to use cloud based environment to conduct classrooms, and we think those will continue and then you're going forward as the future of work remains hybrid.
Speaker 6: to conduct classrooms and we think those will continue and endure going forward as the future of work remains hybrid. Within the enterprise storage and
Within the enterprise storage environments.
I've always believed that flash will have a growing part of the customer data center as the economics of flash and the ability to consolidate and simplify your data center environment growth that being said there are workloads like I've mentioned earlier in the call that we will continue to stay on hard drives.
Speaker 6: We've always believed that flash will have a growing part of the customer data center as the economics of flash and the ability to consolidate and simplify your data center environment grows.
Speaker 6: That being said, there are workloads, like I've mentioned earlier in the call, that will continue to stay on hard drive. And I think the big early draft to flash is now sort of stabilizing and people understand what flash is going to be used for and understand what HDDs are going to be used for. And so we see a more steady pattern there. With regard to.
And I think the big early drafts to flash is now sort of stabilizing and people understand what flash is going to be used for and understand what to HDD is are going to be used for and so we see a more steady pattern there with regard to.
Speaker 6: you know, lead times and transactions and things like that. As Mike mentioned, we didn't see anything unusual. We have been able to meet customers through a variety of mechanisms, digital conferences, you know, using video conferencing mechanisms.
Lead times and transactions and things like data as Mike mentioned, we didn't see anything unusual we have.
<unk> been able to meet customers through a variety of mechanisms digital conferences.
Using video conferencing mechanisms.
As well as now starting to meet some customers in person and so we expect that to continue going forward for a period of time at least.
Thank you so much and congratulations to you and your teams.
Q.
Thank you.
Speaker 1: Our next question comes from the line of Tim Long with Barclays, your line is open.
Our next question comes from the line of Tim Long with Barclays. Your line is open.
Thank you.
I was hoping you could talk a little bit.
About the pricing.
Environment and strategy, given commodity moving prices and obviously inflation that you're facing on the supply chain side.
Could you talk a little bit about how you see that kind of flowing through.
The model over the next few quarters here and what do you think competitors will be doing and will will there be any differentiation in how.
Some some view net app and some of the other.
Speaker 15: NetApp and some of your peer companies are going to tackle these challenges in a market where sometimes pricing is somewhat of a factor.
Peer companies are going to tackle these.
Challenges in a market, where sometimes pricing is somewhat of a factor. Thank you.
Hey, Tim it's Mike So yes. So thanks for the question, we have not seen much of a change in the pricing environment as we've talked about before.
Speaker 4: Hey, Tim, it's Mike. So yeah, so thanks for the question. We have not seen much of a change in the pricing environment, as we've talked about before. It's a it's still relatively rational market. Every once in a while, somebody does something to grab a customer or keep one, but that's going to certainly be an unusual event. As we've looked forward. I won't speak for any of our competitors. I think everybody's looking at their business saying, Hey,
So it's still a relatively rational market every once in a while somebody does something to grab a customer or keep one but that's going to certainly be an unusual event as we've looked forward.
I won't speak for any of our competitors I think everybody's looking at their business, saying, hey costs have gone up across the board, especially in freight component costs.
Speaker 4: Costs have gone up across the board, especially in freight component costs.
Speaker 4: We're all dealing with that. So I do expect that you'll continue to hear folks talk about doing price increases.
We're all dealing with that so I do expect that you'll continue to hear folks talk about doing price increases.
Speaker 4: I think a lot of this depends on how long we're in this situation. Again, from a NetApp perspective, we've looked at that. We have implemented a price increase, so we do expect that to start to have an impact later in our fiscal year. I would expect to continue to see that across our competitors, but again, I don't want to speak for them. I think a lot of this depends on how long this short supply chain shortage...
A lot of this depends on how long we're in this situation again.
From a net add perspective, we've looked at that we have implemented a price increase so we do expect that to start to have an impact later in our fiscal year I would expect to continue to see that across our competitors, but again I don't want to speak for them to take a lot of this depends on how long this short supply chain shortage lasse.
Speaker 16: And as well, our component manufacturers, how they approach the market as well.
And as well our component manufacturers, how they approach the market as well.
Okay. Thank you.
Thank you.
Thank you.
Speaker 1: Our next question comes from the line of Sidney Hull with Dutcher Bank, your line is open.
Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open.
Speaker 17: Thanks for taking my question. I have a question on the free cash.
Thanks for taking my question I have a question on the free cash flow. So based on your full year guidance. It would imply about 60% of the full year free cash cash flow will happen in the second half of the fiscal year.
Speaker 17: So, based on your four-year guidance, it would imply about 60% of the four-year free cash flow will happen in the second half of the fiscal year. That's below the five-year average of about 70%, it's definitely lower since maybe 2015. First of all, is my math right? Second, if so, anything you would highlight that may change this cash flow seasonality and particularly do you expect supply constraint being a factor in terms of cash flow generation? Thanks.
Below the five year average call. It about 70% is definitely lower since maybe 2015 first of all is my math right second if so anything you would highlight that may change this cash flow seasonality and particularly do you expect supply constrained being a factor in terms of cash flow generation.
Alright, Hey, awesome. Thanks for the cash flow question.
Speaker 4: Hey, awesome. Thanks for the cash flow questions. So yeah, let's talk about it. And hey, let's start at the top. We did guide for free cash flow $1.2 billion or greater. So let's do operating cash first. That would imply for your operating cash of call it 1.425 billion. To your point, we've already generated 540 million.
So, yes, let's talk about it.
Hey, let's start at the top we did guide for free cash flow $1 2 billion or greater so, let's do operating cash burn that would imply full year operating cash flow of call. It one $4 billion to $5 billion to your point, we've already generated $540 million.
So what you saw in Q2 was a record for us low DSO, we had a great collections quarter in Q2 that did pull forward. Some collections into Q2. So as we look at the second half of 2022 you should expect to see the seasonality as you called it would be a little bit lower in the second half.
So what you saw in Q2 was a record for us low DSOs. We had a great collections quarter in Q2. That did pull forward some collections into Q2. So as we look at the second half of 22, you should expect to see the seasonality as you called it, be a little bit lower in the second half because of the really strong Q2, still getting to at least that 1.4 billion operating cash number.
Because of the really strong Q2 still getting to at least at that $1 4 billion operating cash number.
On your question about supply chain, we have baked in an assumption that we will continue to invest in inventory you saw that our inventory turns went from 17 in Q1 to 13 in Q2 that was planned we talked about that with you folks as well for the last couple of quarters. So we have baked that into our assumption.
As on your question about supply chain, we have baked in an assumption that we'll continue to invest in inventory. You saw that our inventory turns went from 17 in Q1 to 13 in Q2. That was planned. We talked about that with you folks as well for the last couple of quarters.
So we have baked that into our assumption. Going forward, I think you should expect to see kind of the seasonal averages return. Again, it was just in a very, very good Q2 from a collections perspective, and I wouldn't expect that to continue into the future. So again, thanks for that question. Hopefully that answers your question.
Going forward I think you should expect to see kind of the seasonal averages return again. It was just in a very very good Q2 from a collections perspective, and I wouldn't expect that to continue into the future. So again. Thanks for that question hopefully that answers your question.
Thank you.
Thank you.
Our next question comes from the line of Neil Joshi with Northland Capital. Your line is open.
Our next question comes from the line of Nehal Shofsky with Northland Capital. Your line is open. Yeah, thanks and congrats on the strong public cloud services. That's great to see. On the overall business, buildings did decelerate pretty materially on a year-over-year basis. Can you talk to what were the dynamics behind that and then why do you say you feel good about the pipeline given the buildings?
Yeah, Thanks, and congrats on a strong public cloud services Thats great to see.
On the overall business billings did decelerate pretty materially on a year over year basis.
Can you talk to what were the dynamics behind that and then why do you say you feel good about the pipeline, giving given the billings.
Sure. So thanks for that and so as we talked about a Q1 billings grew by about 20% in Q2 billings grew by about 7% keep in mind.
Sure. So thanks for that, Nahal. So as we talked about in Q1, billings grew by about 20%. In Q2, billings grew by about 7%. Keep in mind that so on a fully on a year to day basis, right around 12 to 13% growth, that number is going to jump around a little bit each quarter, based on the dynamics of deferred revenue, as well as as FX as well. So we calculate billings as
So on a fully on a year to date basis right around 12% to 13% growth that number is going to jump around a little bit each quarter based on the dynamics of deferred revenue as well as FX as well so we calculate billings as net revenue in the quarter and then quarter.
net revenue in the quarter and then quarter over quarter change in deferred excluding the impact of FX on in deferred so that's going to move the numbers a little bit there's a little bit of seasonality to that.
Over quarter change in deferred excluding the impact of FX and deferred so that's going to move the numbers a little bit there is a little bit of seasonality to that so looking forward. We would expect to continue to see billings overall grow at or above the revenue number and again I would encourage you to take a look.
So looking forward, we would expect to continue to see billings overall grow at or above the revenue number. And again, I would encourage you to take a look at the year to date number or the trailing 12 months.
At the year to date number or the trailing 12 months billings will jump around a little bit based on the components of our of our billings mix matters as well as seasonality.
Billings will jump around a little bit based on the components of our of our billings, mixed matters as well as seasonality. Okay.
Okay, great. Thank you.
Thank you. Thank you.
Our next question comes from the line of Ramsey Mohawk with Bank of America. Your line is open.
Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is open.
Hi, yes. Thank you.
When you guide for Q3 and Q4, maybe you can express this a little differently on the puts and takes from Q3 to Q4 trajectory. Are you expecting component issues to be resolved through Q3 and that drives better seasonality Q3 to Q4? Or is there something else, like a better pipeline, or for Q4, Mike, you also mentioned increased pricing as well. So maybe you could bridge Q3 to Q4. That would be helpful.
On your guide for Q3, and Q4, maybe at an asbestos a little differently on the puts and takes from Q3 to Q4 trajectory are you expecting component issues to be resolved through Q3 and that drives better seasonality compared to Q4.
Is there something else like a better pipeline R. R.
Q4, Mike you also mentioned increased pricing as well so maybe you could bridge Q3 to Q4.
That'd be helpful.
Q4 is the finish of our fiscal year as you might know we run a semiannual plan and so.
You know, Q4 is the finish of our fiscal year. As you might know, we run a semi-annual plan. And so, you know, we had a strong Q2 and we'll have a strong Q4. So that reflects the seasonality in our business.
We had a strong Q2 and we'll have a strong Q4, so that reflects the seasonality in our business driven by our compensation planning as well as customer bye.
driven by our compensation planning as well as customer buying
through the year. I think with regard to margins, I'll have Mike cover that in terms of.
Through the year I think with regard to margins I'll have Mike cover that in terms of.
you know, the supply chain and the margin profile, I would just tell you, we do not expect a near term resolution of the supply situation.
The supply chain and the margin profile I would just tell you we do not expect a near term resolution of the supply situation. What we have seen through excellent execution with our teams and our partners is that component costs for the full year are largely flat year on year there are some.
What we have seen through excellent execution with our teams and our partners is that component cost.
for the full year are largely flat year on year. You know, there are some elements of the components that are up year on year and others that are down year on year. But as we have said before, component costs are largely
So the components that are up year on year, and others that are down year on year, but as we have said before component costs are largely.
you know, flagged on a year-on-year basis.
Flat on a year on year basis, I think what we see is really the expedite and freight costs that are.
I think what we see is really the expedite and freight costs that are
you know, at a premium now. And, you know, that is reflected in the pricing lift.
At a premium now and.
That is reflected in the pricing lift that we have implemented at the start of November and which will take some time to flow through our system I'll, let Mike characterized.
that we have implemented at the start of November and which will take some time to flow through our system. I'll let Mike characterize it.
Great. Thank you, George. And just to add to that, on the specific question, Wamsi, if you go from Q3 to Q4, a couple of things to keep in mind. One is, hey, the services revenue will continue to grow. You're going to see cloud support, hopefully professional services, that adds to that quarter on quarter growth.
Thank you George and just add to that.
On the specific question <unk>. If you go from Q3 to Q4, a couple of things that keep in mind. One is hey, the services revenue will continue to grow youre going to see cloud support hopefully professional services that adds to that quarter on quarter growth.
As we look at Q4 versus Q3, to Georgia's point, always want our seasonally high quarter.
As we look at Q4 versus Q3 to Georges point always our seasonally high quarter.
we're doing a lot of work not only in supply chain, but in engineering and other things to make sure that we can deliver as much as we can in Q4. And then certainly the price increase, it'll take a little bit of time to work its way through the system. So add all those together. And that's what added up into our guidance, our implied guide for Q3 and Q4.
We're doing a lot of work not only in supply chain, but in engineering and other things to make sure that we can deliver as much as we can in Q4, and then certainly the price increase that will take a little bit of time to work its way through the system. So add all those together and that's what it added up into our our guidance our implied guide for Q3 and Q4.
Thank you.
Thank you.
Thank you.
Our next question comes from the line of Amit Daryani with Abicor. Your line is open.
Our next question comes from the line of Amy <unk>.
<unk> with Evercore Your line is open.
Yes, perfect. Thank you and thanks for taking my question. I guess my question is around the cloud services business. George, I was just wondering how, when you think of the AWS partnership, and I know it's somewhat in the early stages, how would you stack that up against Azure at this time? Just anything in terms of...
Perfect. Thank you and thanks for taking my question.
I guess, the question's around the cloud services business.
I was just wondering how when you think of the AWS partnership.
We're in the early stages, how would you stack that up against the Euro at this time just any anything in terms of number of pilots are the workloads that you're doing with AWS right now versus what you did with Azure and then really when I think about the $1 billion roadmap that you had given us a while back.
number of pilots or the workload that you're doing with AWS right now versus what you did with Azure. And then really when I think about this billion dollar roadmap that you've given us, you know, a while back.
Did you envision that AWS partnership, especially how fully integrated and that App is on the console and the fact that AWS is proactively selling that off did you envision the oldest and $1 billion roadmap or is this incremental to that narrative.
Did you envision an AWS partnership, especially how fully integrated NetApp is on the console and the fact that AWS is...
who are actually selling that app. Did you envision all this in the billion dollar roadmap or is this incremental to that narrative?
Listen I think first of all AWS and Azure have enormous scale and reach into the customer base.
Listen, I think first of all, AWS and Azure have enormous scale and reach into the customer base.
These are trillion-dollar corporations with enormous impact on the IT market, and we are honored to work with both of them. They have different approaches to the customer base, and different ways, and different strengths, and so we're excited to work with Amazon and Microsoft. I think the overall opportunity set reflects their scale in the market. Amazon has massive.
These are trillion dollar corporations with enormous impact on the market and we are honored to work with both of them. They have different approaches to their customer base and different ways and different strengths and so we're excited to work with you know Amazon and Microsoft I think the old.
There are opportunities that reflects their scale in the market right. So Amazon has massive.
you know, market presence and market share. I think in the file space, they are a very large part of the files market. So the fact that we have a play with them gives us enormous scale into the file storage market. I think, you know, we are
Market presence and market share I think in the final stage. They are a very large part of the files market. So the fact that we have a play with them gives us enormous scale into the file storage market. I think you know we are.
From a execution standpoint listen we've learned a lot over the last few years, we know what it takes to scale a business.
From an execution standpoint, listen, we've learned a lot over the last few years. We know what it takes to scale a business, and we've done that in partnership with Microsoft. We continue to scale that with innovation and co-engineering and, you know, go-to-market. But we are also taking some of those lessons learned into how we can scale other services more quickly. With regard to the billion-dollar plan, listen,
And we've done that in partnership with Microsoft We continue to scale that with innovation in co engineering and go to market, but we're also taking some of those lessons learned into how we can scale. Other services more quickly with regards to the billion dollar plan listen we.
We always believed that we would, you know, be working with multiple hyperscalers.
<unk> always believed that we would be.
Working with multiple Hyperscale.
You know, I don't think you should assume that we were cocky enough to say that we had that in the bag, but we had that as part of our roadmap.
I don't think you should assume that we.
We're causing enough to say that we have that in the bag, but we have data as part of our road map and we're honored to have the partnership with AWS.
And we're honored to have the partnership with AWS. I think, you know, as I said, I feel very, very good about where we are in our roadmap to a billion dollars. We'll tell you more about the timing and the mix and all of that when we get to analyst day, right? But I feel really good about where we are.
<unk>.
I said I feel very very good about where we are in our road map to $1 billion.
We'll tell you more about the timing and the mix and all of that when we get to analyst day, right, but I feel really good about where we are.
Thank you.
Our next question comes from the line of Ananda Baruah with loop capital. Your line is open.
Our next question comes from the line of Nanda Barah with Luke Capital. Your line is open.
Hey, good afternoon, guys. Thanks for taking the question.
Hey, good afternoon, guys. Thanks for taking the question. Yeah, George and Mike, I guess.
Yeah, George and Mike I guess.
Mine's on the business model. How do you guys think about the interplay or the trade-off maybe, interplay slash trade-off?
On the business model, how do you guys think about the interplay and the tradeoff Navy interplay flash tradeoff now that.
you know, now that the margins continue to expand, I think you guys are actually absorbing like 100 to 200 basis points of off-margin.
The margins continue to expand I think you guys are actually absorbing like 100 to 200 basis points of op margin.
So to sort of expand supply chain, yes.
you know, sort of expense, supply chain, you know, kind of components, et cetera, which really has the margins already be in the mid-20%, and of course, 25%, 25% or so. How do you guys think about the interplay between investing in growth, investing in M&A, as the margins continue to go up, you know, seemingly towards 30%? Appreciate it, thanks.
And a component et cetera, which really has the margins already in the mid 20% and.
25, 25% or so how do you guys think about the interplay between investing in growth investing in M&A as the margins continue to go up.
Towards 30%.
Appreciate it thanks.
Sure. So a great, great question. So as we talked about, for the last couple of years is, our goal is to continue to invest in the business to drive growth.
Sure So hey.
Great great questions. So as we've talked about.
For the last couple of years as our goal is to continue to invest in the business to drive growth.
Being fully cognizant of.
being fully cognizant of investing in operating expense and COGS at a lower rate than revenue to drive up margins. You saw an incredible really operating leverage so far this year, and if you take the midpoint of the guide
Staying in operating expense and Cogs at a at a lower rate than revenue to drive up margins you saw an incredible really operating leverage so far this year and if you take the midpoint of the guide revenues up almost $550 million year over year on a 118 or 120 pick your favorite number opex number.
Revenue is up almost $550 million year-over-year.
on 118 or 120 pick your favorite number op ex number. So we're continuing to drive really good scale while investing in the business. We will continue to do that going forward.
So we're continuing to drive really good scale, while investing in the business. We will continue to do that going forward very much focused not only on where we need to invest but what is that return. That's why we're so focused on cloud as well as incremental sales and product development. So you should expect to see us continue to.
very much focused not only on where we need to invest, but what is that return? That's why we're so focused on cloud as well as incremental sales and product development. So you should expect to see us continue to invest going forward. Now, outside of
To invest going forward now outside of Opex, we've talked about it before we will continue to be active in M&A and we're still allocating at least 30% of our free cash flow plus we have a very nice cash balance and a lot of flexibility on the balance sheet to fund acquisitions. So yes, you should expect to see us continue.
We've talked about it before we will continue to be active in M&A and we're still allocating at least 30% of our free cash flow plus we have a very nice cash balance and a lot of flexibility on the balance sheet to fund acquisitions. So yeah, you should expect to see us continue
Two.
increase OpEx to drive growth as well as be active in the M&A market.
Increased opex to drive growth as well as be active in the M&A market.
So it sounds like opportunity to keep accelerating revenue growth expanding margins and get bigger in M&A in the free cash flow goes up like that.
So it sounds like opportunity to keep accelerating revenue growth, expanding margins, and get bigger in M&A as the pre-cash flow goes up, Mike.
And doesn't that sound like fun? That's exactly what we're focused on. Thank you guys. Thank you.
And doesn't that sound like fun, that's exactly what we're focused on.
Thanks, guys.
Thank you.
Thank you.
Our final question comes from the line of some meat Chatterji with J P. Morgan Your line is open.
Our final question comes from the line of Samit Chatterjee with J.P. Morgan. Your line is open.
Hi, Thanks for taking my question I guess my question was just following up on the pricing discussion earlier, you mentioned you've taken some pricing.
Hi, thanks for taking my question. I guess my question was just following up on the pricing discussion earlier. You mentioned you've taken some pricing.
and the flow-through would take a bit of time, just how should we think about the stickiness of those price increases? Are they, as supply chain kind of eases, do those price increases get competed away? And I'm just trying to think how much of a benefit can they be
And the flow through would take a bit of time just.
How should we think about the stickiness of those price increases.
The supply chain kind of eases to those price increases we have competed away and I'm just trying to think how much of a full benefit can be.
like the next fiscal year as they take time to flow into the P&L or how sticky can they
The next fiscal year as they take time to flow into the P&L or how sticky can be thank you.
Yes, great Great question. So as you look at the rest of this fiscal year and I'll work. It into next year, you Shouldnt really expect to see much of a benefit in Q3.
Yeah, great, great question. So as you look at the rest of this fiscal year, and I'll work it into next year, you shouldn't really expect to see much of a benefit in q3. There's a lot of a lot of quotes in flight, it takes a while for that to take effect.
You know a lot of logical sense why it takes a while for that to take effect. So we expect to start to see some of that in Q4 as we roll into 'twenty three I think it depends on a lot of things. They earlier question on what are your competitors doing whats the overall pricing environment, what happens with component costs and freight I think theres a lot in that.
So we expect to start to see some of that in Q4. Hey, as we roll into 23, I think it depends on a lot of things. The earlier question on what are your competitors doing? What's the overall pricing environment? What happens with component cost and freight? I think there's a lot in that for us to be able to say, hey, we think X amount sticks.
For us to be able to say, hey, we think X amount sticks, certainly we are very disciplined around our pricing and we want to ensure that we are doing the right things for our customers. While we are taking care of covering our cost as well so we'll be very focused on it.
Certainly, we are very disciplined around our pricing. And we want to ensure that we are doing the right things for our customers while we are taking care of covering our costs as well. So we'll be very focused on it. We'll talk to you as we guide the next year on the impact of that. But I did want to be clear just on the impact of 22.
We'll talk to you as we guide to next year on the impact of that but I did want to be clear just on the impact of 'twenty two.
Thank you.
You.
Yeah.
Thank you.
We have delivered a solid first half with great operating leverage in our business model as we grow revenues and margins were gaining share in the key markets of all flash and object storage, while rapidly scaling our public cloud business.
We have delivered a solid first half with great operating leverage in our business model as we grow revenues and margins.
We're gaining share in the key markets of all flash and object storage while rapidly scaling our public cloud business.
The innovation we bring to market and our unique and deep cloud partnerships position us well to execute against the significant opportunity ahead.
The innovation, we bring to market and our unique and deep cloud partnerships.
Physician us well to execute against the significant opportunity ahead.
We increased our full year guidance for revenue, EPS, and public cloud ARR, driven by the outperformance in Q2, the addition of CloudChecker, and a healthy demand pipeline for the second half of our fiscal year. Thank you. I look forward to speaking with you all again next quarter and at our upcoming Investor Day in March.
We increased our full year guidance for revenue EPS.
And public cloud.
Driven by the outperformance in Q2.
The addition of cloud checker and a healthy demand pipeline for the second half of our fiscal year.
Thank you I look forward to speaking with you all again next quarter.
At our upcoming Investor day in March.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.