Q3 2022 NetApp Inc Earnings Call
Good afternoon, ladies and gentlemen, welcome to the third quarter of fiscal year 2022 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and.
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.
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.
During today's call, we will make forward looking statements and projections with respect to our financial outlook and future prospects such as our guidance for fourth quarter and fiscal year 2022, our expectations regarding future revenue profitability and shareholder returns the value we bring to customers our ability to drive continued growth in both.
Our hybrid cloud and public cloud segments, and our ability to manage through the current supply chain environment, all of which involve risk 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 the resulting supply chain disruptions and the I T capital spend.
The environment 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 forms 10-Q and 10-K, including in the management's discussion and analysis of financial condition and results of operations and risk factors section.
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.
Now turn the call over to George.
Thanks, Chris Good afternoon, and welcome everyone to our Q3 FY 'twenty two earnings call we.
We delivered another outstanding quarter building on the momentum we've had in recent periods demand for our solutions is strong and powered by the alignment of our differentiated technology portfolio with customer priorities.
In Q3, our focused execution delivered.
Double digit revenue growth.
Led by the impressive performance of our public cloud services and all flash array businesses.
Record high gross margin dollars operating income and earnings per share.
<unk> plays a critical role in helping customers achieve their business and cloud transformation goals I am pleased that our differentiation here continues to receive third party validation by industry leaders independent analysts in existing and new customers.
We were recognized by Amazon Web services for our achievements as an AWS partner.
Netapp was named the <unk> 2021 AWS independent software vendor design partner of the year U S for the jointly engineered and natively integrated Amazon there for sex or net up on tap service.
Additionally, giga AUM called out net app as the only vendor with a multi cloud strategy and execution that translates to a continuous data management plane across clouds and locations.
Comprehensive enterprise grade features set and.
Both deployment options.
We were listed as a leader in three Giga AUM readout reports cloud file systems.
Primary storage for large enterprises and enterprise scale out file systems now.
Not only are we a leader in each category.
We are the only vendor to lead in all three.
This recognition spotlights the value, we bring to our customers on their cloud and digital transformation journeys.
Customers are also endorsing our value, creating strong demand for solutions in both our hybrid cloud and public cloud segments.
Growth in our hybrid cloud segment was driven by continued strength in object storage and all flash arrays.
Our all flash array business hit another milestone in Q3 with a record high annualized run rate of $3 $2 billion, an increase of 23% year over year.
All flash array penetration of our installed base.
Up another points to 31% of installed base systems, giving us substantial headroom to continue to help existing and new customers modernize their storage environments with cloud connected flash arrays.
We further enhanced our position with the introduction of the <unk>, eight 900, which delivers unified support for file block and object protocols built in data protection with cutting edge anti ransomware capabilities.
And the high performance and resiliency required to support the most critical business workloads.
Public cloudy or are $3 million to $469 million, an increase of 98% year over year, including the benefit from the cloud Checker acquisition, which closed early in Q3.
Public cloud dollar based net revenue retention rate remains healthy at 169% as customers increase their usage of our public cloud services.
And adopt new products.
The expanded market reach from our cloud partners and the broadening participation of our field sales organization has delivered outstanding performance in our public cloud segment. This year, which puts US well ahead of our plan to achieve $1 billion in air are in fiscal year 'twenty five.
We uniquely have fully integrated services with all the major public cloud providers I am pleased with the level of engagement from our cloud partners.
And with the performance of our cloud storage services.
As your net up files again grew ahead of plan.
Cloud volumes service for Google Cloud is ramping nicely.
And while still very early days, we are seeing lots of proofs of concept and activity with AWS FSX for Netapp on tap.
Our differentiated cloud ops portfolio for multi cloud infrastructure management is also growing well led by spot and cloud insights.
It is expanding our addressable market and opening opportunities with new buyers at existing customers and with new customers.
As we help them reduce the cost and complexity of managing their rapidly growing cloud environments.
We are delivering innovation at cloud speed and enhancing our solutions to address the needs of cloud native.
And born in the cloud applications.
We've made cloud backup kubernetes of wear and broaden spot ocean with automated cloud infrastructure and application management for Apache Spark.
And Ocean C D, enabling faster deployment of kubernetes applications with end to end visibility and management.
As I mentioned earlier, we closed the cloud checker acquisition.
Early in Q3 cloud checker complements the spinoffs capabilities of spot with the multi cloud reports analytics and governance needed to plan manage and optimize cloud costs to ensure organizations get the most out of their cloud investments.
We continue the rapid pace of organic and inorganic innovation with today's announcement of the acquisition of filament.
Filament extends our leadership in cloud operations.
Adding filaments cloud automation technology to the spot platform will make it easy for customers to integrate spot solutions with their existing tools processes and infrastructure cold.
This will accelerate their ability to take advantage of spot suite of capabilities for understanding and optimizing their cloud infrastructure I'm excited to welcome the filament team do net out.
As I've said many times our strategy to help customers deal with the challenges of managing data and applications and hybrid multi cloud environments is helping us expand our business by winning new customers and displacing the competition.
Our global third party logistics company chose FSX for Netapp on tap to.
To host data migrated from Nucleonics systems and its data centers.
They chose Netapp based cloud services for our resiliency cost efficiency and multi protocol support.
This win marks a new logo for us and has already created additional opportunity for cloud manager and cloud insights.
Another new customer win came from a multinational energy infrastructure company, who chose <unk> cloud volumes on tap in Azure to migrate workloads away from on premises Dell systems.
They are now considering replacing expired Dell systems with on premises Netapp systems to make it easier to move data across environments in the future.
We had a first time win at an international government agency, which sparked echo to optimize its multimillion dollar cloud spend.
This win becomes a lighthouse reference account for us, which we can leverage to reach into other related agencies.
In summary, our strong Q3 results underscore our unique position in solving organizations most significant challenges in both cloud native in traditional applications.
On premises and in hybrid multi cloud environments.
First.
We help customers simplify and modernize existing data centers and deploy traditional applications quickly and confidently.
We help customers adopt modern application architectures like kubernetes and micro services for new workloads.
And deployed data rich applications like machine and deep learning.
And third we help customers optimize cost performance availability and security for applications and associated infrastructure across multiple clouds.
The complexities created by rapid data growth.
Multi cloud management and the adoption of next Gen technologies creates a sizable opportunity for us with focused execution I am confident in our ability to capture that opportunity and deliver continued growth.
We're holding an investor day on March 22nd.
We will talk more about our growth opportunity and our clients to drive shareholder value you can register at investors Dot net dot com. If you have any questions. Please reach out to the IR team.
Before I turn the call over to Mike to walk you through the numbers I wanted to take a moment to welcome harp Bela to net up as our chief product Officer.
<unk> brings with him more than 25 years of experience building industry defining software categories and cloud services.
I also want to thank Brad Anderson for his leadership and wish him well in his retirement with that I'll hand, it over to Mike.
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.
Number one Q3 was another strong quarter with all time company highs in gross profit dollars operating income and EPS as our business model continues to show significant operating leverage as we grow our operating profitability and margins.
Number two our cloud business had another outstanding quarter. We clearly are solidly ahead of our original plan to hit our $1 billion a L. Our target in fiscal 'twenty five.
Number three we are prioritizing meeting as much customer demand as possible as we navigate near term component shortages and expect revenue to continue to be constrained in Q4.
And number four we are increasing our full year guidance for revenue EPS and public cloud are are driven by the outperformance in Q3, and a very healthy demand backdrop for Q4.
Now to the details in fiscal Q3, we delivered strong revenue gross margin and operating leverage across the entire business outstanding execution by the Netapp team yielded Q3 billings of $1.76 billion up 10% year over year.
Revenue came in at $1.61 billion also up 10% year over year.
Our solid Q3 results were driven by continued strong demand across both our hybrid cloud and public cloud segments.
Hybrid cloud segment revenue of $1.5 billion was up 6% year over year.
Within hybrid cloud, we delivered product revenue growth for the fourth consecutive quarter and expect this momentum to continue into Q4 and throughout fiscal 'twenty three.
Product revenue of $846 million increased 9% year over year.
Consistent with the trends we've seen over the last two quarters software product revenue of $507 million increased 18% year over year, driven by the ongoing mix shift towards our all flash portfolio.
Total Q3 recurring support revenue of $586 million increased 3% year over year.
As George highlighted our all flash revenue run rate, which includes both product and support revenue eclipsed $3.2 billion for the first time in the company's history and was up 23% year over year.
Public cloud a our exited Q3 at $469 million up 98% year over year, and 21% sequentially driven by strong growth in Azure Netapp files spot and cloud insights with cloud checker contributing $35 million.
N E R R.
Organic public cloud AOR, excluding cloud checker was $434 million in Q3 up 83% year over year.
Public cloud revenue recognized in the quarter was $110 million up 100% year over year and 26% sequentially.
The growing scale of our public cloud portfolio continues to positively impact the overall growth profile of net out delivering four of the 10 points in revenue growth.
Recurring support in public cloud revenue of $696 million was up 11% year over year constituting 43% of total revenue.
When combined software product revenue recurring support and public cloud revenue totaled $1.2 billion. Another company high and increased 14% year over year, representing 75% of total revenue up from 72% in Q3 'twenty.
One.
We ended Q3 with $4 billion in differed revenue an increase of 4% year over year Q3 marks the 16th consecutive quarter of year over year deferred revenue growth, which is the best leading indicator for continued recurring revenue growth.
Total gross margin was 67%, reflecting the value of our software and public cloud portfolio.
Total hybrid cloud gross margin was also 67% in Q3.
Our hybrid cloud segment product gross margin was 52%, while our growing 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 as we highlighted last quarter, 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.
Sure.
The introduction of S. S X for on tap with AWS and the addition of cloud checker to the spot portfolio, both of which our software offerings support our long term margin goal.
Q3 highlighted the tremendous leverage in our operating model with operating margin of 25%, an all time company high.
E. P. S of $1.44 was up 31% year over year and also represented a new quarterly record for the company.
Cash flow from operations was $260 million and free cash flow was $199 million.
During Q3, we repurchased $125 million in stock and paid out $111 million in cash dividends.
In total we returned $236 million to shareholders.
Presenting a 119% of free cash flow.
We closed Q3 with $4.2 billion in cash and short term investments.
As many companies have highlighted during this earning season the dynamic supply chain situation continues to cause disruptions across the technology ecosystem.
These headwinds were further exacerbated by Amazon in.
In addition to a worsening freight and expedite environment we.
We also experienced component supplier decommit beginning in the second half of Q3, which required us to purchase components in the open market at significant premiums we.
We were faced with the short term decision of supporting the robust customer demand versus optimizing near term product margin.
Net app has consistently focused on being a great long term strategic partner to our loyal customer base, especially throughout the last two years of Covid consistent with this philosophy, we made the strategic decision to prioritize meeting customer demand with the trade off being lower product margins.
In the short term.
To be clear the <unk>.
Reising and availability of our core HDD and SSD components are stable and are not a contributor to the near term headwinds.
With these supply chain headwinds as a backdrop I want to highlight two critical takeaways number one we believe these cost headwinds are temporary in nature and number two we expect that Q4 will be the trough for product margins.
As you all know the timing of getting completely through the supply chain challenges remains fluid.
But we do expect cost improvements in the coming quarters as the supply headwinds begin to ease throughout the first half of fiscal 'twenty three.
We also expect our recent price increases to help further stabilized product margins in the coming quarters.
As a supply base for components and airline cargo normalized we are confident that product margin will return to its structural level in the mid fifties.
Particularly as our mix continues to trend towards all flash.
We do anticipate the supply chain challenges do impact our product revenue and product gross margins in Q4.
The supply chain headwinds and our ongoing actions to mitigate them have been factored into our Q4 and updated full year guidance.
We expect Q4 net revenues to range between 1.635, and $1.735 billion, which at the midpoint implies an 8% increase year over year.
We anticipate consolidated gross margin in Q4 to be approximately 64%.
The near term margin headwind is being driven by an incremental $50 million to $60 million of premiums, we expect to incur an open market component purchases.
Consistent with our philosophy and culture, we actively prioritize being a great strategic partner to our loyal customers many of which have been with us for over 25 years and feel great about the discipline and execution. The netapp team has displayed in managing through the current supply situation.
We expect operating margin to be approximately 22% in Q4, which would have been closer to 25% without the recent supplier decommit.
Assumed in this guidance, our Q4 operating expenses of $705 million to $715 million driven by continued investment in revenue generating activities, including expanding our public cloud portfolio and investments in both our cloud and customer success.
Sales teams.
We anticipate earnings per share for Q4 to range between $1 21, and $1 31 per share.
Assume then our Q4 guidance is our expectation that other income and expense will be a negative $15 million and our tax rate will be approximately 18%.
Our Q4 guidance implies revenue growth of approximately 10% year over year for fiscal 'twenty two.
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.
As a result, we are raising the guidance on our public cloud era, with a new range of $525 million to $545 million exiting fiscal 'twenty two.
Please note that filament is a tech and talent acquisition and will not contribute any ALR in Q4.
The implied forecast for total gross margin is approximately 67% for the full year, our disciplined management of the business. Despite the backdrop of supply cost headwinds has allowed us to reaffirm our full year operating margin guidance of 23% to 24%.
We are raising our fiscal 'twenty to EPS guidance, we now expect EPS to range between $5.07 and $5.17, representing 26% year over year growth.
At the midpoint.
In closing I want to thank the entire netapp team for the outstanding execution and delivering strong Q3 results.
We will continue to be disciplined on long term minded as we manage through the temporary supply challenges to meet as much customer demand as possible.
Given the current environment, George and I are incredibly proud that the team stayed focused on our strategic priorities and have collectively leaned into executing against a tremendous growth opportunity. We see over the next three to five years as.
As George mentioned, we plan to host an Investor day on March 22nd where we will further discuss the long term growth potential and value drivers for our shareholders customers and partners.
I'll now hand, the call back to Chris stop on the call for Q&A Kris.
Thanks, Mike, Let's open the call for questions operator, let's begin the Q&A.
Thank you.
Mind here to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our first question comes from Karl Ackerman with Cowen You May proceed with your question.
Yes. Thank you.
First question for Mike If I may.
You spoke about how revenue is constrained by component shortages in Europe fiscal Q4.
But I wanted to better understand how that may be impacting your deferred revenue growth, which it has moderated to 4% growth and so I was hoping you could describe a little bit more detail why that may have slowed in and how we should think about the trajectory on a go forward basis.
Sure. So thanks for the question Charles on Theres, two parts of that so the first thing is.
When revenue is constrained and we're not able to ship and invoice. It does not go into deferred revenue. So it does not go on the balance sheet until its actually invoiced. So we're not able to ship.
Michael on the balance sheet.
On deferred revenue against a super important question I'm going to tie in all sorts of support revenue when you look.
The year over year growth for the last seven quarters.
Total deferred revenue.
And total support revenue.
The average somewhere between call it 4% to 6% when you take into account the impact of FX. So to be more specific in Q3 and Q4 of last year Q1 of this year.
So two to three percentage points this quarter was actually.
Wind a one percentage point, so when you normalize deferred revenue and support revenue and those two are going to go almost hand in hand for the FX impact youre going to get between four 5%, 6% on an annual basis for all of those so hopefully that answers. The question again, if we don't ship it doesn't go into.
Deferred and then deferred and support also had been impacted by FX and they would largely move together.
Thanks for the question.
Thank you I'll hop back in queue.
Thank you. Our next question comes from meta Marshall with Morgan Stanley You May proceed with your question.
Great. Thanks.
Just on the supply chain impact I wondered if you could give any sense of type of product that was impacted more and maybe just a split between what is kind of what you would call free versus underlying input.
Kind of a difference in that the headwind that you're seeing and whether it's kind of giving you more visibility as you look into kind of the next fiscal year or whether you're seeing kind of order activity pick up.
As our customers try to.
Sure availability thanks.
First of all with regard to the large items in our bill of material, meaning processors DRAM.
Hard drive solid state storage, we have a very well managed supply chain and have seen continued support from our leading suppliers.
Most of our storage media are multi sourced as you would expect.
And we have had really good engagement from them.
The places where we have seen.
Supplier Decommit have been mostly in analog semiconductors. These are low volume low value components that are used across a lot so far.
Product families for.
Things like voltage stabilization and other kinds of analog functions in those systems. So they are broad based across our systems portfolio and which is why we've had to resort to in some cases open market purchases to offset constrained supply or supplier.
The commits that we saw in the middle of Q3 with regard to the logistics as you all know cargo.
Air freight has been a major source of distribution of both parts and finished products and airframe was impacted by omicron. We're hopeful that we can see a steady recovery as we head into fiscal year 2003 of both.
Parts availability and logistics constraints and I can certainly share with you the.
Multistep action plan that we have taken that includes engineering programs that includes strong supplier engagement that includes pricing uplifts and discount management as well as you know closed customer engagement.
Through this process.
Great. Thank you.
Thank you. Our next question comes from Mehdi Hosseini with.
Besides <unk> you May proceed with your question.
Yes. Thank you Mike I could have two questions first one for Mike you talked about April to Mark the trough in operating margin does that mean, despite trend into Q1 July quarter. The mix will help you.
We should see margin expansion and then on just a quick follow up on all flash array, how should I think about the mix of flash array.
Between on.
On crime or enterprise customers versus.
Cloud and I'm, assuming that the cloud will be considered near Tegra customers for you or fluctuate.
Hey, Matt it's Mike.
Just wanted to flip back to your question and as you can.
The lower operating margin in Q4, which was driven almost entirely by the premiums.
And what was the question on the mix going into the July quarter.
I'm, assuming that July would follow some sort of a seasonal trend revenues down but.
You would benefit from the mix so that your operating margin would rebound despite <unk>.
Lower revenues.
Yes, so we haven't guided fiscal 'twenty three yet we'll talk about that on the next call well. We would tell you is that we wouldn't expect any change in our seasonality from Q4 to Q1, that's been relatively consistent but one thing I'd ask you to think about it as well going into Q1 and both George.
And I talked about it is the growth in cloud is starting to have a much bigger impact positively on revenue growth as well as gross margins, which goes to op, Inc. So that would be the one area I would ask you to consider as you do your models for next year and again I won't guide Q1 on the Q4 call.
Great.
Go ahead.
That would just repeat the question diversification of all flash array customers.
Yes, with regard to our customer footprint.
Winning with multiple elements of our portfolio all flash arrays continue to be well ahead of market growth rates, which is a clear indication that we are gaining share and we are doing that by both winning new workloads in existing customers as well as new customers are cloud portfolio.
As I mentioned with an example on our call gives us strength not only net new to netapp customers on the public cloud, but also an opportunity to displace their previous suppliers, India data centers as the harmonize their cloud environment with their data center environment and our cloud.
Ops portfolio spot cloud insights cloud checker has been a source of great new customer additions.
Thank you.
Thank you. Our next question comes from <unk> Mohan with Bank of America. You May proceed with your question.
Yes. Thank you.
George I was wondering about if you could talk about the confidence in Q4 margins being being a trough what signs are you seeing that is.
You know, making you think that that specifically and it appears that you're not baking in headwinds from NAND and HDD and you called out good good supply relationships there but.
It seems as though some of these are are running into some issues as well and you.
If you could comment on.
If those had if those startup I call them headwinds is it right to understand that that's not contemplated.
To create incremental margin pressure and I will follow up.
Okay, Let me take that in two parts. So let me first talk about the NAND and SSD market and then talk about the rest of the supply base, if thats alright sure on that.
On the NAND side, we obviously have strong supplier relationships across the memory industry and are purely multi source for all elements of our supply portfolio and ssds with regard to the recent incidents impacting one of the members of that industry ecosystem.
As you know are not our leading supplier for SSD and so we feel good about the work that we've done.
There may be some increases in prices in ssds, but our engineering and manufacturing team has done a super job and we expect that for the go forward.
Total storage media cost.
We'll be flat year on year.
So we feel good about that offsetting certain elements of the supply base with other elements of the supply base.
Regard to the broader.
<unk>.
Why do we believe product gross margins are trough in Q4, there's been a lot of work that we have undertaken.
To deal with the supply constraints clearly we have most of the large volume items and the high dollar items in our supply base are well advantaged and we do not see them impacted by the supply constraints that we have seen so far there are certain elements of.
Our supply base.
We are dealing with with <unk> commenced in the quarter that has required us to be in the open market and we have engineering qualifications going on.
All of the major elements to create alternative sources of supply or to engineer our way around those supply constraints and some of those engineering solution have reached the market and will come to market over the course of the first half of fiscal year 'twenty three.
The third element is pricing and discount management as you know we have communicated previously that we did raise prices in the fall and we have recently also communicated another impending price increase that takes effect. This month those two price increases will have.
The primary impact later in Q4 and going through for the most part the benefit will be seen in fiscal year 'twenty three.
And those are all the mechanisms that caused us to feel confident.
While we have been dealing with the constrained supply base, we have put in place a lot of controls to allow us to feel better about the path forward.
Okay, that's really helpful and if I could Mike just to go back on your seasonality from fiscal <unk> to fiscal <unk> comment.
If I understood. This right, you're taking actions and paying open market prices to mitigate that.
Revenue impact so are you able to but you also noted that you do have some revenue impact.
Fiscal Q4.
And your if we take George's comments here about sort of the supply chain normalization happening as you head into fiscal 'twenty. Three then well why would we not see a better than normal seasonality in fiscal <unk> 23 of fiscal <unk> was constrained. Thank you.
Okay. Thanks for the question <unk>. So we do going into Q1. After Q4, assuming Q4 plays out as we expect that really all depends on the availability of supply in specific supply and Hain mixed matters here a lot George talked about the components affecting a lot of the Prada.
Across our portfolio so as it sits today and as we look into Q1, we would expect to see some of that flow into fiscal 2003, when that's going to hit really depends on where we are from a supply chain perspective and specific components.
Dan will update you on the Q4 call in terms of Q1.
Certainly the backdrop and say, we feel really good about the demand environment.
The timing of those.
Are really dependent on the supply chain situation.
Okay. Thank you so much.
You bet.
Thank you. Our next question comes from Aaron Rakers with Wells Fargo. You May proceed with your question.
Yeah. Thanks, Thanks for taking the question guys.
I have two as well if I can just building on kind of warm these question there.
The simple question for me is that you talk about the confidence in returning to a mid 50% product gross margin, obviously, you're working through some things and you've outlined kind of your expectations on storage media costs being flat, but.
With all of that said do I do I think should I think that gross margin on a product line returns to mid fifties in fiscal 'twenty. Three is it second half of fiscal 'twenty, three any kind of framing of how youre thinking about the longevity of the pressures on that product gross margin would be helpful.
Yeah, Hey, Aaron it's Mike Thanks for the question.
This is super important so just as a context as you look at fiscal 'twenty three.
Couple of things for you folks to think about it we really think we executed well on the things that we can control in Q3, and we've raised guidance and revenue.
Largely due to the great work of the team.
And we have multiple new highs, we would expect to continue to execute well going into fiscal 'twenty three.
As we sit today, we're not guiding Q3, but what we would say is.
Hey.
Do a replay of what we have said and I think this will help you which it is.
<unk> revenue has grown for four straight quarters, we expect that to continue into next year, we've talked about the supply chain.
Issues, we expect to moderate as we go through the first half of fiscal 'twenty three.
We would hope and expect that we would get back to that mid fifties. It during the second half of next year.
And Thats really driven by the three things George talked about the improving supply chain situation freight and expedite and the impact of the price increase.
As you look at next year, Yes, we would expect to get back sometime in the second half of the year hopefully that helps you with your modeling again, we're not.
We're not giving guidance for Q3 of this as we sit today.
But hopefully that helps a lot Eric.
Yeah. That's that's very helpful and just as a quick follow up you know you talk about the public cloud business and I know that you mentioned that that Google in particular was ramping could could you just give us a baby a bit more context of where we're at as far as the progression of maybe both Google and Amazon at this point and Windows.
How we should think about those really kicking into that public cloud revenue.
I think we're pleased with all of our partnerships.
Certain data files was the really strong pro forma this quarter as it has been for several quarters, now, which demonstrates both our ability and knowledge of how to scale hyperscale a relationship and the enormous strength and leverage that gives us once it's scaled.
See the earliest stuff that <unk> III is Amazon FSX for data on that we announced it in September and VM.
Very very pleased with the level of trials and early activity.
Frankly surpassed our expectation.
It's early in the going in so it takes time to train.
Those trials into paid customers and to expand.
Relationships across the FX. So I would say we're excited but we've got a long a lot of work to do and we know where.
Where it gets and so you should expect.
Broadly speaking I see <unk> about 18 months behind where we saw.
With Microsoft Azure, Google and between Google has.
<unk> seen several big customer successes with Google and we are working to expand the range of workloads in the range of use cases with them across the portfolio.
Thank you.
Yeah.
Thank you. Our next question comes from stomach strategy with Jpmorgan. You May proceed with your question.
Hi, Thanks for taking my question.
Questions on the public cloud as well and then just following up on <unk>.
<unk> question I think the sportswear and if you can help me understand if I look at.
So you didn't have a increase of about 18 million or so which looks to be an exploration sequentially compared to how you've done it.
Recent quarters, how much of that is maybe it can move into cloud checkerboard.
Excluding that it does still look like next generation. So if you can get us give us some more insight into.
How much of that is driven by salt and newer partnerships forces. It does sound like more upbeat.
It was coming from partnerships that you initiated a full yield that would be great and then I have a quick follow up on public already.
Okay.
Sure. So this is Mike I'll take the first part. So we finished quality are at $469 million as you referenced 98% growth in that number of cloud checker represented about $35 million.
So the core organic business about $434 million that was a year over year growth of about 83% versus 80% in Q2 and <unk> 89 in Q1, so really nice growth on the organic business and as we called out that was really driven by Azure.
Azure Netapp files cloud insights and spot.
Oh, John Guinee.
Any color on what's driving the acceleration here how much of that is coming from the OEM.
The partnerships with Azure ad versus the newer partnerships with AWS.
As Mike mentioned, the new partnerships are not material contributors yet.
We are excited about the potential but you should see that potential realized over the next few years I think that.
In the past quarter, the vast majority of the acceleration comes from both new customer additions as well as when you see a really strong dollar based net retention rate. It shows that once a customer uses one of these cloud portfolios.
Expanding the use quite substantially so I think that's where the vast majority of the progress has been.
Thank you.
Thank you. Our next question comes from Simon Leopold with Raymond James You May proceed with your question.
Thanks for taking the question.
Thank you you've talked about your order growth rates and I just wanted to see if you could maybe help us get a better understanding of how your customers are behaving given that we get a sense that in space.
Space, many customers given the length and lengthening.
Lightning of lead times, and the supply chain constraints or are putting in orders earlier I want to confirm it if youre seeing that and what kind of order growth rates you're experiencing thank you.
Listen we don't see any unusual behavior, we have close relationships with our customers clearly we are monitoring given the supply chain situation very very tight inspection of our order backlog and our order pipeline, we see healthy broad based demand, but knows no sir.
So shadow demand or multi multiple purchases do you know in our.
In our pipeline. So we feel good about the sort of the real demand in the business and we're doing as much as we can to meet it demand as Mike has said is outpacing supply.
Thank you.
Thank you. Our next question comes from Rod Hall with Goldman Sachs. You May proceed with your question.
Yes, Thanks for fitting me in I wanted to start off with the price increases we've seen other people in this.
General category of products, increasing prices by around 10% and I Wonder if you guys could maybe quantify the ballpark of those price increases in and maybe comment a little bit on the stickiness of that too. There's a difference of opinion as to whether these are going to be around to stay or will people flex prices back down as underlying costs go back down if they do.
So just wanted to comment on that if I could get it.
Listen I won't give you a specific number I'll just say you're right.
The industry and our participation in it or is in the target range right. So I'll just say, we monitor the behavior of the industry and the cost of our supply and we take appropriate action we've taken to.
Actions as we mentioned earlier one.
One in the fall and the second one.
In February and we should see the benefits of those play out over time, we have to give our customers the benefit of those orders that are already in flight.
<unk> that are in flight.
One of them to be a good partner to customers, but over the course of Q4 and certainly heading into the new fiscal year, you should see the benefits of that come into the business with regard to the you know likely duration and so on listen we always tradeoffs being a good partner to customers.
With the needs to maintain margins in our business. It's too early for me to comment we will continue to monitor the situation and if we make changes we will let you know.
Okay, and then I had a quick follow up and that is on the.
The public cloud services, we were wondering if all of that regionally accounted for in the Americas or do you spread it across the regions and then I guess more generally after you answer that one just comment maybe on the strength of the Americas, what's driving that it was pretty strong this quarter.
Yes, So I'll answer. The first question is does large majority of the BCS business is generated in the Americas.
To the extent that there is an international business that flows through entities internationally, we will certainly report it that way.
Strong the strong results in the Americas as you as you mentioned they did have a very strong quarter, that's where we saw a lot of the strong order growth come in so the Americans had a good quarter, both in the hybrid cloud and the public cloud.
Segments Rod.
Okay, great. Thanks, Mike.
Thank you.
Yeah.
Thank you. Our next question comes from Steven Fox with Fox Advisors. You May proceed with your question.
Hi, Good afternoon, just first of all just a clarification on some of the comments you made about the quarter. Just closed are you, saying that unmet demand was entirely entirely related to supply chain or was there also a further acceleration in orders and then I had a follow up.
Demand as we said demand is outpacing supply we have.
Been aggressive to meet demand wherever we could and I would just say our team executed really well I think that.
Well just to be transparent demand has outpaced supply both in Q3, and we expect in Q4.
That's helpful and then George it seems like the M&A that you've done on the public cloud side is starting to have a compounding effect on your growth rates.
Is there any way to sort of think about how that sort of changes the view for longer term growth in public cloud given that you know when you first set some of these targets you you didn't have some of the capabilities you have now and.
Sort of how that layers into growth going forward. Thanks.
I think first of all listen we know we are clearly ahead of our $1 billion <unk> target, we will communicate the long term targets and.
Perspectives on the cloud business at our Investor day, right. So I am really excited about the portfolio. We built we started with cloud storage.
We have natively integrated cloud storage with the world's leading cloud providers and you are seeing the acceleration of that business.
We also expanded our cloud portfolio with a strong position in cloud infrastructure management, which spot cloud insight cloud checker and now filament healthy.
Entire portfolio get easily adopted by customers and so I really do feel like we have two strong beachhead in markets that are expanding to our overall Tam and are demonstrating the ability for us to get new customers and cross sell and up sell them a lot of different things. So I am really.
Excited about our portfolio.
We continue to be disciplined acquirers and manage shareholder returns.
With investing for the long term growth of our business while returning.
A significant amount of.
Free cash flow to shareholders.
Great. That's helpful. Thank you.
Thank you. Our next question comes from Jason Ader with William Blair. You May proceed with your question.
Yeah. Thank you.
So.
George I understand that the supply is.
I'm sorry, the demand is outpacing supply, but how would you characterize the demand environment right now versus say the last few quarters, especially for your hybrid solutions.
In light of what some people have talked about was some pent up demand impact.
2021, and then just as a quick follow up I know you guys are not guiding for FY 'twenty three revenue but.
Mike any early thoughts on kind of puts and takes in terms of helping us thinking about the model for revenue in 2023.
Listen I think we continue to see steady broad based demand Ryan is very solid it's across a lot of different industries, a lot of different verticals and they are for use cases that are.
Headline news in the industry digital transformation cloud enabled man unstructured data analytics artificial intelligence ran somewhere protection I mean, these are all well known use cases with broad secular demand.
I did not believe that there was a V shaped recovery to be honest I think.
<unk> is our mature buying centers in the by steadily over time I think the year on year comparison in some cases were exacerbated by the fact that Europe Colby you saw the opposite pattern for many companies we had a good business pattern, even during COVID-19 . So I continue to remain optimistic our teammates.
Executed excellently, we have gained share in every category that we have played in and.
I would cloud business is still strong growth engines and object storage and all flash.
And Mike.
Yes, Hey, Jason on your question.
I'm, sorry did you want to add something no go for it yes go for it.
Great.
I will go back over what.
Basically to Aaron's question so.
Exiting when you look at the different revenue components four straight quarters of growth in product guidance for the fifth in Q4, and we expect that to continue in 'twenty three on a year to date basis products up about 11% support we've talked about when you when you normalize for FX, Hey, the last seven quarters.
It's been a four 5% 6% grower.
Dan look hard at deferred revenue, especially short term deferred because more than 90% of support revenue in a quarter comes off the balance sheet. The cloud cloud ALR again, we'll update you in March but you can do your own forecast there.
Talked about in my script data cloud contributed four of the 10 percentage points of growth in the quarter. So it's really starting to have a meaningful impact and then hey, nice nice results in professional services, but it's pretty small so those would be the puts and takes going into next year. The one thing to keep in mind and as that's largely organic.
<unk>, obviously be disciplined.
<unk>, but we do look to expand our cloud portfolio next year as well.
Thanks, very much good luck.
Thank you.
Yes.
Thank you. Our next question comes from Nick Todorov with Longbow Research You May proceed with your question.
Yes, thanks, and good afternoon, everyone.
On regarding given all of the trains and the price increases you guys talked about are you seeing any changes in customer behavior and relationships are what are they prefer hardware versus cloud solution or do you see any increase in appetite from fully manage.
Solutions like your cloud services or maybe Keystone.
We feel good about the ability to serve customers in all of the ways that you've talked about absolutely on target I think we've seen you know why.
We haven't seen any sort of radical shifts in behavior, the long term trends around cloud and.
The use of as a service models broadly defined continue to be you know playing out for us. Our cloud portfolio is continues to be really really strong and we are able to help customers deploy workloads very quickly on public cloud environments. It's the R&D book to.
Build and deploy.
And the environment in their data center Keystone also had a good quarter. It's early in the going but we continue to see more and more vertical industry wins, more and more new customer wins and also wins across our geographic base.
Like you would expect us to be focused on when managing an early business. So I feel good about both parts of the business and then of course, our differentiated product portfolio. As we said we're focused on growing all flash and object storage. We have the best operating system in the market for hybrid flash and that had a good quarter.
So good execution across the board.
Got it thanks, guys. Good luck.
Thank you. Our next question comes from Shannon Cross with Cross Research you May proceed with your question.
Thank you very much just two for me.
He has guided 75 to 715 I think it was for Opex last quarter and came in you know about 63, I'm just curious how youre thinking about opex.
<unk> hinder your ability to sort of toggle it yes.
Gross margin remains under pressure and then if you could just talk a bit about Hs since it was about 12% of revenue, which seemed low was there anything specific that pressured that thank you.
Sure So Shannon it's Mike.
Yes, we did come in a little bit below guidance that was really driven by timing of program spend and quite frankly, we had baked in.
Being able to hire more folks that we were able to solve that.
Those were the two big drivers from Q3 to Q4, we've talked about it hey, we want to make sure that we're investing in areas that drive growth. So the increase was driven by cloud both in sales and in product. There is some program spend that we didn't spend in Q3 that will fall into Q4, and then there is always timing around things like commissions.
<unk> Q4, and it's a great question on Toggling Opex.
Again, our view is this is temporary it's going to work its way through and through 'twenty. Three therefore, we don't want to do anything to enhance streams to growth in the business if something changes during 'twenty three we'll certainly take a look at it but thats not our stance today.
The Asia revenue drop that you saw is really driven by two things.
Largely supply chain and us not being able to deliver so that was mostly supply chain related.
Versus we were able to deliver more than the other geos, which is why you saw that year over year drop.
Alright, thank you.
Thank you.
Thank you. Our next question comes from Jim Suva with Citigroup you May proceed with your question.
Thank you I just have one question its probably for George or maybe Mike, but you've been very ethical loyal and true to your customers, who placed orders and agreed to the terms and contracts and commitments when.
When you hear these decommitments.
The action of reaction $10 form strategically do you find alternative providers long term or do the homes, who contracted with you who broke their promises come back and give you some concessions down the road.
Are you just kind of.
Divorce or break the bridge and move on without them I'm, just kind of curious because you've taken the high road and it seems like some of your suppliers that really puts you in an awkward situation.
Listen I think these are all the conversations that we have with our supply base.
We have good long term suppliers that.
Support the vast majority of our Bom that we manage directly there are other components that are integrated into subassemblies and our overall systems that sometimes are you know I've been a part of the challenge here.
Sort of a multiple discussions there right I think clearly we want to understand the reasons for such a deep domain.
We wanted to understand where we are in sort of the ability for the customer for the supplier to meet our demand.
Profile and then there are ways that we have worked really hard in engineering.
<unk> continued to build diversity of supply across our entire bill of materials and in the cases, where we don't feel like we can rely on a supplier to give us access to other suppliers and so you'll see us continuing to work that over the next several quarters to make sure that.
We have all the levers at our disposal to meet demand.
Thank you so much George.
Thank you. Our next question comes from Ananda Baruah.
Loeb Capital May proceed with your question.
Yeah, Hey, guys. Thanks for thanks for taking the question.
Yeah, just a quick one quick one for me George how would you describe in hybrid environment, where your sweet spot is today for object storage and all flash or all flash array and do you think that changes overtime.
Yeah to the portfolio.
I mean.
<unk> clearly.
Are the strongest vendor in the midrange systems and midrange is displacing traditional high end system. So we are in more and more and more customers.
The really high end of the market as well, so really strong broad based distribution of our.
Portfolio, our hybrid flash systems have done really well in the energy market. If you look at the entry price band growth rates those are much more hybrid flash.
Businesses, then all flash business and so the combination of those two give us the ability to cover a broad range of use cases with the right form factor with regard to object storage. It's another extension of our unstructured data portfolio.
Unstructured data started out in files for the most part and increasingly as the scale of those groups.
The Tories are drawn customers are starting to use object technology to allow for management and ease of administration. Our solutions have been really really strong I think they're focused on that market. We have a really good.
Cost effective highly scalable centrally managed objects coupons solution and even in the object World. We have unique integration with the public cloud that allows us to build a truly hybrid object environment, combining some parts of the environment the customers data.
Centers and some parts being improved public cloud under one policy frameworks.
That's.
Super helpful. I appreciate it thanks.
Thank you. Our next question comes from Amit <unk> with Evercore you May proceed with your question.
Thanks for squeezing me in I apologize if this has been asked already.
The first thing that happens on the cloud side.
You talked about the gross margins being 71% better than corporate average is is there a way to think about at what point do we crossover and start to see operating margins in that business that are in line to corporate averages potentially.
Yes.
Yes.
So.
This is Mike So we go down in the segment reported a gross margin at this point, we don't have any plan to go down to operating margin. We will continue to look at that but we're going to report segment reporting revenue down to gross margin.
Fair enough.
And then you're on these component issues.
I think you and everyone else has been going through these challenges now.
As I think about maybe the April quarter headwind right and you talked about the gross margin issues.
Is there a way to think about how much of that is freight logistics versus component issues and then is there any revenues. He left on the table in April that you would call out or quantify for us.
So the majority of the headwinds are from components versus freight freight and logistics are there, but the components are a bigger piece of that and then we won't quantify what that was from a revenue perspective, what we'd say is thats all baked into the Q4 and full year guidance that we gave.
I guess, Mike the part is really going to get there.
We should have conviction that we could pick up a lot of revenue was left on the table in the July quarter as you'll requalify some of these products.
These bottlenecks alleviated right.
Yes. So there was a previous question on that what we'd say is to the extent that we have supply available and we're able to deliver those.
They could flow into Q1, we're not guiding Q1, yet we'll do that at the end of Q4, but that is almost entirely dependent on the supply chain situation and mixed matters here. It's super important in terms of what is the mix of what are the components.
Fair enough. Thank you very much.
You.
Thank you our last question comes from Louis Michelle's here with Starwood that you May proceed with your question.
Okay, Yeah, that's all I've got.
For demand questions into our Opex ones.
So but joking aside.
When you look at what happened in in calendar 2018, with a big hardware refresh cycle. I know you talked multiple times about demand is outpacing supply, but just curious because some of my CIO checks suggest that there is a replacement cycle coming on maybe more in the back half of this year and then on top of that so we might see I O.
Checks also suggests that with some I T workers getting back to the office or just people getting back to the office. That's also some of the growth drivers. So I know you did talk about a couple of before George but maybe if you could extrapolate if some of these are also contributing to a hopefully a good demand year for you all this.
Calendar year.
Yeah listen I think you hit the points quite accurately I think we see the benefit the improvement in the overall sort of return to work and the impact from <unk> sort of easing through the course of the year all things remaining the same and we think.
Demand continues to be really solid steady and broad based and so we're excited about the euro and we're certainly not guiding extra scoville guided when we guided.
As I said in my remarks.
We feel very very good about the demand picture and we're working hard to meet it with as much supply as we can get.
Okay. Thanks, good luck on the new year.
Thank you.
As we wrap up I wanted to leave you with three call outs.
<unk> and enduring trends of cloud and data driven digital transformation, where we had net play a critical role in helping customers achieve their goals are driving broad based customer demand for our products and services.
Embrace of cloud has expanded our addressable market the real opportunity is still in front of us and thanks to a strong public cloud services performance. We are well ahead of our plan to achieve $1 billion data.
In fiscal year 'twenty five.
Our focused execution and effective management of temporary supply chain headwind enable us to capture our expanding opportunity and deliver operating leverage as we grow our operating profitability and margins. Thank you and I hope to see you at our Investor Day next month.
We'll talk more about our long term growth and value drivers.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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