Q4 2022 NetApp Inc Earnings Call
Good afternoon, ladies and gentlemen, welcome to the net at fourth quarter and fiscal year 2022 earnings call. At this time, all participants are in a listen only mode.
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.
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 first quarter and fiscal year 2023, our expectations regarding future revenue profitability and shareholder returns the value we bring to customers our ability to drive could you.
<unk> 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 eye.
Capital spending 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 sections.
During the call all financial measures presented will be non-GAAP , unless otherwise indicated.
Conciliations of GAAP to non-GAAP estimates are posted on our website I'll now turn the call over to George. Thank you, Chris Thanks, everyone for joining us this afternoon.
Our solid fourth quarter results capped off a strong year.
We made sustained progress against our strategic goals.
Successfully achieving our commitment to grow the business, while delivering operating leverage in fiscal 2022.
We gained share in enterprise storage with strong growth in all flash array and object storage products we.
We expanded our public cloud business with robust expansion of customers E. R. R innovation and routes to market.
And most notably we delivered record levels of gross margin dollars operating income and earnings per share.
While the demand environment remains strong macroeconomic uncertainty, including supply constraints rising interest rates inflation and geopolitical conflict has increased since we last spoke with you at our Investor day in March.
Navigating this complex and dynamic environment is testing our teams and we are sharply focused on managing what is in our control.
Backlog is elevated due to supply constraints, despite our excellent supply chain management.
Helping us meet as much of the demand as possible.
I want to thank our global team for their disciplined execution and agile response to changing conditions.
That we achieved all time highs for gross margin dollars operating income and earnings per share in the face of these headwinds demonstrates our disciplined operating management.
The turbulent environment also creates challenges for our customers.
Raising the urgency for data driven digital and cloud transformations.
We sit at the intersection of these Mega trends as the complexities created by rapid data growth.
Multi cloud management and the adoption of Nextgen technologies, such as AI cloud native and modern application and data infrastructures create a sizable opportunity for us.
At our Investor day, we outlined our objectives to deliver long term value through sustained growth.
And that thesis remains unchanged.
A critical role in helping customers achieve their transformation goals underpins, our strategy and drives confidence for future growth.
Public cloud ear, or a 505 million grew 68% year over year and.
And the Q4 dollar based net revenue retention rate remained strong at 159%.
Before I get to the many highlights of the quarter I wanted to address the fact that our public cloud ear are keen short of our expectations.
Demand for our cloud storage solutions was strong in Q4.
We also saw a healthy number of new customer additions across both cloud storage.
And cloud operation services in the quarter.
Unfortunately, these tailwind were not enough to offset the lower than expected growth.
Created by higher churn lower expansion rates and Salesforce turnover in our cloud operations portfolio.
We understand the root causes of these temporary headwinds and in FY 'twenty three our focus will be on returning these services to the growth trajectory. We saw in the first three quarters of the year.
We have made organizational changes to increase focus on renewal and expansion motions.
And we'll continue to refine our go to market activities to better address the cloud operations market.
Additionally, we have refreshed the sales organization and strengthened the leadership team.
We believe strongly in the sizeable opportunity created by our cloud operations portfolio Webby.
Where we bring differentiated enterprise capabilities to cloud infrastructure management built on our long experience supporting a broad range of applications.
Our differentiation in this space continues to receive third party validation.
Sparked by net App was recognized as the leader and the only outperformer in Giga ohms radar for cloud resource optimization.
As I noted earlier, our cloud storage services continued to perform well.
Azure Netapp files remains the standout here.
Cloud volumes service for GCB.
FSX for Netapp on tap also had strong growth in E. R R and customer additions, albeit off small bases.
We continue to deliver significant innovation to help customers get the most from their cloud storage environments.
AWS announced FSX thereon depths support for single availability zones, lowering storage costs and improving performance as well as its inclusion in the E. C. Two launch Wizard streamlining the selection of preface EXPAREL tap.
File storage for customers, creating a new compute instance.
These new capabilities unlock new use cases.
Spending the opportunity for FX for on tap.
Our cloud storage and data management services are complemented by our cloud operations infrastructure management.
And optimization functionality together these capabilities deliver an industry, leading portfolio of multi cloud infrastructure services for state pool and stateless workloads.
Now, we're enabling customers to deploy applications quickly easily and cost effectively on that multi cloud infrastructure.
For big data applications with spark on Kubernetes for managed desktops with spot D C.
And for open source database data pipeline and workflow applications with our most recent acquisition into cluster.
Instead of cluster delivers open source data and workflow applications as a fully managed service.
Instead of cluster will leverage our best in class infrastructure services.
Loud volume storage optimization spots compute optimization and cloud insights monitoring and troubleshooting to make it easier and faster for customers to build deploy and operate cloud applications.
This will enable us to deliver more value to cloud operation steams and capture more revenue from those same buyers by delivering new services as well as through the significant synergies with our cloud storage services.
I am excited to welcome the instant cluster team to the naira family.
Overall fiscal year 'twenty two was a good year for our cloud business, we doubled public cloud segment revenue from 199 million in fiscal year 'twenty, one to 396 million in fiscal year 'twenty, two we expanded our cloud partnerships and routes to market introduce.
New organic inhibitions.
And we completed a number of acquisitions that position us well for the future in.
In the coming year, we will prioritize the integration of these services.
To underscore our commitment here, we plan to slow the pace of acquisitions and re prioritize our use of cash in FY 'twenty three to favor shareholder returns Mike will provide the details in his commentary I wanted to underscore that we remain convinced of the opportunity the strength of our position and our ability.
<unk> to achieve $2 billion in ear are exiting fiscal year 'twenty six now.
Now turning to hybrid cloud.
Demand for our hybrid cloud solutions remain high despite.
Supply constraints that again impeded our ability to meet all customer demand.
We grew product revenue, 6% in the fourth quarter and 10% in fiscal year 'twenty two.
All flash array annualized revenue run rate grew 12% year over year to $3 $2 billion. Thanks to strong unit growth in fast hybrid arrays, all flash penetration remained flat at 31% of installed systems.
In Q4, we further enhanced our position in hybrid cloud with new innovations and recognition.
We updated our object storage solution with security and compliance enhancements, Google cloud integration and faster performance for analytics sport boats.
We also announced the next generation of our collaboration with Cisco.
Flex spot X C S for hybrid multi cloud deployments.
Additionally, business intelligence group recognized Netapp AI as a winner of its artificial intelligence Excellence Award.
Looking forward our priorities are clear.
We remain focused on capturing the substantial opportunity ahead as we scale our public cloud services, while continuing to drive growth in our hybrid cloud solutions. The long term thesis, we presented at our Investor day of delivering value through sustained growth remains intact.
The strong fundamentals of our business.
Including our alignment to customer priorities.
Strong balance sheet and prudent operational management could net up in a position of strength I.
I want to underscore my confidence in our strategy, our execution and the value we bring to all our stakeholders.
With that I'll turn the call 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.
As we look back on fiscal 'twenty, two I am incredibly proud of the results the team delivered in an environment with such fluid and complex supply chain challenges.
We delivered billings of $6.7 billion, an increase of 13% year over year and grew revenue, 10% to $6 $3 billion.
Within our hybrid cloud segment, all flash revenue grew 20% and object storage revenue grew 49%.
We finished fiscal 'twenty, two with 505 million in public cloud a R. R with public cloud revenue growing 99% for the full year.
We balance strong growth in our key strategic areas with another year of disciplined investment delivering record operating margin of 23.7% up more than three points from last year with an all time high EPS of $5 28 up <unk>.
30% year over year.
In Q4, despite supply constrained shipments elevated freight and logistical expense and component cost headwinds, we delivered solid revenue with both gross margin and operating margin coming in above guidance strong execution yielded Q4 billings of $2 billion.
Up 16% year over year.
Revenue came in at $1.68 billion up 8% year over year, including a two point headwind from FX. Our solid Q4 results were driven by continued strong demand for our all flash and object storage solutions.
Our cloud portfolio continues to positively impact the overall growth profile of net out delivering three and a half of the eight points in revenue growth.
Hybrid cloud segment revenue of $1.56 billion was up 5% year over year.
Within hybrid cloud, we delivered product revenue growth for the fifth consecutive quarter and expect this momentum to continue into fiscal 'twenty three.
Product revenue of $894 million increased 6% year over year.
Software product revenue of $530 million increased 10% year over year, driven by the ongoing mix shift towards our all flash portfolio.
Total Q4 recurring support revenue of $590 million increased 2% year over year, highlighting the health of our installed base.
Public cloud a our exited Q4 at $505 million up 68% year over year, driven by strength in cloud storage led by Azure Netapp files public cloud revenue recognized in the quarter was $120 million up 82% year over year.
<unk>, 9% sequentially, we did end the year as expected for cloud a R. But are confident that we remain well positioned to deliver on the long term public cloud opportunity.
While it is not unusual for hyper growth assets to hit air pockets along their journey. We are using this moment to learn and continue to improve the operational rigor across the cloud products.
Towards this goal we are laser focused on using fiscal 'twenty three to strengthen our field and customer success go to market motions, while integrating our cloud ops product portfolio.
Recurring support in public cloud revenue of $710 million was up 11% year over year constituting 42% of total revenue.
We ended Q4 with a record $4.2 billion in differed revenue an increase of 6% year over year.
Q4 marks the 17th consecutive quarter of year over year deferred revenue growth, which is the best leading indicator for our recurring revenue growth.
Total gross margin was 66% and came in solidly ahead of our guidance, reflecting better than expected product margins.
Total hybrid cloud gross margin was 65% in Q4.
Within our hybrid cloud segment product gross margin was 51% as our supply chain team did an amazing job of mitigating a portion of the component cost headwinds.
Our sales team was very focused on capturing our recent price increases.
Our growing recurring support business continues to be very profitable with gross margin of 93%.
Public cloud gross margin of 68% was again accretive to the overall corporate average.
The sequential decline in public cloud gross margin was driven by lower than expected cloud revenue.
And incremental Capex investment for Azure, Netapp files, which is a healthy leading demand signal.
We remain confident in our long term public cloud gross margin goal of 75% to 80%.
As we continue to drive scale and cloud storage.
And an increasing percentage of our public cloud business being built on software solutions.
Q4 highlighted the strong leverage in our operating model with operating margin of 23% despite the ongoing supply chain headwinds.
EPS of $1 42 was up 21% year over year, and even excluding a onetime tax benefit of 12 cents represents a new Q4 record for the company.
Cash flow from operations was $411 million and free cash flow was $343 million.
The ongoing supply constraints resulted in shipments being pushed to the end of the quarter, leading to the highest ever accounts receivable balance of $1.2 billion exiting the year, an increase of $431 million from Q3 as a result, we expect healthy cash.
Collections in the first half of fiscal 'twenty, three which will be a tailwind to operating cash flow for the full year.
During Q4, we repurchased $250 million in stock and paid out $111 million in cash dividends.
In total we returned $361 million to shareholders, representing 105% of free cash flow.
We closed Q4 with $4.1 billion in cash and short term investments.
Now to guidance.
In fiscal 'twenty, three we are guiding revenues to grow 6% to 8% year over year, which includes a two percentage point headwind from FX.
In fiscal 'twenty, three we anticipate sustained demand for and continued share gain momentum in both our all flash and object storage solutions.
Which we expect to drive product revenue growth in the mid single digits.
We will also continue to grow and invest in our public cloud business.
We expect to exit fiscal 'twenty, three with public cloud <unk> of 782 $820 million, which includes approximately $40 million from our recently closed acquisition of <unk> the cluster.
At the a our midpoint, we expect our public cloud segment to drive four points of total company revenue growth in fiscal 'twenty three.
As George noted, we remain confident in our ability to deliver $2 billion in public cloud are exiting fiscal 'twenty six.
In fiscal 'twenty, three we expect gross margin to range between 66, and 67% as elevated component costs and logistical expenses from supply constraints continue to weigh on product margins.
We expect first half product margins to be roughly consistent with Q4 levels.
As we have previously disclosed we believe these cost headwinds are temporary in nature.
And we believe that Q4 'twenty two is 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 coupled with our recent price increases to be a modest tailwind to product margins as we head into the back half of fiscal 'twenty three.
We anticipate operating margin to range between 23% to 24% for the full year as we continue to invest in our growth initiatives.
While maintaining a disciplined approach to spending.
Our commitment is to again grow revenue faster than operating expenses in fiscal 'twenty three.
Moving down the P&L, we expect net interest expense to be approximately $30 million and our effective tax rate to be in the range of 21% to 22%.
Despite the considerable headwind to earnings as a result of the higher tax rate, we are committed to delivering $5 40.
To $5 60 in fiscal 'twenty three E P S.
We expect to generate greater than $1.4 billion in operating cash flow in fiscal 'twenty three as we continue to drive incremental profitability in our hybrid cloud segment to fund the growth in our public cloud business.
Free cash flow is expected to exceed $1.1 billion for the full year.
Factored into the year over year free cash flow growth is a step up in capex to approximately $250 million to $300 million. The higher capex forecast is being driven by three key items, one additional capacity deployments in Azure and G. C P.
Two higher cloud software capitalization.
And three <unk>.
Growing pipeline for our Keystone offering.
As we've discussed before additional capacity deployments within Azure and G. C. P. R. A healthy leading indicator for cloud storage demand.
Generating over $1.1 billion in free cash flow will allow us to continue to deliver on our shareholder return commitments, while also investing in our key strategic areas.
From a capital allocation perspective, we expect to hit pause on cloud ops acquisitions for the first half of fiscal 'twenty three.
As we focus on strengthening our field and customer success go to market motions.
While integrating our cloud ops product portfolio.
As a result, we plan to return 100% of fiscal 'twenty, three free cash flow to investors through dividends and share repurchases.
We expect our quarterly dividend to remain at 50 cents per share throughout fiscal 'twenty three with the remainder of free cash flow allocated to share repurchases.
We plan to front end load these share repurchases with $500 million coming in the first half of the year, which will reduce share count by 2% to 3% as we go through fiscal 'twenty three.
Now onto Q1 guidance.
We expect Q1 net revenues to range between 1.475 billion and $1.6 billion to $5 billion, which at the midpoint implies a 6% increase year over year.
We expect consolidated gross margin to be approximately 67% and operating margin to be approximately 21%.
We anticipate our tax rate to be between 21, and 22% and we expect earnings per share for Q1 to range between $1 five and $1.15 per share.
Assume that our Q1 guidance is net interest expense of $10 million to $15 million and a share count of approximately $224 million.
In closing I want to thank the entire Netapp team for the outstanding dedication focus and hustle and delivering strong fiscal 'twenty two results in a very fluid environment, we remain disciplined and committed to the long term thesis we shared with you as we continue to navigate.
The dynamic supply challenges to meet as much customer demand as possible.
We are confident enthusiastic and incredibly focused on our long term strategic priorities and the tremendous growth opportunity we see over the next several years.
I'll now hand, the call back to Chris to open the call for Q&A Kris.
Thanks, Mike operator, let's begin the Q&A.
Thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one follow one question and one follow up question. You May then return to the queue to withdraw your question press the pound key please standby, while we compile the Q&A roster. Our first question will come from Jim Suva with Citigroup. Please go.
<unk>.
Thank you based upon the results and your competitors who've also have reported it looks like net app has been gaining significant share.
Which is great is there anything in there that we should think about that would cause us to kind of pause or down shift that like any big recent design ins or acceptances or on the other hand with your sales force now fully ramped and the additional capex and things that Mike laid out is there are actually the potential you are looking at actually.
Upselling, our up shifting it to even a higher share gain in the future quarters. Thank you.
I think if you look at the dynamics of this past year.
Demand was strong and consistent throughout we were gated by supply, particularly in the back half of the year that certainly was true even in Q4.
We feel very good about our competitive position as we outlined at our financial Analyst day, and we continue to see cloud storage has been a really strong addition to the portfolio. The number of net new to netapp customers, meaning those that do not have our storage on premises.
That BARDA cloud storage continues to be strong so we get to cross sell additional on premises workloads in the future.
And I think with regard to the performance of our flash portfolio throughout the year and the growth of object. The second growth engine in our on premises portfolio. We feel really good. So thank you for the question Jim Thank you and congratulations.
<unk>.
Thank you. Our next question will come from Amit <unk> with Evercore. Please go ahead.
Thanks, a lot for taking my question is George was hoping you could talk a little bit about some of the headwinds that you saw on the cloud services side that impacted that number this quarter I know you talked about key issues. Maybe you can just elaborate on what these things when really the important part would be to understand if the lithium conviction.
Resolve and the timeline to resolve these.
Follow up just related to the same question around it.
About the 60% growth rate you're implying.
All services for fiscal 'twenty three is there some linearity that I should be thinking about maybe the back half of travel which of the books out that'd be helpful. As well. Thank you.
Mike. Thanks for the question, Mike just start walking you through the specifics I'll talk about the remedies that then we'll come back to guidance.
Thank you George Thanks for the question. So when we talked to you folks in February and we're looking at Q4, we had raised our expectations on the strength of Q3, we had expected Q4 to be largely consistent with what we saw in Q1, two and three.
We expected to see some continued growth in spot and cloud insights. We did know that there were some significant renewals and cloud insights.
We went through the quarter, especially as we got into April we saw increased churn and cloud insights as you know a good bit of the sales there are helping our customers move from their OCI their on Prem solution to the cloud solution and some of them are still trying to find their way there.
Spot, we saw lower expansion as you know we see we have seen in the first three quarters, a good bit of expansion in that business as they've deployed more into the cloud and that that didn't come through as expected and then we did see higher sales and customer success turnover, especially in the.
Spot groups. So that's what happened in cloud ops I'll now turn it back to George and I'll come back on your question on seasonality.
I think with regard to the.
The remedies in the overall portfolio listen we feel good about the customer adds across the portfolio cloud storage was a strong number with regard to specifically how we are addressing the cloud ops portfolio. We have refreshed the sales team. So a lot of the churn in the sales organization is behind US we do.
Have a newer set of members so it will take time to ramp them.
We have brought on a new experienced leader for US part portfolio, who led enterprise sales that Splunk. We have brought on as you might have seen our new senior Vice president for customer success.
Who was a senior executive that Informatica and a leader for our renewals and customer success motion in the field who what.
As the leader of that renewals and sales.
Palo Alto so much stronger team at the top with a focused mission around our cloud ops portfolio and driving renewals and customer success, a couple of other things that we've learned right.
That we need to integrate these acquisitions more quickly, particularly on the go to market side, and we are taking that lesson learned and applying that to our in store cluster acquisition as well as the work that we're doing to integrate the product portfolio more quickly so that it's easier for customers to buy now I'll hand, it back to <unk>.
Mike to talk about how that impacts guidance for next year.
Thank you George So Amit.
On the numbers I just want to walk that for you. So we ended the year total.
505, the midpoint of guidance is 800 that does include <unk>.
$40 million from X to cluster.
The organic business first 505 to $7 60 at the midpoint, which implies about a 50% growth during the year and then you add the 40 million exiting the year from edge to cluster decades into the 800 and as we go through the year, we feel really good about several drivers of growth that we should start to see.
<unk> as we go through fiscal 'twenty three number one we have added a good bit of sales capacity you see it in the Opex numbers not only in 'twenty two but we will in the first half of 'twenty. Three we are excited about the ramp of FSX for FX.
Capex is on tap as well as GCT as we go through the year have those become more meaningful contributors.
As I talked about in my prepared remarks, we continue to invest a lot in the capacity for <unk>, specifically and then a smaller piece is just as we resolve some of the items, we talked about with cloud ops, we think that that will help the second half. So you should expect to see acceleration as we go through the year into the second half.
And we feel really good about the 769.
Yes.
Perfect. Thank you very much for all the clarity.
Thank you.
Thank you. Our next question will come from Sami <unk> with J P. Morgan. Please go ahead.
Hi, Thanks for taking my question I guess George.
In relation to your public cloud sort of the air pocket that he's seeing it does look like you.
Implying that most of the headwinds stemming from a go to market sort of execution.
Just wanted to sort of maybe.
<unk> put a bit more color there of what gives you confidence just to go to market approach relative to some of the decision to stop.
<unk> what gives you the clarity at this point, there's not a sort of additional services that you need to add to round out the portfolio.
What's giving you that that is just a go to market execution at this point and I have a quick follow up for Mike. Thank you.
We saw strong adoption of our services I think as we mentioned in prepared remarks, a strong number of customer additions.
I think the places where we can do a better job is really customer success and cross sell and up sell which is work thats in front of US I think Thats also requires some integration work and the product portfolio to make it easier for the sales organization to do that cross sell and up sell some of that integration work is completed others.
In process and you will see us integrating into cluster quickly into the net our portfolio. So that it can take advantage of all of our differentiated infrastructure services storage spot cloud inside so that we can hit the ground running pretty quickly with all of that differentiated platform behind them. So I would say.
We did in the quarter. It was mostly go to market execution I think two eight the go to market team. We also have work to do on the product side, which we're accelerating and trying to accelerate the integration of inter cluster.
Okay, and Mike just a quick follow up on gross margin sort of pritchard treat through the yield.
Is the improvement that you are implying sort of as you get into the back half is that just more a function of the public cloud margins improving as you scale those revenues are.
Are you expecting a similar improvement in hybrid cloud and how much of that has to do with sort.
Sort of pricing actions.
More materially through the P&L.
Yeah.
For the question so it's both of those.
And then let's take hybrid clouds first so we do expect the margins to product margins and hybrid cloud in the first half to be relatively consistent with Q4. We did say we thought Q4 was the trough, we still feel that way as we go through the year and then seeing some expansion in the back half driven by both the pricing.
Actions that we took as well as all the work that's going on around supply chain. So both of those go into that number and then from a public cloud perspective. There are several drivers of that increase gross margin that we've talked about a scaling that business.
As an upscale and utilize those assets better more software and growth in that business. So it's both of those that will add to the margin and and and that breaks out apart Youll also see we go through when you go through the numbers.
The cloud gross margins are starting to be a pretty significant contributor to the growth as we go into 'twenty three and beyond so thank you for the question.
Okay.
Yes.
Thank you. Our next question will come from Rod Hall with Goldman Sachs. Please go ahead.
Hi, Thanks for taking my question. This is <unk> on for Rod.
I want to start with price increases.
It looks like desktop into kicking and memory.
Sure.
The pricing for the magnitude is to the tune of high single digits, maybe 10% or in that change.
Given this price increase and fun thing.
<unk> product revenues grow more than mid single digit.
In fiscal 'twenty T. Maybe there is an element of cautiousness in that guide given the current macro uncertainty.
Product.
It would help us understand a little bit better.
They got caught up.
First of all customers buy in dollars and so you know, whether we raise prices or not their budgets are determined in dollars and so if we raise prices they'll buy fewer systems for the same dollars alright, I think thats the first.
The second is listen we feel good about really good about the work that our supply chain team has been doing all year, we've had two successive quarters, where <unk> been gated by supply rather than demand, we see a steady demand picture.
Next year or this coming year, and we're just being realistic about how fast the supply chain constraint so buying in dollars and supply chain continuing to be work in progress for us through the course of the year.
That helps and just to make sure.
So you're actually baking in.
Any macro slowdown not anything in the back half of the year on Etsy.
As a function of supply chain shocking.
Yes.
At the moment, we see demand to be steady.
And we are gated by supply and so yes, we understand the economic environment is uncertain, we're managing what we can control our demand outlook has so far been really solid and we're gated by supply.
That's helpful and a quick follow up for me.
Got it.
On a cost commercial mix and your mix in the quarter. It looks like it's on the flat.
Quarter over quarter.
Typically in Q4 and on the other hand.
Asia Pacific has done really well in the quarter and just one thing are you seeing any kind of divergence Howard.
Have magnitude, what hunk shopper allocating satellite to different places.
Yes.
So it's really the supply chain gating that revenue generation and it varies by Geo in terms of the product. So no significant changes from a geo perspective, those what you see there is really supply chain gaining that revenue.
Got it thanks a lot.
Thank you. Our next question will come from meta Marshall with Morgan Stanley . Please go ahead.
Great. Thanks.
You know you guys noted some success in hiring new sales reps during the quarter I just wanted to get a sense of whether that was more back filling or whether you've had some success on that.
The hiring for the higher level solutions sales like Arris fails because of X I can help with the cross sell and up sell them.
And then maybe just kind of on the second point around.
The replacing some some of the sales like X that have left you know just what do you see as the ramping and timeline for some of the new hires to productivity.
I think the majority of our investment is focused on new sales reps with cloud backgrounds, we call them cloud sales specialists. So the types of exacts meta that you've mentioned that know how to sell some of our applications portfolio and cloud apps portfolio.
So.
Next the majority we also our CAC to replace some attrition in our frontline sales teams as well and we continue to manage through that as a normal sort of course of business right I think the specific areas that.
We saw higher then.
The anticipated attrition were really in our cloud ops portfolio and I think we've done a good job sort of refreshing the team and also bringing on the new leadership team.
I think when you look at the ramp time it takes a few quarters and that's why I think there has already been activity underway, we see that there will be some improvement through the first half and then certainly the second half of the year, we should see the team being fully productive.
In addition, you know given the ramp of our cloud business and the expectations of the ramp we are continuing to invest in additional capacity for example in cloud storage and other areas. We will of course in line with our disciplined operating management philosophy, we don't see the growth tap on the brakes, but right now we feel thats a good investment.
Right.
Okay, great. Thank you.
Thank you. Our next question will come from Nik Todorov with Longbow Research. Please go ahead.
Yes, thanks, and congrats on strong results, particularly given the supply chain headwinds.
GA question maybe.
How have I am just curious how have the conversations been over the last especially couple of weeks when you talk with customers regarding their it budgets in this environment I think clearly theres a lot of headwinds that could talk macro and in supply chain and inflation, but there's been some recent third party survey showing that budgets for I T or actually.
Ticking up and not down and even if inflation pressure.
Pressure kind of persists. So just curious what is the feedback that you're getting from <unk> and cfos on those discussion for owned actually budget. Thanks.
I think it is continuing to be seen as we've said eight four for the transformation of the business and so there are the strategic projects.
Customer experience transformation and business process automation.
Our IP of those projects better analytics continued to move forward AI ml projects. For example continue we had a strong year and continue to see a strong outlook for that part of our business. So so far as we've said.
The demand picture has been steady and we recognize that there is increased uncertainty, but I think so far the demand picture for it spending within our customer basis remained steady.
Okay, Great and then if I can follow up Mike on the price increases I just want to understand do you envision incremental price increases, especially if you see further cost pressures through the year or you think that you've kind of frontloaded. The price increases didn't you just need to realize dose as the year progresses.
Yes. So thanks, Nick my answer to that would be we are intently focused on realizing the ones that we put in place we're still working through those so at this point that's our focus we will see what the rest of the year holds.
Never say never but our focus right now Nick has realized that and those other two price increases.
Got it thanks, guys. Good luck.
Thank you. Our next question will come from Sidney Ho with Deutsche Bank. Please go ahead.
Thanks for taking my question in terms of your billings, obviously very strong billings with over $2 billion for the quarter.
I always strong in the second half of the fiscal year and that's also the case that this past year.
Are there any trends within the billings that you would highlight that suggests maybe customers are putting in orders along with it.
The likely because of maybe some concerns of supply constraint, maybe just ask differently. How do you monitor the health of the Sterling. Thanks.
Hey, it's Mike So so great question. So thank you. So in Q4, we saw billings growth of 16% as you know billings as revenue plus change in deferred largely on a quarterly basis. When you see billings and revenue come in differently, it's going to be driven by the timing of support.
Only on point of sale, but also renewals and that's exactly what happened in Q4 keep in mind that a lot of our initial transactions will come with three years of maintenance. So you will get some variability on when those renew so if you bifurcate the 16% above 12% of that growth came through <unk>.
Port renewals and thankfully a lot of that was in software support so that bodes well for all of US and that was really based on the timing of some renewals not only initial sales, but also renewals. So we watch that very carefully we watch duration and when you look at deferred revenue you see some of that did go into long term. So we did see some loss.
Her term renewals typically related to initial sales, but we've seen that short term and long term deferred revenue percentage stayed remarkably consistent so that will jump around a little bit by quarter nothing to be concerned about on this it was a great quarter of billings and the nice part is that will translate into cash flow next year. So hopefully that helps.
Yes.
Yes. Thank you.
Thank you.
Thank you. Our next question will come from Tim long with Barclays. Please go ahead.
Thank you.
Yeah, maybe two if I could.
First on.
On the all flash array front.
Still pretty good growth, but you mentioned the <unk>.
Stall base, it's still not not moving that much. So could you talk a little bit about what you think netapp can do to further.
Get that that installed base over all flash given the better economics, all around for you and then.
If I could just go back to the cloudy or our business.
Could you talk a little bit about.
Better conversion of your installed base on Prem.
And what you're seeing from the other large on Prem players and if they're trying to enter.
Into this this piece of the market as well thank you.
First of all the installed base that we are penetrating is a very very large installed base and there are several factors that they consider as they look at new purchases right.
Budgets are mix of different systems side, we did see a higher mix of our hybrid flash portfolio. When we have the only modern operating system that supports hybrid flash technology in prior circumstances.
There was some uncertainty about budgets or economics.
It would shift towards more of a value oriented system like a hybrid flash so whether that's true or not its one data point, but we did see very strong hybrid flash unit shipments this quarter, which is why the total penetration into our installed base was relatively flat. We continue to do the work to quantify more.
<unk> more new workloads and drive our field to go after new logos as well as drive our installed base conversion there are incentives in place to sell new systems at a higher rate than renewals or refreshes and those have been put in place for this year and so I'm hopeful that.
That will drive more conversion with regard to cloud.
I think the main questions are listen we feel good about the acquisition of net new customers into our cloud portfolio I think when we started the cloud journey. There was a concern that cloud growth would literally be offset by on Prem decline, we're not seeing that and it's reflective of the strength of our port.
Folio on both fronts and so yes could we do more to convert our installed base to cloud we have got incentives in place this year where the.
Sales reps cannot meet their number without selling cloud as a part of their overall.
Kind of quarter and so there are discrete quarter setup for cloud they've got a complete selling that to be able to accomplish their total compensation objectives and so we've got more underway, we're doing enablement, but I do feel good about the fact that we are able to acquire a lot of net new customers. Those are our competitors customers. After all.
With our cloud storage portfolio.
Thank you very much.
Thank you. Our next question will come from David felt with UBS. Please go ahead.
Great. Thanks for taking my questions guys.
Just a quick question on the acquisition strategy. So before you decided to hit pause can you kind of discuss how the pipeline was shaping up and how sort of the opportunities might have looked for that particular strategy given the repricing that we've seen in both the public and the private markets and when you think about the opportunity cost of <unk>.
Ceiling not pursuing transactions, how do we think that affects the ramp of the longer term target in that sector or in that segment I should say and then I have a quick follow up.
Listen I think we've had a disciplined acquisition strategy right, we started with cloud storage.
We enabled cloud storage to become a multi cloud across all the hyper scaler with both net managed and native cloud services. We then added monitoring which is cloud insights.
<unk>, taking one of our enterprise products and making it cloud ready and meet that a multi cloud monitoring service so that customers could understand the performance of their applications that we brought in spot, which gave us the compliment for compute that we had with storage.
Radar organic storage. So now we've got a multi cloud infrastructure services portfolio, that's truly unique in the market.
And we are adding applications deliberately right. So we're not trying to be in every application. We've got specific applications that leverage the full portfolio of our infrastructure services spot Tc for virtual desktop users.
And spots compute optimization technology, we've got.
Spark for Kubernetes, which uses the spot ocean technology as part of its underlying infrastructure capability and then most recently in Stoke cluster I feel really good about the portfolio listen we want to integrate these acquisitions, so that they get off to a fast start and I think we.
Feel really good about our portfolio if you look at the numbers that.
We are guiding to I think if we hit we finish FY 'twenty three strong we're in great shape to accomplish our $2 billion target.
We're just focused on let's get let's get this right in the first half of the year and then we'll take a look at the market.
Alright, Thanks, George and then Mike maybe a follow up for you on a public cloud gross margin.
What scale, maybe can you give us a sense of scale that you need to get to to get to your longer term targets because even if I looked before this quarter sort of the incremental gross margins have been running in the low seventies as you invest in the business and obviously, there's some cost absorption issues or maybe it's helpful. If you can give us sort of an order of magnitude of what that delta might look like from a margin perspective.
So we could see the roadmap to that 75 plus percent public cloud gross margin that you sort of targeted out there. Thanks.
Yeah. Thanks, David So I would answer that by saying Hey by the time, we get to $1 billion in AOR and I'm going to break it up for you a little bit we will.
Certainly expect to see us getting very close to at least the bottom of that range and there was two major drivers to that brand and cloud ops. The majority of those products are software cloud based as those continue to grow they are accretive to not only cloud, but certainly the total company and any of the other big driver here is in cost.
George we are continuing to invest a good bit for all the right reasons to drive growth in F&B ECP as we've talked about.
When it comes after a couple of years as we start to modulate that Capex investment those are being depreciated over three years that depreciation is going to start to cap out it's going to have a significant positive impact to gross margins because now we're going to benefit from utilizing those assets longer than their accounting.
Life, because their useful life is quite a bit longer so of all the stuff we've talked about I feel really good about getting to 75 at least at the bottom end because of all those those items and to your earlier question acquisitions will focus around those software and cloud assets as well so all of those things added together.
We feel really good about that range.
Great.
Yeah that's helpful.
Hey, if I were to just add one more FSX is a software only solution. So as that ramps that's also accretive.
Great point again, another clarification very helpful. Thanks, guys.
Thank you. Our next question will come from Simon Leopold with Raymond James. Please go ahead.
Thank you very much for taking the question first.
First I just wanted to see if maybe we can clarify what happened to gross margin for the public cloud in the quarter with the step down was there any new significant.
<unk> being made.
In terms of the deployed footprint ahead of revenue.
Given that you are not facing the same kind of input cost issues. That's just clarification and then in terms of my my longer term question I I'd like to see what Youre hearing in terms of the demand side, that's influencing your forecast for the public cloud services revenue outlook.
A lot about the execution and the internal aspects, but I want to get a better understanding of the demand side of that equation. Thank you.
Sure. So hey, Simon it's Mike I'll do the gross margin first so a couple of things it did dip down a little bit from I believe 71% to 68, there were two major drivers of that number one is.
A little bit lower revenue, obviously, there are some fixed costs in there. The other part is we've continued to invest in the capacity specifically for <unk>, even though we are largely for our capex number for fiscal 'twenty two right about where we guided there was a mix shift candidly, we spent less in facilities because I'm going to break.
Supply chain again, we had a little issue there that got pushed into 'twenty three.
And for all the good reasons, we actually deployed more capacity for <unk> now that depreciation hits right away and then.
<unk> built so that those were the two major drivers.
As we go through fiscal 'twenty three our goal is to get back to that 70% and the cluster will come in at call. It mid sixteens margin and we expect that to fully get to about 70 exiting the year and then as we continue to build a R and leveraging existing footprint. That's why we feel good about getting back to 70 by the end of the year.
The margin puts and takes.
On demand, we feel good listen we had strong customer adds across the portfolio in the quarter.
We continued to see good dollar based net retention rates of 159%. So we feel good.
And we're really focused on growing and capturing the demand cloud continues to be a place where we see customers prioritizing investments.
Thank you.
Yeah.
Thank you. Our next question will come from Ramsey El <unk> with Bank of America. Please go ahead.
Yes. Thank you.
On gross margins are you thought that <unk> would be the bottom in gross margins I think youre, saying that again today, but are.
You're also saying first half will be roughly at the same level for this in the next quarter is that the trajectory you had expected last quarter or two.
Things change that is causing you to bump along the trough margins for a longer time, especially given that fiscal <unk> you typically have a much richer mix from federal that should be helping your gross margins tick up higher.
A follow up.
Listen I think what we've said in the first half of this coming year will be relatively similar to what we had in Q4, which is substantially better than what we.
We realized a substantially better outcome than what we feared going into the quarter I think what we said the second half of the year as a modest tailwind to the first half of the year, we see improvements in the supply chain through the course of the year I think.
Covid related free should get better I think the amount of open market purchases should hopefully get better over time, I think we're being a little bit cautious about where we are in the course of the Europe , but overall I think that's the picture.
Okay, Thanks short and.
Just as a clarification I know you made several comments around.
P C S tracking a bit weaker than expected, but as you're mapping this onto longer term targets can you give your thoughts around.
Hitting pause on cloud ops, M&A, which is a big part of the overall long term guide I mean, it's a substantial part of how you were originally.
Adding to your long term guide, especially in light of the fact that valuations seem to come down you just did into Clos or just wondering if hit.
Hitting the pause is more.
Some cautiousness about the rate and pace of off trajectory or is it about the speed of integrating some of these assets that you've acquired.
Especially given the valuation compression that we've seen in the market. Thank you.
Listen we don't expect the valuation compression to go away right I think we see that at the start of the journey and so we see plenty of opportunity has to do inorganic bowls I think the focus we're trying to bring is first of all in our outlook. We feel really good about the outlook, we wouldn't guide to year to a strong number if we didn't feel that way.
See continued strength in organic innovation for example.
Storage and cloud insights, we've done a substantial number of acquisitions in cloud ops, and we're going to take a little bit of time to integrate them on the product side and integrate them on their go to market.
It's just it's prudent disciplined and will be you know.
We feel very very good about our portfolio not just in cloud storage and cloud apps as well.
Okay. Thanks sure.
Thank you. Our next question will come from Aaron Rakers with Wells Fargo. Please go ahead.
Yeah. Thanks for taking the question I'll try and slip into real quick if I can I guess the first one is one of your competitors Tonight talked about actually some customers pulling forward demand from the back half of the year into the first half of the year.
There's been a lot of discussion around the backlog and so I'm curious number one if you've seen any of that and how would you characterize the duration of kind of the backlog youre seeing and how maybe thats changed over the last.
Two or three quarters.
We haven't seen any evidence of pull forwards our Phantom demand I think we have a close relationship with our customers every one of them has been quite balanced in terms of being a good citizen around haynesville take some of our order and we'll wait for others. So I think we've got a pretty balanced book of business.
As we said.
We've had supply gate demand for two successive quarters Q3, and Q4 very clearly saw the same pattern and backlog is elevated.
Yes.
Yeah, and just as a quick follow up I guess simple question, how would you characterize the competitive landscape I know Dell EMC saw growth for the first time in a while this last quarter.
How would you characterize what you're seeing competitively in the market.
I think it's pretty much the same pure and net up taking share from Dell and HP and several other players. So I would characterize it there is no fundamental change to be honest. Thank you.
Perfect. Thanks.
Thank you. Our next question will come from Nihon <unk> with Northland Capital. Please go ahead.
Yeah. Thanks.
I realize you guys are not economists here, but.
What do you think is the probability of Capex down cycles, given tightening financial conditions and then what are your thoughts on that share gain trajectory stunted or help.
Central Ikea Capex down cycle as well.
Let's see.
I'll, just say I'm not an economist right. We are in discussions with our customers I would say in every portfolio theres probably projects that are strategic that will continue to be invested in regardless of supply chain constraints or you know economic environment or whatever it is right. So I think those projects we see continue.
Doing and we're going to be a part of those as much as we can I think with regard to our competitive environment listen we are part of several megatrends that those will continue right cloud.
Data management analytics high performance computing environments.
So long as we continue to innovate and stay focused I think we've got a good opportunity ahead.
Yeah.
So just to be clear are you expecting or share gain trajectory the help our stunted by a potential capex down cycle.
I think if there's a light capex down cycle, what we generally see is within the spending envelope transformational projects that are critical to a business need will get prioritized and so long as we are part of those projects, it's a share gain opportunity.
Okay, great. Thank you.
Thank you. Thank you and today's final question will come from Jason Ader with William Blair. Please go ahead.
Great. Thank you.
I guess, George just to wrap up.
What lessons has net I've learned from.
These last couple of years, where you've been kind of on an acquisition Benjen. This cloud services space.
As you kind of reflect on what you could have done better than what you need to do better maybe just kind of summarize your thoughts there for us.
Listen I feel like we've accomplished a lot right I think nobody believed us when we said our cloud storage would be a needed service in all of the three major hyperscale cloud providers and we've delivered on that we said, we would cross $500 million and Claudia R&D delivered on that we said cloud gross margins would be.
At or better than company average gross margins. We've delivered on that we think cloud would be a way for us to acquire a whole lot of net new customers. We've delivered on that and over the course of the last two years, we've balanced organic innovation and there's been a substantial amount with complementary.
Deliberate acquisitions that allow us to serve a full <unk>.
Customers need right around an application portfolio I think where we could do better is learn from the mistakes. We made around integration and we're gonna you know everybody learns from that and we're going to own that and we're going to do the work that needed to integrate those acquisitions better than the first half of this year, but I don't think any of that diminished.
From the opportunity in front of us or the place that we are we're in a strong position and we're going to capitalize on it with disciplined execution.
Very good good luck. Thank you thank.
Thank you.
Before we close we delivered a solid Q4 rounding out a strong FY 'twenty two with the record levels of gross margin dollars operating income and earnings per share looking forward. We remain focused on capturing the substantial opportunity ahead as we scale our public cloud services.
While continuing to drive growth in our hybrid cloud solutions.
I wanted to underscore my confidence in the long term pieces we.
We presented at our Investor day of delivering value through sustained growth.
Our alignment to customer priorities strong balance sheet and prudent operational management, but net up in a position of strength. Thank you.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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