Q3 2023 NetApp Inc Earnings Call

February 22, 2023

Good day and welcome to the <unk> third quarter fiscal year 2023 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone.

And Swift all your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Kris Newton Vice President of Investor Relations. Please go ahead.

Hi, everyone. Thanks 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 two.

<unk> thousand 23, our expectations regarding future revenue profitability and shareholder returns are.

Our alignment with the secular growth trends of data driven digital and cloud transformation, our expectations regarding the future growth in the number of cloud customers their usage of cloud services, and the resulting impact on our public cloud and hybrid cloud segments, our ability to deliver innovation sharpen our execution and focus on our strategic growth opportunity.

It is while optimizing our operating cost and our ability to strengthen our position rebalance our sales and marketing efforts and drive sustained growth in both our hybrid cloud and public cloud segments in a turbulent macroeconomic environment, all of which involve risks and uncertainty.

We disclaim any obligation to update our forward looking statements and projections actual results may differ materially for a variety of reasons, including macroeconomic and market conditions, such as the I T capital spending environment, including the focus on optimization of cloud spending inflation rising interest rates and foreign exchange volatility.

And the continuing impact an uneven recovery as the COVID-19, pandemic, including the resulting supply chain disruptions as well as our ability to keep pace with the rapid industry technological and market trends and changes in the markets in which we operate execute our evolve cloud strategy and introduce and gain market acceptance for our products and services.

Maintain our customer partner supplier and contract manufacturing relationships on favorable terms and conditions managed material cyber security and other security breaches and manage our gross profit margins 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 spin.

Typically our most recent Form 10-K and Form 10-Q, 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.

I'll now turn the call over to George.

Thanks, Chris Good afternoon, everyone. Thanks for joining us today.

In Q3, we executed well on the elements under our control in the face of weakening our it spending environment.

And continued cloud cost optimization.

Disciplined operational management yielded operating margin and EPS that exceeded expectations. Despite revenue coming in at the low end of our guidance.

We are delivering on our commitments and responding to the dynamic environment.

We adjusted our cost structure introduced a portfolio of capacity flash arrays to support cost sensitive customers and continue to work with our customers to help them optimize their cloud spending.

On today's call I will discuss our Q3 results in the context of the current environment.

And our plans to sharpen our execution.

Accelerate near term results and enhance our long term position.

We continued to see increased budget scrutiny, requiring higher level approvals, which resulted in smaller deal sizes longer selling cycles and <unk>.

Some deals pushing out.

We are feeling this most acutely in large enterprise and the Americas second service provider sectors.

Customers are looking to stretch their budget dollars sweating assets shifting spend to hybrid flash and capacity flash arrays from higher cost performance flash arrays and as our cloud partners have described optimizing cloud spending.

We saw signs of a softening environment early in fiscal year 'twenty, three and took swift action to control costs with increased scrutiny of program spending a hiring slowdown in Q2 and a hiring freeze in Q3.

At the start of Q4, we implemented a workforce reduction of approximately 8%.

Decisions that impact our employees are always difficult.

I take great pride in fostering the Netapp culture and.

And I am committed to using this difficult action to refocus our team guided by the values and mission of the company.

Our hybrid flash in USD based all flash arrays continued to perform well benefiting from customers price sensitivity in this challenging macro.

This shift from high performance, all flash arrays to lower cost solutions, coupled with the lower spending environment.

Actually among large enterprise and U S Tech and service provider customers, who are large consumers of flash created headwinds to our product and all flash array revenues in.

In Q3, our all flash array business decreased 12% from Q3, a year ago to an annualized revenue run rate of $2.8 billion.

Public cloud ear are of 605 million did not meet our expectations driven by a shortfall in cloud storage as a result of the same factors we experienced last quarter.

Spending optimization and the winding down of project based workloads like chip design E D E and HBC or headwinds again in Q3.

We have a sizable base of public cloud customers with a number of large customers who have grown rapidly over the past year and are now optimizing.

Their cost optimization mask the growth of other customers.

We continue to add new customers and churn has remained consistently low.

Overall, the cloud ops portfolio performed to plan.

Cloud insights are stabilized and spark continues to grow nicely benefiting from the cost optimization plan or.

Our dollar based net revenue retention rate decreased to 120%, but it's still within healthy industry norms.

We are confident that we remain well positioned to take advantage of the secular growth trends of data driven digital and cloud transformations.

We are aligned to customers top priority and have demonstrated success in controlling the elements within our control.

Building on that solid foundation, we are sharpening our execution.

Accelerate near term results, while strengthening our position for when the spending environment rebounds.

We have three areas of focus.

First we will remain prudent stewards of the business and we'll continue to tightly manage the elements within our control.

Second we are reinvigorating efforts across the company in support of our storage business.

Third we are building a more focused approach to our public cloud business.

Starting with the first area of focus.

Remaining prudent stewards of the business and managing the elements within our control.

We will maintain our focus on cost controls so that expenses do not grow ahead of revenue.

We will achieve this by maintaining a scrutiny on program spending and hiring.

As well as focusing our investments on the products that represent the biggest opportunity.

We've made difficult decisions to reduce investment in products with smaller revenue potential like aster data store and solid fire.

The results of this focus are visible in our ability to maintain our free cash flow operating margin and EPS guidance, despite lower revenue.

Onto the second focus area reinvigorating our storage business.

As we moved rapidly to embrace cloud we lost some momentum in our hybrid cloud business.

We are taking decisive action to strengthen our position in performance by better addressing the areas of market growth.

Delivering more customer value and realigning our go to market activities.

<unk> address this opportunity.

We were slow to fully embrace the customer desire for lower cost capacity oriented all flash systems.

At the start of Q4, we rectified that situation with the introduction of the F. F. C series. The most comprehensive industry, leading portfolio of <unk> based all flash arrays that addresses a wide range of workloads and price points.

These products will help customers manage through a cost sensitive environment while.

While at the same time supporting their pursuit of sustainability targets.

Initial response has been very positive and we are already quoting deals for customers.

<unk> C series will drive <unk> revenue and support product gross margin as customers rotate from lower margin hybrid flash, who all flash systems.

In addition to expanding our product portfolio, we've introduced a number of innovations to improve the customer experience and bring predictability to their investment process.

In Q3, we released Blue XP, a unified control plane that helps decrease resource waste complexity and the risk of managing diverse environments.

As a part of our sustainability commitment we are previewing, a new dashboard and blue XP to help customers understand their datacenter carbon footprint across environments.

Early in Q4, we introduced net App advance a best in class portfolio of programs and guarantees which is already helping us win new customers and drive revenue.

We are rebalancing, our sales and marketing efforts to better address the significant storage market opportunity, including aligning compensation plans to drive sales of our reinvigorated storage portfolio.

We believe that these actions will enable us to drive product revenue growth and regain share in the all flash array market.

Finally, our third area of focus.

Building, a more focused approach to cloud.

We are reinvigorating our storage business, we have no intention of taking our foot off the pedal in public cloud. It represents a huge growth opportunity for us with a gross margin profile that is accretive to the business.

Additionally, our public cloud services are highly differentiated with a multiyear advantage over our traditional competitors.

And create customer preference for net app.

We have sharpened the focus in our cloud ops portfolio and have taken actions that could have future revenue and there are implications.

We believe that our cloud apps services will continue to deliver stable steady growth over the long term.

Our customer success team has made good progress in driving utilization of our cloud services.

We need to do more with our cloud storage and data services.

Additionally, we recognized that we have not been using our go to market resources.

Their best effect here.

In addition to refocusing our sales team on the reinvigorated storage portfolio.

We are identifying ways to most effectively align our sales resources to the buying centers and consumption models for all our solutions our cloud storage business is predominantly consumption base and largely driven by a hyperscale or partners.

These factors coupled with the current cloud cost optimization environment have impacted our ability to forecast a R. R.

However, as we grow the business the impact from a subset of customers will be mitigated smoothing its growth and improving predictability.

I want to underscore my confidence in this opportunity.

The migration of enterprise applications, like SAP, and Vmware to the cloud as well as cloud native applications like artificial intelligence create a massive market and which we can grow.

We believe strongly that public cloud services can be a multibillion dollar <unk> business for us power.

However, achieving that target will take longer than we initially planned due to the industry wide slowdown in cloud spending.

And our recent performance.

In closing we have seen tangible success.

From our efforts to manage the elements within our control in a challenging environment.

Despite our lower revenue outlook we.

We have preserved free cash flow and EPS expectations.

In the first three fiscal quarters of this year, we have returned over $1 billion to shareholders and reduced share count by 4%.

We are sharpening our execution to accelerate near term results.

And enhance our position for the long term.

We are taking these steps now so that as we begin FY 'twenty four we are in a new more focused operating model to attack the opportunity ahead.

<unk> growth and deliver shareholder value.

Before turning the call over to Mike.

I want to give my thanks to the Netapp team for their operational discipline and rapid response to set us up for better results.

I have seen firsthand how hard they are working to navigate the challenging environment and I really appreciate their efforts.

Thank you George Good afternoon, everyone and thank you for joining US before we go through the financial details I think it would be valuable to reiterate the key themes for today's discussion that George highlighted.

Number one despite the temporary headwinds to revenue our disciplined operational management yielded op margin and EPS above the high end of guidance.

Number two the macro backdrop in demand environment continued to be major headwinds the weakening it spending environment was most pronounced in our large enterprise and use technology and service provider customers.

Materially impacted our all flash revenue in Q3, while significant cloud optimization across all three major Hyperscale has continued to weigh heavily on AOR growth.

Although the U S dollar weakened slightly during Q3.

FX continues to be a material headwind to our financial results on a year over year basis.

Number three as we navigate through this fluid demand environment, we remain laser focused on driving operating margins and free cash flow generation.

Towards this end, we took swift action in Q3 to control costs through increased program spending scrutiny and a hiring freeze.

And at the start of Q4, we implemented a reduction in force of approximately 8%.

In addition to adjusting our own cost structure. We also introduced C series, a portfolio of pure LC capacity flash arrays to support cost sensitive data center customers and we continue to work with our cloud customers to help optimize their spending.

Number four as a result of our disciplined cost management, we are reiterating our full year EPS guide of $5 30 to $5 50.

We are also confident in our free cash flow target of 1.1 billion adjusting for the restructuring and onetime cash payment in Q4.

From a capital allocation perspective, we remain committed to returning more than 100% of fiscal 'twenty, three free cash flow to investors through dividends and share repurchases.

Now all of the details.

As a reminder, I'll be referring to non-GAAP numbers unless otherwise noted.

Q3, billings were 1.57 billion down 11% year over year.

Revenue came in at 153 billion down 5% year over year.

Adjusting for the 340 basis point headwind from FX billings and revenue would have been down, 7% and 2% year over year, respectively.

Even with the challenging Q3, our cloud portfolio continues to positively impact the overall revenue growth profile of <unk>.

That app.

Hybrid cloud segment revenue of $1.38 billion was down 9% year over year.

Product revenue of $682 million decreased 19% year over year as customers took a decidedly cautious approach to capital spending.

Total Q3 recurring support revenue of $616 million increased 5% year over year, highlighting the health of our installed base.

Public cloud <unk> exiting Q3 at $605 million up 29% year over year.

Public cloud revenue recognized in the quarter was $150 million.

Up 36% year over year and 6% sequentially.

Highlighted by our three major Hyperscale or partners customers continue to optimize our cloud spend as organizations are exercising caution.

Given the macro economic uncertainty.

While the timing of the recovery remains unclear we are confident the secular trends of AI machine learning Iot and high performance computing.

Along with the migration of enterprise apps like Vmware and SAP.

We will drive a long term growth and cloud storage consumption.

Recurring support in public cloud revenue of $766 million was up 10% year over year.

Constant tuning 50% of total revenue.

We ended Q3 with $4 $2 billion in differed revenue an increase of 6% year over year.

Q3 marks the 20th consecutive quarter of year over year deferred revenue growth, which is the best leading indicator for recurring revenue growth.

Total gross margin was 67% in Q3 in line with our guidance.

Total hybrid cloud gross margin was also 67% in Q3.

Within our hybrid cloud segment product gross margin was 46, 5%, including a two point year over year headwind from FX.

As noted our large enterprise and U S Tech and service provider customers have continued to reduce capex spend as they rightsize their spending envelope.

These customers are the most forward leaning technology adopters and the biggest consumers of all flash systems in the economy.

And they are pausing capex spending has had a material impact on our total revenue.

All flash mix and product margins.

And while the supply chain component premiums in NAND pricing, notably improved in Q3, we had to work through higher cost inventory during the quarter.

We expect the improving supply chain and NAND pricing to be a tailwind of product margin in Q4 and fiscal 'twenty four.

Our growing recurring support business continues to be very profitable with gross margin of 93%.

<unk> gross margin of 69% was accretive to the corporate average for the ninth consecutive quarter. We remain confident in our long term public cloud gross margin goal of 75% to 80%.

As the business scales, and an increasing percentage of our public cloud revenue is driven by cloud and software solutions.

While revenue came in at the low end of guidance Q3 highlighted our operational discipline and cost controls with operating margin of 24%, including two points of FX headwinds.

The EPS of $1 37 came in above the high end of guidance and included 14th.

Of year over year FX headwind.

Cash flow from operations was $377 million and free cash flow was $319 million.

Inventory turns increased to 12 in Q3 up from nine in Q2.

Our supply chain challenges eased in the quarter, enabling us to take down inventory by nearly $70 million sequentially.

During Q3, we repurchased $200 million in stock and paid out $108 million in cash dividends.

In total we returned $308 million to shareholders, representing 97% of free cash flow.

Share count of $219 million was down 4% year over year.

We closed Q3 with $3 $1 billion in cash and short term investments up $108 million.

Shelly.

Now to guidance.

As George discussed we are seeing continued softening in the macro backdrop with customers, taking a decidedly cautious approach to spending.

Now expect fiscal 'twenty three revenue to be roughly flat year over year, which includes three to four percentage points of FX headwind.

In fiscal 'twenty, three we continue to expect gross margin to range between 66% 67%.

As elevated component cost and FX headwinds way on product margins.

While the timing is uncertain, we remain confident that our structural product margins will normalize back to the mid fifties in the fullness of time.

Particularly when you factor in our new C series portfolio, which will largely displace lower margin hybrid spinning disk systems in our product mix.

Given our disciplined cost controls we are raising our fiscal 'twenty three operating margin guidance. We now expect op margin to range between 23, and 24% which includes approximately two points of FX headwind.

Last quarter, we committed to protecting both EPS and free cash flow during this uncertain macro environment.

Today, we are reiterating our full year EPS guide of $5 30 to $5 50.

Which includes 54 cents of currency impacts.

We also continue to expect to generate $1 1 billion and free cash flow, excluding one time items.

From a capital allocation perspective, we remain committed to returning more than 100% of fiscal 'twenty, three free cash flow to investors through dividends and share repurchases.

Now onto Q4 guidance.

We expect Q4 net revenues to range between 1.4 dollars 75 billion and 162 5 billion, which at the midpoint implies an 8% decrease year over year or a 6% decrease in constant currency.

In this macro environment, we expect customers to continue to optimize our cloud spend at our three major hyperscale or partners as.

As a result, we expect cloud revenue and <unk> to be approximately flat sequentially in Q4.

Please note as we head into fiscal 'twenty four we plan to anchor our cloud segment guidance on revenue dollars instead of.

To be clear, we will continue to disclose cloud as a key metric as we go through the year.

We expect consolidated gross margin to be approximately 67%.

As we head into Q4, we are forecasting a material reduction in component premiums decreasing NAND costs and engineering product efficiencies.

As such we are confident that product margins will rise in Q4.

These trends also position us nicely heading into fiscal 'twenty four to drive the leverage through our business model.

Early as customers begin to Reengage on all flash capacity build outs.

And customers mix shift away from hybrid spinning disk systems to new <unk>, all flash solutions.

While the exact timing is unclear large enterprise and U S Tech and service provider customers are the largest consumers of data and storage in the global economy, and our all flash on tap systems are structurally and linked to their data growth cross cycle.

In Q4, we expect operating margin to range between 23 and 24%.

We anticipate our tax rate to be approximately 21%.

We are forecasting earnings per share for Q4 to range between $1 30, and $1 40 per share.

Assumed in our Q4 guidance is net interest income of $7 $5 million and a share count of approximately $218 million.

In closing I want to thank the entire net app team for their continued commitment in such an uncertain economic environment.

I'll now hand, the call back to Chris to open the call for Q&A.

Chris.

Thanks, Mike operator, let's begin the Q&A.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.

And the first question will come from Amit <unk> with Evercore. Please go ahead.

Yep. Thanks, taking my question I guess.

The first one I had was if I think about the delta in cloud <unk> from $700 million last quarter do we expect them to maybe 605 range right now how.

How much of the delta or the drop if you may is due to macro issues versus something that might be more company specific that way to parse that out and then do you see the resumption of growth happening in 'twenty four as we go forward.

I think the broad themes that we saw were shared across all of the hyper scaler and across a broad range of customers. We continue to see good numbers of new customer additions to our cloud storage offerings, even though the impact.

In the quarter from there.

Being acquired is slower.

We had we saw no changes to the churn in our cloud storage business.

Did see optimization any movement of capacity from higher cost more high performance levels to lower cost lower performance levels and there was no predictable pattern in terms of what types of customers. As we noted last quarter. We also saw some.

Reductions in spending from customers, who racked up projects with us. So I will just say this is part of normal cloud behavior and consumption. We feel good about the additions we feel good about our engagement with customers and we feel good about the fact that we continue to broaden the number of use cases.

And customer value proposition that we can address that should benefit us moving forward with a more focused route to market approach cloud as well.

And could I have spent maybe 60 seconds on the gross margin dynamics into April quarter, I think essentially saying I think gross margins are flat to up 20 basis points sequentially, but.

But that's despite the fact you have a little bit of revenue leverage and then it sounds like NAND pricing and commodity pricing broadly is coming down. So I would have thought gross margins could be up a bit more maybe in April quarter. So maybe you just talk about the puts and takes on the gross margin line that would be super helpful. Thank you.

Sure. It's Mike So I'll do both hybrid cloud just a little bit of cloud margins as well so on hybrid cloud what we really saw was if you go back to the two big drivers that we saw.

In the business one is with our lower spending in U S. Strategic large enterprise. They are the largest providers of all flash. So we saw all flash dollar index come down. In addition, we've talked about seeing.

So our capacity I E folks buying less terabytes per system that happened within both flash and hybrid. So those two added together brought our margins down in Q3.

Didn't really see a benefit on NAND on premiums yet. This is hopefully the last time I'm going to say this on a call because we fully expect in Q4 that are finally, starting to realize that in the P&L, we will see the benefits.

A lot lower premiums and finally, the lower cost NAND as we work through the inventory will roll through the P&L. So we feel good about the gross margin projection in the April quarter being at least 50% and then cloud margins, it's really dependent more than anything on scale, we feel good about getting to the mid <unk>.

<unk> as we've as we scale that business, but we do need to drive higher revenue so hopefully that helps.

Yeah.

Super Thank you.

Alright, Thanks, and the next question.

The next question will come from David <unk> with UBS. Please go ahead.

Okay, great. Thanks, guys for taking my question.

Maybe George I, just want to go back to your comment that you mentioned that you lost some momentum in hybrid cloud just wanted to drill down on that comment can you maybe elaborate a little bit more specifically what did you mean by that obviously.

It's a key driver of the business and an important cash flow engine, but just would love to get some more color on that and then I have a follow up thanks.

I think there are three elements of that I think the first we have been a little bit later than we would have liked to introduce lower cost.

More value oriented capacity flash arrays, we've corrected that we feel really good about the early interest in our C series.

The second was that we have moved resources to the more stable steady growth parts of the market like the commercial market and lower parts of the enterprise.

The cyclical large enterprise segment, we haven't done as much as we need to and we will continue to do that heading forward.

Third is that from a compensation and goal alignment perspective, we're going to sharply focus certain parts of our field organization to drive our flash portfolio, while aligning other parts of our field organization to focus on the cloud business.

Got it and then maybe just a follow up to that is so.

Typically what is the lead time or how does the cycle or the sales cycle work.

From let's say start to traction for these initiatives should we expect sort of a recovery in let's say the second half of fiscal 'twenty four and these particular markets driven by the strategy or does it take a little bit longer or maybe shorter.

You see some tangible benefits. Thank you.

I think first of all we are excited about the T series products. They will be available this quarter I think the mid tier and the impact of those product portfolios will be in the first half of next <unk> next fiscal year.

Large enterprise segment will continue to be a place of caution for us I think that we will meet we are working with our customers to understand their buying behavior. My senses that and my hope is that they are back buying more aggressively than they have paid in the second part of <unk>.

Next fiscal year, so we hope that the product portfolios in the market this quarter commercial and lower rated parts of the enterprise should see some benefits from that in the first half of next fiscal year, but the large enterprise segment were a bit more cautious about your expectation more accurate around second half of next fiscal year is out.

Hope.

Alright, Thank you very much guys.

Thanks, David next question.

The next question will come from Steven Fox with Fox Advisors. Please go ahead.

Hi, Good afternoon, just following up on those last comments around the commercial versus large enterprise I guess.

How do we think about just sort of a pivot back so that you're prepared for the cycle like what are you looking for in order to maybe have the right resources ready to win.

The large enterprises to come back and you need to be prepared to service them in a more aggressive manner and then I had a follow up.

We are very closely engaged with these customers we've known them for decades, I think the fundamental pattern is that the improvements in their business prospects. So as soon as they see that they start the discussions with us on purchasing.

Okay. That's helpful. And then just in terms of the benefits now with Nandan.

The component costs low can you just talk about or give us a sense for how much of your sales are benefiting from the low cost of NAND in this current quarter and how much more there would be to go before you like at a 100% of where NAND prices are thanks.

So this quarter.

And it's not a big number of Steve and this quarter, we do expect that that will be a significant contributor going into fiscal 'twenty four.

Just how you take a step back on the margin side. There are two significant drivers to our optimism as we look at product margins in <unk> and 'twenty. Four one is the premiums we've talked about that it's about $50 million a quarter. It is a material improvement.

Improvement going into next year NAND as we all know has come down materially every quarter since in the last three quarters. We're finally going to be able to realize in our P&L as we got as we move through high cost inventory and then you talked about the mix that will also benefit product margins going into next year.

And then and then good.

This hopefully FX also help so I would add all four of those together when you look at product margins in fiscal 'twenty four.

Great. That's helpful. Thank you.

Thank you Sachin.

The next question will come from Onesie Mahan with Bank of America. Please go ahead.

Hi, yes. Thank you it sounds like you were impacted by both share and weaker demand in all flash.

Is that correct is the share and as the share loss because of product gap that you are now filling what the FFC. It just seems like a large decline coming just from the low end of the <unk> market. So any color there would be helpful and I will follow up.

Yes, I think.

Our exposure to the large tech and service provider segments.

And our large market share in markets like Germany exposed us when those segments and countries slowed down in their purchasing behavior I think that having a smaller number of <unk> products also precluded us from participating in some purchasing activity.

Im rfps in the past couple of quarters and I think we're excited about the return to having the best lineup of Flash both performance and capacity Flash and we've got to see progress in terms of continued progress in our enterprise and commercial customers over the next few quarters to wait for.

The large enterprise purchasing to come back.

Okay, Okay, Thanks, shark and Youre exiting this year with.

Somewhat worsening momentum given the macro from down 2% constant currency in Q3, two guiding down 6% in Q4.

So all of this new introduction of new products.

Any early thoughts into fiscal 'twenty four I know you commented on your margin improvement in the confidence there, but anything on the revenue side that you can help us with would be super helpful. Thank you.

Yes, I think first of all you have seen us be disciplined stewards of the business in good times and bad you should expect us to continue to maintain operating expenses.

Tightly managed until we see growth.

Product margins as Mike said should have significant upside as we roll into Q.

Into fiscal year 'twenty four as both mixed shifts towards all flash and component costs in all flash come down as well as premiums go away.

In terms of returning to growth listen I think that we will be on aligning our resources to be much more focused on our respective businesses in the flash market you should expect us to continue to track the progress of our flash market share I think that as I said, both enterprise and commercial.

Segment should see growth, while the large enterprise take some more time to come back and then I think in terms of cloud listen I think consumption will continue to be a headwind for a period of time as our cloud provider partners have also said that does not mean that we are going to.

Not continued to accelerate new customer acquisition and a more aligned go to market model for flash and for public cloud services, respectively will help us do that execute better against each of those opportunities. We'll tell you more when we guide fiscal year 'twenty four.

Okay. Thank you Sir.

Thanks Lindsay next question.

The next question will come from Mehdi Hosseini with <unk>. Please go ahead.

Yes, thanks for taking my question.

It seems like.

April .

Fourth quarter fiscal year.

Absolutely.

The sequential bump in revenue, but should I expect rather seasonal trends into Q1 fiscal year 'twenty four I don't have the photo.

Yeah.

Listen at this point, we are being appropriately conservative in our guidance.

I think that when we see the impact of a.

Tough macro environment on customer spending in both Mike and I are being appropriately prudent in our Q4 guide we're not guiding Q1 at this point, we'll guide fiscal year 'twenty, four and Q1, when we do that but at this point I want to be prudent about.

What we see in the market.

Got it and then for Mike should I assume that the full impact of the head count reduction.

Is dialed into the April quarter, or would you be able to reduce the opex into July quarter.

Yeah. Thanks, Thanks, Matt for the question. So we'll get a portion of the restructuring call it 70% to 80% because of notifications and other things. So that is baked into our Q4 implied opex of about $6 75, which is down from our previous number of about 715 most of that is restructuring.

And some incentive comp comp and then the other thing again, we will guide Q1, when we get there I just wanted to add two other things to Georgia, Great summary, going into next year, we talked about product margins, we've talked about opex keep in mind too that FX has been a material headwind for us this year and we expect hope that that is at least flat.

The other thing is keep in mind from a tax rate perspective, we've grown EPS, even with a significantly higher tax rate. So lots of good things going into fiscal 'twenty for that give us confidence in being able to drive the bottom line.

Yeah.

Thank you.

Thanks, Andy next question.

The next question will come from Tim long with Barclays. Please go ahead.

Thank you.

Two questions if I could first.

First.

Just curious on the.

Yes.

C product.

Could you talk a little bit about it sounds like youre expecting that will cannibalize.

Some of the disk and hybrid based system.

The risk there.

There is some effect on the higher performance flash and what would that mean.

<unk> margin structure or revenues.

And then I had a follow up on the cloud after that.

I think the capacity flash arrays that we recently announced.

<unk>.

Workload profile and our performance profile, that's distinct from the performance Flash arrays performance placer typically sub millisecond.

Of latency.

In capacity flash its about two to three milliseconds. So theyre distinct use cases capacity flash will be an upsell on the hybrid flash array and will over time in fact, the percentage of our business makes that hybrid flash.

Yeah.

Okay. Thanks, that's helpful and then on the cloud part in a recovery a two parter one have you noticed any level of engagement, we get the push outs, that's going around but any different level of engagement by the big cloud players and then related to that.

How have you guys progress with transitioning.

On tab.

On premise customers to also start taking some of your cloud based services and their hybrid cloud deployments.

We continue to have great engagement with our cloud provider partners as I mentioned customer acquisition continues to be a good part of our cloud business.

In fact in the quarter is limited because the initial deployments are small so thats. The first second with regard to cross sell multiple cloud services.

After the initial use case, we have done well and I am pleased with progress in terms of the customers that we are engaged with on consumption. There is no assurance difference right. So the pattern is they are reducing.

The performance level of the storage use case, but they're not churning off our service. So I feel really good actually I think its the best part of being a partner is to help your clients use the right combination of services and then in terms of penetration of our installed base wireless early with <unk>.

To see that moving forward steadily I think the penetration in our net ops managed enterprise accounts is much higher than in our commercial segment.

Okay. Thank you very much.

Next question.

The next question will come from <unk> <unk> with Jpmorgan. Please go ahead.

Oh, hi, Thanks for taking my question I guess I had two on the public cloud and if I can just start with.

Just the broader trends that you're seeing in relation to public cloud and the pressures that are on consumption and optimization it.

It doesn't indicate that not every skis, but the enterprises, we're leveraging critical critical.

Cloud I mean, how do you think about some of the addressable market that you were defining it on the cloud storage and cloud ops just in relation to that.

Enterprises don't see everything as being critically in the cloud and there's a lot more room for it.

My vision as it is being demonstrated in doing these budget cuts and I have a follow up.

So first of all I think that the long term trend towards cloud continues to be a strong trend I think even if you look at the most recent data from analyst as well as from the cloud providers.

Cloud market growth is higher than the data center.

Infrastructure growth. So that's one I think second is.

We are learning the behavior patterns of different workload profiles in our customer base I actually think the fact that customers in that.

In down.

Environment is a benefit to the cloud model over the long term because the real cost of operating a cloud environment will then be lower than what you would see on premises.

We are for example, being able to understand and as we spread the consumption of our cloud services across a much larger customer base the impact of any particular customer's change in behavior will actually be much less than it is today.

So we remain bullish about the cloud opportunity bear more sharply focusing our go to market resources to go after it and continuing to sharpen the customer success motion to allow our customers to benefit from the use of our technology more completely.

Okay, Okay, and maybe on the same lines as digging a bit deeper like what are you seeing in relation to sort of the difference in engagement on spot versus.

Cloud insights and when you have net revenue retention rates up around 120% like how does that breakdown between spot and.

<unk> of the portfolio may be seeing a bit more challenges.

Spot has done well and cloud insights are stabilized and met our internal targets. So this shortfall was mostly from the cloud storage business.

I think that in spot it's the opposite right. When people are concerned about cost optimization spot is a perfect tool for that and it had a good quarter.

Okay.

Thank you.

Thanks, Nick next question.

The next question will come from Chris <unk> with Cowen <unk> Company. Please go ahead.

Yeah, Hi, Thanks for taking my question. The first one is it seems like despite the cloud optimization those being 40% of your portfolio the cloud portfolio.

The bank declined from public cloud seems to be more than offsetting any improvement. There. So can you tell us how was the performance of this and do you think at some point this year calendar year.

It could get to be more than 50% of your cloud era, and then I had a follow up.

We continue to add new customers.

To our all of our cloud services cloud App and cloud storage.

The impact of those customers in the first few quarters of there being acquired is actually small because they typically supine small deals and they are testing out the services or the deploy develop and test environment, rather than a production environment those customers who are actually.

<unk>.

Benefits to our business from those customers.

Overrun by the reduction from some of the large customers who contracted their spending in the quarter. So we feel good about your new customer additions can be do more there shortly but I don't think that was the material issue in the quarter.

And if I could it's Mike that we talked about Chris.

Cloud storage is about 60% called out says about 40, we don't see that changing materially it'll move around a little bit by quarter, but we expect that to remain relatively consistent over the next several quarters.

Got it got it Super helpful, George and Mike and then a quick follow up George of kind of like what is your visibility today.

Like how many months visibility do you have and also to an earlier question George you mentioned that when our customers business get better.

We'll start spending again I just wanted to find out is it as simple as that or get to look at other metrics like kind of how you said deal sizes are smaller and maybe deal size gets larger you don't need a CFO approval for purchases.

Any other.

Leading indicators to look into thank you.

We do a whole lot of account level analysis, especially for our larger customers. We look at the total wallet. We look at whether we are gaining share or losing share. We look at are we do we need to bring new business models to you know.

The customer we have done well with our consumption business, our Keystone offering there are many customers that have chosen to use that.

Over the past couple of quarters, rather than go the Capex route. So we're heavily involved with customers right.

Just tell you that it's a daily conversation with customers.

I'm, just trying to sort of the broader theme that in general what we see with the larger customers is that when their business outlook improves.

They generally start to purchase some segments that typically go ahead of GDP and economic.

Performance to lead the market in other parts of that large enterprise segment come along when GDP turns around so.

Look at the business cycle of those customers, that's probably the best leading indicator.

Thanks George.

Thanks, Chris next question.

The next question will come from Matt Sheerin with Stifel. Please go ahead.

Yes. Thank you I had a question on the pricing environment are you seeing any incremental pricing pressure from competitors, given the slower demand environment and with the expectation of lower input costs. Both on components and then give you an opportunity to be more aggressive on pricing or is that not part of the playbook.

I think it's always a competitive environment and it continues to be a competitive environment.

A tough demand environment I don't see any player doing anything kind of.

Out of the ordinary I think that just like everyone else, we see the opportunity, especially with TLC based flash arrays to be competitive in the market.

Okay. Thank you.

Thanks, Matt next question.

The next question will come from Sidney Ho with Deutsche Bank. Please go ahead.

Great. Thank you.

<unk> seen a few down cycles in the past 10 years, where you saw multiple quarters of overall revenue decline of 10% or more on a year over year basis, I think that wasn't 2016.

<unk> and 'twenty.

Curious how you think this cycle will shake out maybe just help us compare and contrast with the previous cycles in terms of the depth and duration of the downturn, maybe they are completely different but and then a follow up question.

Sure.

Listen I think that.

You know, we've got a different mix of business today than we did in the past I think there is a growing percentage of our business from more recurring revenue business models like the cloud business.

I think we've tried to move more of our resources to parts of the market that are less cyclical and that allow us to acquire new customers to broaden our customer base I would say we've done a good job not enough, but we certainly see good progress and we will continue to pivot in that direction.

I think the large customer segment behavior pattern is quite similar to what we've seen in the past I think.

2016 is quite similar to what we see today the only thing that I would point out is that the for many customers 2020 was a very difficult year and so there's a it.

It hasn't been this downturn has not been.

Pre staged by many many years of economic expansion. So we're hopeful that customers will be back buying in a more predictable pattern than they have in the past.

Okay, Great Thats, great maybe a quick follow up here just on the earlier comment.

The answer on the operating expenses, you talked about holding opex flat and tuc growth, but to be clear are you expecting opex to be down in the July quarter from the 675% level in the April quarter, which I know, it's seasonally down for Opex anyway for the July quarter, and you hold expenses at dose levels going forward until revenue growth.

For as soon as that's how we should think about it.

Yes.

It's Mike So theres a couple of nuances I will try to keep this pretty.

And in the <unk>.

Q4 number we do have a portion of the restructuring benefit will get all of that in Q1, the thing that will come back in Q1.

Incentive compensation, hopefully will come back you've seen that Sydney and the last you talked about some of the downturns you've seen this coming out of it as well so on an absolute dollar perspective, it's probably up slightly Q4 to Q1, just based on that but everything else from a controllable perspective, we will try to keep that as flat as we can.

Outside of movements in incentive comp.

Okay, great. Thank you.

The next question.

The next question will come from Jim Suva with Citigroup. Please go ahead.

Thank you I have a different questions one for George and one for Mike I'll ask them at the same time and you all can answer them in any order, but George in the past. Several years you have gained significant market share very significant with this slowdown I'm wondering if you're seeing any share shifts are you continuing to gain share or are you.

Seeing any competitive pricing get even more aggressive I know, it's a competitive market, but youre past several years have spoken multiple leagues of share gains and so I'm just kind of wondering from that perspective, and then for Mike can you comment on the FX or are we looking at kind of maybe two more quarters, and then it laps or three or four more quarters because of <unk>.

<unk> I'm sorry, the FX headwinds are very severe and you're still keeping your full year guidance, which is remarkable but the FX you simply cant just discredit it because it was so material so any looks at when we start to lap that thank you.

I think on the share part.

Our exposure to the large enterprise is bigger than some of our competitors and so I think in a down cycle, we will probably concede share given our exposure to those customers I think the second is now that we have a more you know.

On a full lineup of capacity flash arrays I feel good that we can compete in all the segments of the flash market, which are key to driving share gain and keep the hybrid flash segment, where we have a strong offering moving forward and then I think as I noted in my comments, we are going.

To better align our execution in the field. So that we can more sharply focused on the storage market and more sharply focused on the cloud market in a more tailored go to market model for each.

And Tim It's Mike on your FX question for a full year now vessels on revenue, we expect it to be about a 350 basis point headwind for the full year.

140 basis points in Q4 compared to 340 in Q3, I would expect that it would be almost zero, but slightly a headwind in Q1, and then lap in Q2.

Thank you so much for the details and clarifications.

Thank you Jim next question.

The next question will come from Jason <unk> with William Blair. Please go ahead.

Yes. Thank you.

Hey, George are there any headwinds that you guys are seeing on the revenue side from NAND pricing coming down sharply on your assay business in other words, just street pricing because we know some of your competitors have kind of a cost plus.

Our cost model our margin model.

I think that overall customers budgeted dollars.

So we segmented the market and the use cases quite distinctly distinctly for performance versus capacity Flash I don't think theres going to be material cannibalization between the two I think it really comes down to customer budget dollars being available.

Got you. So is it is this different than what we saw back in like 2018, 2019, where NAND prices came down really drag.

Drastically and it affected kind of revenue for the whole industry.

I think that we've always seen customers buy in dollars and the budget in dollars I think if you ask me right now I don't actually see the NAND pricing coming down being the real headwind I really do think its customers budget and it spending thats the more material area.

Focus for us.

Okay. Thank you.

Thanks, Jason next question.

The next question will come from meta Marshall with Morgan Stanley . Please go ahead.

Great. Thanks for fitting me in.

On the.

The cloud ops portfolio any of this has spoken to kind of a more aligned our sharpened go to market motion I just wanted to get a sense of some of the integrations of those that product portfolio that was going to happen and.

Just whether that's a part of that kind of refined go to market and where we are on that and then the second.

On a piece of that question is just on the cloud storage piece in it.

You guys have had a little bit less visibility into kind of customers that just getting a sense of are some of these sharpening and go to market motions kind of overlay sales just anything that's happening on the cloud storage to increase the visibility there. Thanks.

Yes, I think first meter on.

Cloud <unk>.

It brought together the sales teams for instance, cluster cloud checker and spot into one unified cloud up selling motion and we've seen good momentum with the integrated team I think particularly spot and inter cluster. There is good synergy in turn.

The customer buyer and buying motion that we hope to exploit over the next few quarters, it's too early to call. It a success yet.

In terms of the product portfolio, we brought some of the functionality of cloud checker into spot already for compliance and you should see us build bringing more of those capabilities into spot with regard to cloud storage.

Listen I think the most important work that we're doing is to be closely aligned with the hyper scaler.

Hyperscale cloud providers and some of the key application motions that are going on.

Or.

Chip design or Vmware and I think that what we are going to do as we head into FY 'twenty four is even more closely aligned our hyperscale hyperscale sales resources with those buying motions.

I think that that will give us a better understanding of customer behavior. We've seen good adoption of our customer success capabilities in our subscription cloud storage business, but we have yet to see the full impact from doing so and the consumption cloud business and Thats work ahead of us.

Great. Thanks.

Thanks, Peter next question.

The next question will come from Shannon Cross with Credit Suisse. Please go ahead.

Thank you very much I'm wondering how should we think about the impact of your 8% head count reduction on your top line I know you mentioned a couple of areas. He invested but can you provide some more details on where are the cuts were made and how much of it was I don't know that.

Proverbial back office parcels revenue okay.

Head Count and then I have a follow up thank you.

I think those.

Those costs are factored into our guidance for this quarter and when we guide next year.

As you would expect us to you know.

Factored those into the guidance broadly speaking, we focused our resources on the biggest market opportunity and the places that we impacted or less significant.

<unk> to revenue for us.

In the cloud portfolio as well as in cloud apps.

Made some decisions that will have impacts to <unk> going forward, but I think that those are in the spirit of let's focus on the best market and the best opportunities.

Our guidance for the quarter and vintages those changes Mike do you want to add any.

No I think that's a great answer it's all baked in.

And we did across the board, we tried to focus where we didn't have productivity or revenue issues as George said, a little bit of.

Outside of that we feel good that we are.

So we focused on the right areas.

I guess, where there any cuts in hybrid cloud and then my second question and what drove the year over year increase in stock based comp just given all the pressures you're seeing thank you.

In hybrid cloud.

Noted in my comments to be impacted aster data store.

We are able to solve the kubernetes use case better through a combination of Astra controller, which we continue to invest in and on tap rather than a completely separate architecture like Astro data store and then we had a small business is on fire, but we continued to sustain but we don't plan to grow going forward.

Let me just say Shannon on your question on stock based comp every six months, we have to do a look back on <unk>.

<unk> program and there was about an $11 million I'll call catch up entry in the quarter or two to take into account the lower price of those purchases and you'll see that typically every six months when we do our ESP depending on the price movement of the stock during that period of time.

So that that catch up is done now and assuming your stock stays where it is that there won't be another catch up.

Got that.

$60 million level going forward just to be clear.

So if it stays in the run rate it won't drop down and what happens in six months is dependent on where the stock prices at that purchase date.

Okay. Thank you.

Scott Thanks, Shannon next question.

The next question will come from Nihon <unk> with Northland. Please go ahead.

Yes. Thank you.

What has been the year over year demand trend in the month of February relative to the January quarter.

Has it worsened as implied by the guidance, even with the C series now available.

We're not going to comment about what's happening this quarter I think broadly speaking we're cautious as you can see in our guidance about the pattern of spending for the year I think many parts of our business performed well, but the large enterprise, particularly in the Americas.

Tech and service provider segments.

And certain parts of Europe , particularly UK and Germany have not performed as well and we are concerned about how spend and how robust spending will be there in the short term.

Okay and what's the postmortem on why you guys were late with the lower capacity product on all flash arrays.

We have.

Hybrid flash arrays that serve those use cases, we believe that we could continue to support those use cases with hybrid flash a.

A few months ago, we a few quarters ago.

Created a capacity flash product, we started to see strong pickup but it was at the high end of our lineup and we realized that we needed to introduce a full lineup and that has taken us a little bit more time than we expected.

Good about our lineup now it is the most comprehensive in terms of functionality used cases guarantees and price and capacity points in the market.

Okay. Thank you.

Thanks, Tal next question the.

Next question will come from Ananda Baruah with loop capital. Please go ahead.

Hey, Thanks, guys appreciate it.

Hey, George just a sort of circling back to your remarks about concentration with financial services and service provider.

Do you feel the company.

Has greater.

Get greater exposure to those end markets than than than your key competitors and is there anything that you can do with it you're focused on to try to diversify that exposure and then I have a quick follow up thanks.

Listen I don't want to comment about our competitors I should let you ask them that question I think what we have seen is that we have got a large base of high tech and service provider customers and large enterprise customers they are demanding customer.

And they are forward leaning and theres lots of benefits to having those customers, but when they are in a down cycle. It does impact our business over the years, we've done a few things to expand our business.

One we continue to invest in the commercial segment, it's too early to call that a broad push but we've seen good results. We've also brought in the number of enterprise customers.

Sign up below the large enterprise and perhaps most importantly has been the push to grow our cloud business cloud has been the single most.

Strongest vehicle for new customer additions for us and Im very pleased with that route to market that we've enabled over the past few years.

That's great context, and the quick follow up is both you and Mike and your AR and your earmark.

Mike I think in his prepared remarks in years in response to your question made reference to.

Mix shift and an all flash in 'twenty four sorry, not next year and industry shifts all flashing 20 point. There was just wondering is that something that you guys see as being distinct from what current trend is.

Do you see a break in the trend and that's it so an amplification tread.

I think broadly speaking as we have said in past cycles. When the price of NAND comes down you see a mix shift towards plus based system.

<unk> based system.

This has been more steady than sort of up and down like flash. So that's the broad trend in our case, we expect that shift to also benefit from the fact that we now have.

To complete lineups high performance flash, which will benefit from NAND.

And capacity Flash, which will also benefit from that.

Yes.

I got it I appreciate the context. Thank you.

Thanks, Amanda next question.

Our last question will come from Kyle Mcnealy with Jefferies. Please go ahead.

Hi, Thanks, very much for the question.

Can you talk a little bit about the positive impact you expect to have from AI on the business what's.

What's the positive impact will come from is it a higher mix of high performance low latency all flash just sheer data growth are both those factors and.

Do you think we'll have to get past the near term softer macro environment that you've been talking about through 'twenty three two.

Do we see some kind of material new AI workload growth. Thanks.

AI workloads continue to grow in parts of the market that are more resilient to commodity cycles. So for example, lifesize certain elements of financial services industries that are more counter cyclical have done well and we continue to see that moving forward.

AI workloads, especially those that do image and audio analysis for example in life Sciences.

<unk>.

Cancer detection of various types of diagnostic Kate cases are perfectly suited to net I mean, we store a large number of files at a very high performance system and so we are benefiting from those use cases today and certainly at the range of AI tool chain.

To grow we expect that to be a more material contributor to our business going forward.

Alright, thanks that helpful.

Thanks, Kyle I'm going to pass it back to George for some closing comments.

It's Chris.

Our strategy is aligned to the long term secular growth trends of data driven digital and cloud transformation.

Address key long term priorities for our customers with strong positions in each of our key markets and have demonstrated success in controlling the elements within our control.

Over the course of our history, we've been through several challenging macroeconomic period.

We have used to sharpen our focus.

New opportunity and emerge in a better position.

We are committed to doing that again.

You can expect that.

<unk> prudent stewards of the business tightly managing the elements within our control.

Reinvigorate efforts across the company in support of our storage business.

And build a more focused approach to our public cloud business.

We'll give you updates on our progress in coming quarters. Thank you.

This conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Oh.

Okay.

[music].

Yeah.

[music].

Good day and welcome to the <unk> third quarter fiscal year 2023 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. If you ask a question you May Press Star then one on your Touchtone phone and to withdraw your question.

Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Kris Newton Vice President of Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining us with me today are CEO , George Korean 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 2023, our expectations regarding future revenue profitability and shareholder returns.

<unk>, while optimizing our operating costs and our ability to strengthen our position rebalance our sales and marketing efforts and drive sustained growth in both our hybrid cloud and public cloud segments in a turbulent macroeconomic 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 it capital spending environment, including the focus on optimization of cloud spending inflation rising interest rates and foreign exchange volatility.

Maintain our customer partner supplier and contract manufacturer relationships on favorable terms and conditions managed materials cyber security and other security breaches and manage our gross profit margins 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 spin.

I'll now turn the call over to George.

Thanks, Chris Good afternoon, everyone. Thanks for joining us today.

In Q3, we executed well on the elements under our control in the face of weakening our it spending environment.

And continued cloud cost optimization this'll.

Disciplined operational management yielded operating margin and EPS that exceeded expectations. Despite revenue coming in at the low end of our guidance.

We are delivering on our commitments and responding to the dynamic environment.

We adjusted our cost structure introduced a portfolio of capacity flash arrays to support cost sensitive customers and continue to work with our customers to help them optimize their cloud spending.

On today's call I will discuss our Q3 results in the context of the current environment.

And our plans to sharpen our execution to accelerate near term results and enhance our long term position.

We continued to see increased budget scrutiny, requiring higher level approvals, which resulted in smaller deal sizes longer selling cycles and some deals pushing out.

We are feeling this most acutely in large enterprise and the Americas second service provider sectors.

At the start of Q4, we implemented a workforce reduction of approximately 8%.

Decisions that impact our employees are always difficult.

Great Pride and fostering the Netapp culture and.

And I am committed to using this difficult action to refocus our team guided by the values and mission of the company.

Our hybrid flash and <unk> based all flash arrays continued to perform well benefiting from customers price sensitivity in this challenging macro.

This shift from high performance, all flash arrays to lower cost solutions, coupled with the lower spending environment.

Specially among large enterprise and U S Tech and service provider customers, who are large consumers of flash created headwinds to our product and all flash array revenues in.

In Q3, our all flash array business decreased 12% from Q3, a year ago to an annualized revenue run rate of two $8 billion.

Public cloud era of $605 million did not meet our expectations driven by a shortfall in cloud storage as a result of the same factors we experienced last quarter.

Spending optimization and the winding down of project based workloads like chip design.

And HBC, where headwinds again in Q3.

We have a sizable base of public cloud customers with a number of large customers who have grown rapidly over the past year and are now optimizing.

Their cost optimizations mask the growth of other customers.

We continue to add new customers and churn has remained consistently low.

Overall, the cloud Arps portfolio performed to plan.

Cloud insights are stabilized and spark continues to grow nicely benefiting from the cost optimization trends are.

Our dollar based net revenue retention rate.

Kris do a 120%, but it's still within healthy industry norms.

We are confident that we remain well positioned to take advantage of the secular growth trends of data driven digital and cloud transformations.

We are aligned to customers top priority and have demonstrated success in controlling the elements within our control.

Building on that solid foundation, we are sharpening our execution to accelerate near term results, while strengthening our position for when the spending environment rebounds.

We have three areas of focus.

First we will remain prudent stewards of the business and we will continue to tightly manage the elements within our control.

Second we are reinvigorating efforts across the company in support of our storage business.

Third we are building a more focused approach to our public cloud business.

Starting with the first area of focus.

The remaining prudent stewards of the business and managing the elements within our control.

We will maintain our focus on cost controls so that expenses do not grow ahead of revenue.

We will achieve this by maintaining our scrutiny on program spending and hiring as well as focusing our investments on the products that represent the biggest opportunity.

We've made difficult decisions to reduce investment in products with smaller revenue potential like aster data store and solid fire.

The results of this focus are visible in our ability to maintain our free cash flow operating margin and EPS guidance, despite lower revenue.

Onto the second focus area reinvigorating our storage business.

As we moved rapidly to embrace cloud we lost some momentum in our hybrid cloud business.

We are taking decisive action to strengthen our position in performance by better addressing the areas of market growth.

Delivering more customer value and realigning our go to market activities to better address this opportunity.

We were slow to fully embrace the customer desire for lower cost capacity oriented all flash systems.

At the start of Q4, we rectified that situation with the introduction of the <unk> C series. The most comprehensive industry, leading portfolio of <unk> based all flash arrays that addresses a wide range of workloads and price points.

These products will help customers manage through a cost sensitive environment while.

While at the same time supporting their pursuit of sustainability targets.

Initial response has been very positive and we are already quoting deals for customers.

The Affc series will drive <unk> revenue and support product gross margin as customers rotate from lower margin hybrid Flash you all flash systems.

In addition to expanding our product portfolio, we've introduced a number of innovations to improve the customer experience and bring predictability to their investment process.

In Q3, we released Blue XP, a unified control plane that helps decrease resource waste complexity and the risk of managing diverse environments.

As a part of our sustainability commitment we are previewing, a new dashboard and blue XP to help customers understand their data center carbon footprint across environments.

Early in Q4, we introduced Netapp advance.

Best in class portfolio of programs and guarantees, which is already helping us win new customers and drive revenue.

We believe that these actions will enable us to drive product revenue growth and regain share in the all flash array market.

Finally, our third area of focus.

Building, a more focused approach to cloud.

While we are reinvigorating our storage business, we have no intention of taking our foot off the pedal in public cloud. It represents a huge growth opportunity for us with a gross margin profile that is accretive to the business.

Additionally, our public cloud services are highly differentiated with a multiyear advantage over our traditional competitors.

And create customer preference for net app.

We have sharpened the focus in our cloud ops portfolio and have taken actions that could have future revenue and there are implications.

We believe that our cloud apps services will continue to deliver stable steady growth over the long term.

Our customer success team has made good progress in driving utilization of our cloud services.

But we need to do more with our cloud storage and data services.

Additionally, we recognized that we have not been using our go to market resources to their best effect here.

In addition to refocusing our sales team on the reinvigorated storage portfolio.

These factors coupled with the current cloud cost optimization environment have impacted our ability to forecast a R. R.

However, as we grow the business the impact from a subset of customers will be mitigated smoothing its growth and improving predictability.

I want to underscore my confidence in this opportunity.

The migration of enterprise applications, like SAP, and Vmware to the cloud as well as cloud native applications like artificial intelligence create a massive market and which we can grow.

We believe strongly that public cloud services can be a multibillion dollar <unk> business for us power.

However, achieving that target will take longer than we initially planned due to the industry wide slowdown in cloud spending.

And our recent performance.

In closing we have seen tangible success.

From our efforts to manage the elements within our control in a challenging environment.

Despite our lower revenue outlook.

We have preserved free cash flow and EPS expectations.

In the first three fiscal quarters of this year, we have returned over $1 billion to shareholders and reduced share count by 4%.

We are sharpening our execution to accelerate near term results.

And enhance our position for the long term.

We are taking the steps now so that as we begin FY 'twenty four we are in a new more focused operating model.

To attack the opportunity ahead drive growth and deliver shareholder value.

Before turning the call over to Mike.

To give my thanks to the Netapp team for their operational discipline and rapid response to set us up for better results.

I've seen firsthand how hard they are working to navigate the challenging environment and I really appreciate their efforts.

Number one despite the temporary headwinds to revenue.

Our disciplined operational management yielded op margin and EPS above the high end of guidance.

Number two the macro backdrop in demand environment continued to be major headwinds the.

The weakening it spending environment was most pronounced in our large enterprise and use technology and service provider customers and materially impacted our all flash revenue in Q3, while significant cloud optimization across all three major hyperscale.

You need to weigh heavily on AOR growth.

Although the U S dollar weakened slightly during Q3 FX continues to be a material headwind to our financial results on a year over year basis.

Number three as we navigate through this fluid demand environment, we remain laser focused on driving operating margins and free cash flow generation.

Towards this end, we took swift action in Q3 to control costs through increased program spending scrutiny and a hiring freeze.

And at the start of Q4, we implemented a reduction in force of approximately 8%.

In addition to adjusting our own cost structure. We also introduced C series, a portfolio of <unk> capacity flash arrays to support cost sensitive data center customers and we continue to work with our cloud customers to help optimize their spending.

Number four as a result of our disciplined cost management, we are reiterating our full year EPS guide of $5 30 to $5 50.

We are also confident in our free cash flow target of 1.1 billion.

Adjusting for the restructuring and onetime cash payment in Q4.

From a capital allocation perspective, we remain committed to returning more than 100% of fiscal 'twenty, three free cash flow to investors through dividends and share repurchases.

Now to the details as a reminder, I'll be referring to non-GAAP numbers unless otherwise noted.

Q3, billings were 1.57 billion down 11% year over year.

Revenue came in at 153 billion down 5% year over year.

Adjusting for the 340 basis point headwind from FX billings and revenue would have been down, 7% and 2% year over year, respectively.

Even with the challenging Q3, our cloud portfolio continues to positively impact the overall revenue growth profile of net out.

Hybrid cloud segment revenue of $1.38 billion was down 9% year over year.

Product revenue of $682 million decreased 19% year over year as customers took a decidedly cautious approach to capital spending.

Total Q3 recurring support revenue of $616 million increased 5% year over year, highlighting the health of our installed base.

Public cloud <unk> exiting Q3 at $605 million up 29% year over year.

Public cloud revenue recognized in the quarter was $150 million up 36% year over year and 6% sequentially.

As highlighted by our three major Hyperscale or partners.

<unk> continued to optimize our cloud spend as organizations are exercising caution.

Given the macro economic uncertainty.

The timing of the recovery remains unclear we are confident the secular trends of AI.

<unk> learning Iot and high performance computing, along with the migration of enterprise apps like Vmware and SAP.

We will drive long term growth and cloud storage consumption.

Recurring support in public cloud revenue of $766 million was up 10% year over year constituting 50% of total revenue.

We ended Q3 with $4 $2 billion in differed revenue an increase of 6% year over year.

Q3 marks the 20th consecutive quarter of year over year deferred revenue growth, which is the best leading indicator for recurring revenue growth.

Total gross margin was 67% in Q3 in line with our guidance.

Total hybrid cloud gross margin was also 67% in Q3.

Within our hybrid cloud segment product gross margin was 46, 5%, including a two point year over year headwind from FX.

As noted our large enterprise and U S Tech and service provider customers have continued to reduce capex spend as they rightsize their spending envelope.

These customers are the most forward leaning technology adopters.

And the biggest consumers of all flash systems in the economy.

And Theyre pause in Capex spending has had a material impact on our total revenue.

All flash mix and product margins.

And while the supply chain component premiums in NAND pricing, notably improved in Q3.

We had to work through higher cost inventory during the quarter.

We expect the improving supply chain and NAND pricing to be a tailwind the product margin in Q4 and fiscal 'twenty four.

Our growing recurring support business continues to be very profitable with gross margin of 93%.

Public cloud gross margin of 69% was accretive to the corporate average for the ninth consecutive quarter.

We remain confident in our long term public cloud gross margin goal of 75% to 80% as the business scales and an increasing percentage of our public cloud revenue is driven by cloud and software solutions.

While revenue came in at the low end of guidance Q3 highlighted our operational discipline and cost controls with operating margin of 24%, including two points of FX headwinds.

EPS of $1 37 came in above the high end of guidance and included 14 sets of.

Year over year FX headwind.

Cash flow from operations was $377 million and free cash flow was $319 million.

Inventory turns increased to 12 in Q3 up from nine in Q2.

Our supply chain challenges eased in the quarter, enabling us to take down inventory by nearly $70 million sequentially.

During Q3, we repurchased $200 million in stock and paid out $108 million in cash dividends.

In total we returned $308 million to shareholders, representing 97% of free cash flow.

Share count of $219 million was down 4% year over year.

We closed Q3 with $3 $1 billion in cash and short term investments up $108 million sequentially.

Now to guidance.

As George discussed we are seeing continued softening in the macro backdrop with customers, taking a decidedly cautious approach to spending.

We now expect fiscal 'twenty three revenue to be roughly flat year over year, which includes three to four percentage points of FX headwind.

In fiscal 'twenty, three we continue to expect gross margin to range between 66% 67%.

As elevated component cost and FX headwinds way on product margins.

While the timing is uncertain, we remain confident that our structural product margins will normalize back to the mid fifties in the fullness of time.

Early when you factor in our new C series portfolio, which will largely displace lower margin hybrid spinning disk systems in our product mix.

Last quarter, we committed to protecting both EPS and free cash flow during this uncertain macro environment.

Today, we are reiterating our full year EPS guide of $5 30 to $5 50.

Which includes 54 cents of currency impacts.

We also continue to expect to generate $1 1 billion and free cash flow, excluding one time items.

From a capital allocation perspective, we remain committed to returning more than 100% of fiscal 'twenty, three free cash flow to investors through dividends and share repurchases.

Now onto Q4 guidance.

We expect Q4 net revenues to range between 1.4 dollars 75 billion and 162 5 billion, which at the midpoint implies an 8% decrease year over year or a 6% decrease in constant currency.

In this macro environment, we expect customers to continue to optimize our cloud spend at our three major hyperscale or partners.

As a result, we expect cloud revenue and <unk> to be approximately flat sequentially in Q4.

Please note as we head into fiscal 'twenty four we plan to anchor our cloud segment guidance on revenue dollars instead of a R. <unk>.

To be clear, we will continue to disclose cloud as a key metric as we go through the year.

We expect consolidated gross margin to be approximately 67%.

As we head into Q4, we are forecasting a material reduction in component premiums decreasing NAND costs and engineering product efficiencies.

As such we are confident that product margins will rise in Q4.

These trends also position us nicely heading into fiscal 'twenty four to drive the leverage through our business model.

Particularly as customers begin to Reengage on all flash capacity build outs.

And customers mix shift away from hybrid spinning disk systems to new <unk>, all flash solutions.

The exact timing is unclear large enterprise and U S Tech and service provider customers are the largest consumers of data and storage in the global economy, and our all flash untapped systems are structurally and linked to their data growth cross cycle.

In Q4, we expect operating margin to range between 23 and 24%.

We anticipate our tax rate to be approximately 21%.

We are forecasting earnings per share for Q4 to range between $1 30, and $1 40 per share.

Assumed in our Q4 guidance is net interest income of $7 $5 million and a share count of approximately $218 million.

In closing I want to thank the entire Netapp team for their continued commitment in such an uncertain economic environment.

I'll now hand, the call back to Chris to open the call for Q&A.

Chris.

Thanks, Mike operator, let's begin the Q&A.

And the first question will come from Amit <unk> with Evercore. Please go ahead.

Thanks, taking my question I guess.

The first one I had was if I think about the delta in cloud <unk> from 700 million last quarter that we expect them to maybe 605 range right now how.

How much of a delta or the drop if you may is due to macro issues versus something that might be more company specific as a way to parse that out and then do you see the resumption of growth happening in 'twenty four as we go forward.

In the quarter from there.

Being acquired is slower.

We had we saw no changes to the sugar in our cloud storage business.

And customer value propositions, we can address that should benefit us moving forward with a more focused route to market approach cloud as well.

And could I have spent maybe 60 seconds on the gross margin dynamics into April quarter, I think you're essentially saying I think gross margins are flat to up 20 basis points sequentially, but.

But that's despite the fact you have a little bit of revenue leverage and then it sounds like non pricing and commodity pricing broadly is coming down. So I would have thought gross margins could be up a bit more maybe in April quarter. So maybe just talk about the puts and takes on the gross margin line that'd be super helpful. Thank you.

Sure it's Mike so.

I'll do both hybrid cloud just a little bit of a cloud margins as well so on hybrid cloud what we really saw was if you go back to the two big drivers that we saw.

In the business one is with our lower spending in U S. Strategic large enterprise. They are the largest providers of all flash. So we saw all flash dollar and mix come down. In addition, we've talked about seeing.

So our capacity I E folks buying less terabytes per system that happened within Paul.

<unk>.

And hybrid so those two added together brought our margins down in Q3.

Didn't really see a benefit on NAND on premiums yet. This is hopefully the last time I'm going to say this on a call because we fully expect in Q4.

Finally, starting to realize that in the P&L, we will see the benefits.

A lot lower premiums and finally, the lower cost NAND as we work through the inventory will roll through the P&L. So we feel good about the gross margins projection in the April quarter being at least 50% and then cloud margins, it's really dependent more than anything on scale, we feel good about getting to the mid <unk>.

<unk> as we've as we scale that business, but we do need to drive higher revenue so hopefully that helps.

Yeah.

Super Thank you.

Alright, Thanks, and the next question please.

The next question will come from David <unk> with UBS. Please go ahead.

Okay, great. Thanks, guys for taking my question.

A key driver of the business and an important cash flow engine, but just would love to get some more color on that and then I have a follow up thanks.

I think there are three elements of that I think the first.

We have been a little bit later than we would have liked to introduce lower cost more value oriented capacity flash arrays, we've corrected that we feel really good about the early interest in our C series.

The second was that we have moved resources to the more stable steady growth parts of the market the commercial market and lower parts of the enterprise from the cyclical.

Large enterprise segment, we haven't done as much as we need to and we will continue to do that heading forward.

Third is that from a compensation and golar alignment perspective, we're going to sharply focus certain parts of our field organization to drive.

Portfolio, while aligning other parts of our field organization to focus on the cloud business.

Got it and then maybe just a follow up to that is so typically what is the lead time or how does the cycle or the sales cycle work.

Benefits. Thank you.

I think first of all we are excited about the C series products.

I'll be available this quarter I think the material impact of those product portfolios will be in the first half of next Kevin next fiscal year.

The large enterprise segment will continue to be a place of caution for us I think that we will need we are working with our customers to understand their buying behavior. My sense is that and my hope is that they are back buying more aggressively than they have paid in the second part of <unk>.

<unk> fiscal year, so we hope that the product portfolios in the market this quarter commercial and lower end parts of the enterprise should see some benefits from that in the first half of next fiscal year, but the large enterprise segment were a bit more cautious about your expectation is more accurate around second half of next fiscal year is out.

<unk>.

Alright, Thank you very much guys.

Thanks, David next question.

The next question will come from Steven Fox with Fox Advisors. Please go ahead.

Hi, Good afternoon, just following up on those last comments around the commercial versus large enterprise I guess.

How do we think about just sort of a pivot back so that you're prepared for the cycle like what are you looking for in order to maybe have the right resources ready for when.

The large enterprises do come back and you need to be prepared to service them in a more aggressive manner and then I had a follow up.

Okay. That's helpful. And then just in terms of the benefits now with Nandan.

The other component costs low can you just talk about give us a sense for how much of your sales are benefiting from the low cost of NAND in this current quarter and how much more that would be to go before you like at a 100% of where NAND prices are thanks.

So this quarter.

Dan it's not a big number Steve and this quarter, we do expect that that will be a significant contributor going into fiscal 'twenty four.

Just how do you take a step back on the margin side. There are two significant drivers to our optimism as we look at product margin and 24. One is the premiums we've talked about that it's about $50 million a quarter. It is a material improvement.

Improvement going into next year NAND as we all know has come down materially every corner since in the last three quarters. We're finally going to be able to realize in our P&L as we got as we move through high cost inventory and then you talked about the mix that will also benefit product margins going into next year.

And then and then goodness hopefully FX also help so I would add all four of those together when you look at product margins in fiscal 'twenty four.

Great. That's helpful. Thank you.

Thank you question.

The next question will come from Onesie Mahan with Bank of America. Please go ahead.

Alright, yes. Thank you it sounds like you were impacted by both share and weaker demand in all flash.

Is that correct is the share and as a share loss because of product gap that you are not filling what the FFC. It just seems like a large decline coming just from the low end of the FF markets. So any color there would be helpful and I have a follow up.

Yes, I think there is.

Our exposure to the large tech and service provider segments.

And our large market share in markets like Germany exposed us when those segments and countries slowed down in their purchasing behavior I think that having a smaller number of QM products also precluded us from participating in some purchasing activity.

The large enterprise purchasing to come back.

Okay, Okay, thanks charge and Youre exiting this year with.

Somewhat worsening momentum given given the macro from down 2% constant currency in Q3 two.

Being down 6% in Q4.

So all of this new introduction of new products.

Yes, I think first of all you have seen us be disciplined stewards of the business in good times and bad you should expect us to continue to maintain operating expenses.

Tightly managed until we see growth.

Product margins as Mike said should have significant upside as we roll into Q.

Into fiscal year 'twenty four as both mixed shifts towards all flash and component costs in all flash come down as well as premiums go away.

Segment should see growth, while the large enterprise takes some more time to come back and then I think in terms of cloud listen I think consumption will continue to be a headwind for a period of time as our cloud provider partners have also said that does not mean that we are going to.

Not continue to accelerate new customer acquisition and a more aligned go to market model for flash and for public cloud services, respectively will help us do that execute better against each of those opportunities. We'll tell you more when we guide fiscal year 'twenty four.

Okay. Thank you Sir.

Thanks Lindsay next question.

The next question will come from Mehdi Hosseini with <unk>. Please go ahead.

Yes, thanks for taking my question.

It seems like.

April .

Fourth quarter fiscal year.

Helps with it.

The sequential bump in revenue, but should I expect rather seasonal trend into Q1 fiscal year 'twenty four I have a follow up.

Listen at this point, we are being appropriately conservative in our guidance.

I think that we see the impact of a tough.

Tough macro environment on customer spending in both Mike and I are being appropriately prudent in our Q4 guidance. We're not guiding Q1 at this point, we'll guide fiscal year 'twenty, four and Q1, when we do that but at this point I want to be prudent about.

What we see in the market.

Got it and then for Mike Schall.

I assume that the full impact of the head count reduction.

Is dialed into the April quarter, or would you be able to reduce the opex into July quarter.

And some incentive comp comp and then the other thing again, we will guide Q1, when we get there I just wanted to add two other things to Georgia is great summary, going into next year, we talked about product margins, we've talked about opex keep in mind too that FX has been a material headwind for us this year and we expect hope that that is at least flat.

Thank you.

Thanks, <unk> next question.

The next question will come from Tim long with Barclays. Please go ahead.

Thank you.

Two questions if I could first.

First just curious on the.

Yes.

Crush seat product.

Could you talk a little bit about it sounds like youre expecting that will cannibalize.

Some of the disk and hybrid based systems.

Risks there.

There is some effect on the tire performance flash and what would that mean.

<unk> margin structure or revenues.

And then I had a follow up on the cloud after that.

I think the capacity flash arrays that we recently announced.

<unk>.

Workload profile and our performance profiles that.

Inked from performance Flash arrays performance placer typically sub millisecond.

Latency.

In capacity.

Capacity flash its about two to three milliseconds. So theyre distinct use cases capacity flash will be an upsell on the hybrid flash array and will overtime in fact, the percentage of our business makes that hybrid flash.

Okay.

Okay. Thanks, that's helpful and then on the cloud part in the recovery two parter. One have you noticed any level of engagement, we get some push outs, that's going around but any different level of engagement by the big cloud players and then related to that.

How are you guys progress with transitioning.

On tab.

On premise customers to also start taking some of your cloud based services and their hybrid cloud deployments.

We continue to have greater engagement with our cloud provider partners as I mentioned customer acquisition continues to be a good part of our cloud business.

In fact in the quarter is limited because the initial deployments are small so that's the first.

With regards to cross selling multiple cloud services.

After the initial use case, we have done well and I am pleased with progress in terms of the customers that we are engaged with on consumption. There is no sure different strike. So the pattern is they are reducing.

We continue to see that moving forward steadily I think the penetration in our net managed enterprise accounts is much higher than in our commercial segment.

Okay. Thank you very much.

Thanks, Tim next question.

The next question will come from <unk> <unk> with Jpmorgan. Please go ahead.

Oh, hi, Thanks for taking my question I guess I had two on the public cloud and if I can just start with.

<unk> trends that you're seeing in relation to public cloud and the pressures that are on consumption and optimization it.

It doesn't indicate that not every use case that the enterprises, we're leveraging critical.

And critical in the cloud I mean, how do you think about some of the addressable market that you were defining around the cloud storage and cloud ops just in relation to that.

Enterprises don't see everything as being critically in the cloud and there is a lot more room for optimization.

Optimization.

As has been demonstrated during these budget cuts and I have a follow up.

So first of all I think that the long term trend towards cloud.

Used to be.

From trend I think even if you look at the most recent data from analyst as well as from the cloud providers. The public cloud market growth is higher than the data center infrastructure growth. So that's one I think second is.

So we are learning the behavior patterns of different workload profiles in our customer base.

Actually think the fact that customers.

In down.

Environments is a benefit to the cloud model over the long term because the real cost of operating a cloud environment will then be lower than what you would see on premises.

Bullish about the cloud opportunities bear more sharply focusing our go to market resources to go after it and continuing to sharpen the customer success motion.

All of our customers to benefit from the use of our technology more completely.

Okay, Okay, and maybe on the same lines as digging a bit deeper like what are you seeing in relation to sort of the difference in engagement on spot versus.

Cloud insights and when you have net revenue retention rates up around 120% like how does that breakdown between spot and the risk of the portfolio may be seeing a bit more challenges.

Spot has done well and cloud insights are stabilized and met our internal targets. So this shortfall was mostly from the <unk>.

Storage business I think that in spot. It's the opposite right. When people are concerned about cost optimization spot is a perfect tool for that I mean, they had a good quarter.

Okay. Thank you.

Thanks, Nick next question.

The next question will come from Chris <unk> with Cowen <unk> Company. Please go ahead.

Yeah, Hi, Thanks for taking my question. The first one is it seems like despite the cloud optimization those being 40% of your portfolio with loan portfolio. The bank have declined from public cloud closed seems to be more than offsetting any improvement. There. So can you fill it out the performance of this and do you think at some point this year calendar year.

It could get to be more than 50% of your cloud era, and then I had a follow up.

We continue to add new customers.

To our all of our cloud services cloud App and cloud storage.

The impact of those customers in the first few quarters of there being acquired is actually small because they typically supplying small deals and they are testing out the services or the deploy develop and test environment, rather than a production environment.

Those customers who are actually.

The benefits to our business from those customers was overrun by the reduction from some of the large customers who contracted their spending in the quarter. So we feel good about new customer additions can be do more there shortly but I don't think that was the material issue in the quarter.

<unk>.

And if I could it's Mike we've talked about Chris Hey, cloud storage is about 60% cloud ounces about 40, we don't see that changing materially it'll move around a little bit by quarter, but we expect that to remain relatively consistent over the next several quarters.

Got it got it Super helpful, George and Mike and then a quick follow up George Carlin.

Kind of like what is your visibility today like.

Like how many months visibility do you have and also to an earlier question George you mentioned that when our customers business get better there.

I'll start spending again, I mean, I just wanted to find out is it as simple as that or get to look at other metrics like kind of how you set deal sizes are smaller and maybe deal size gets larger you don't need a CFO approval for purchases.

Any other.

Leading indicators to look into it thank you.

The customer we have done well with our consumption business, our Keystone offering there are many customers that have chosen to use that.

Over the past couple of quarters, rather than go the Capex route so.

So we're heavily involved with customers right.

Tell you that it's a daily conversation with customers.

I'm, just trying to sort of take the broader theme that in general what we see with the larger customers is that when their business outlook improves.

Generally start to purchase some segments that typically go ahead of GDP and economic.

Performance to lead the market in other parts of that large enterprise segment come along when GDP turns around so.

Look at the business cycle of those customers, that's probably the best leading indicator.

Thanks George.

Thanks, Chris next question.

The next question will come from Matt Sheerin with Stifel. Please go ahead.

Yes. Thank you I had a question on the pricing environment are you seeing any incremental pricing pressure from competitors, given the slower demand environment and with the expectation of lower input costs. Both on components and NAND gives you an opportunity to be more aggressive on pricing or is that not part of the playbook.

I think it's always a competitive environment and it continues to be a competitive environment.

A tough demand environment I don't see any player doing anything kind of.

Out of the ordinary I think that just like everyone else, we see the opportunity, especially with <unk> based flash arrays to be competitive in the market.

Okay. Thank you.

Thanks, Matt next question the.

The next question will come from Sidney Ho with Deutsche Bank. Please go ahead.

Great. Thank you.

You guys seen a few down cycles in the past 10 years, where you saw multiple quarters of overall revenue decline of 10% or more on a year over year basis, I think that was it.

<unk> and 'twenty curious how you think this cycle will shake out maybe just help us compare and contrast with the previous cycles in terms of the depth and duration of the downturn, maybe they are completely different but and then a follow up question.

Sure.

Listen I think that.

I think we've tried to move more of our resources to parts of the market that are less cyclical and that.

Allow us to acquire new customers to broaden our customer base I would say we've done a good job not enough, but we certainly see good progress and we will continue to pivot in that direction.

The large customer segment.

Gave you a pattern is quite similar to what we've seen in the past I think.

2016 is quite similar to what we see today, the only thing that I would point out is that the.

For many customers 2020 was a very difficult year and so there is.

It hasn't been this downturn has not been.

Pre staged by many many years of economic expansion. So we're hopeful that our customers will be back buying in a more predictable pattern than they have in the past.

Okay, Great Thats, great maybe a quick follow up here just on the earlier.

And Sir on the operating expenses, you talked about holding Opex flat until you see growth, but to be clear are you expecting opex to be down in the July quarter from the 675% level in the April quarter, which I know, it's seasonally down for Opex anyway for the July quarter.

You hold expenses at dose levels going forward until revenue growth as soon as that is how we should think about it.

Yes.

So theres a couple of nuances I will try to keep this pretty is that in the.

Q4 number we do have a portion of the restructuring benefit will get all of that in Q1, the thing that will come back in Q1.

Incentive compensation and hopefully we will come back you've seen that Sydney and the last you talked about some of the downturns you've seen that's coming out of it as well so on an absolute dollar perspective, it's probably up slightly Q4 to Q1, just based on that but everything else from a controllable perspective, we will try to keep that as flat as we can.

Outside of movements in incentive comp.

Okay, great. Thank you.

The next question.

The next question will come from Jim Suva with Citigroup. Please go ahead.

Fedex I'm sorry, the FX headwinds are very severe and you're still keeping your full year guidance, which is remarkable but the FX you simply cant just discredit it because it was so material so any looks at when we start to lap that thank you.

I think on the share part.

Kind of a full lineup of capacity flash arrays I feel good that we can compete in all the segments of the flash market, which are key to driving share gain.

And keep the hybrid flash segment, where we have a strong offering moving forward and then I think as I noted in my comments, we are going to better align our execution in the field. So that we can more sharply focused on the storage market and more sharply focused.

On the cloud market in a more tailored go to market model for each.

Yes.

And Jim It's Mike on your FX question for a full year now vessels on revenue, we expect it to be about a 350 basis point headwind for the full year about 140 basis points in Q4 compared to 340 in Q3, I would expect that it would be almost zero, but.

Lately a headwind in Q1, and then lap in Q2.

Thank you so much for the details and clarifications.

Jim next question.

The next question will come from Jason Ader with William Blair. Please go ahead.

Yes. Thank you.

Cost model our margin model.

I think that overall.

Overall customers budget in dollars and so we segmented the market and the use cases quite distinctly distinctly for performance versus capacity Flash I don't think theres going to be material cannibalization between the two I think it really comes down to customer budget dollars being available.

Got you. So is this different than what we saw back in like 2018, 2019, where NAND prices came down really.

Drastically and it affected kind of revenue for the whole industry.

It spending thats the more material area of focus for us.

Okay. Thank you.

Thanks, Jason next question.

The next question will come from meta Marshall with Morgan Stanley . Please go ahead.

Great. Thanks for fitting me in.

On the cloud ops portfolio spoken to kind of a more aligned our sharpened go to market motion I just wanted to get a sense of some of the integrations of those that product portfolio that was going to happen in <unk>.

Whether that's a part of that kind of refined go to market and where we are on that and then the second.

Kind of a piece of that question is just on the cloud storage piece.

You guys have had a little bit less visibility into kind of that customers just getting a sense of are some of the sharpening and go to market motions kind of overlay sales just anything thats happening on the cloud storage to increase visibility there. Thanks.

Yes, I think first meter on the cloud ops piece, we've brought together the sales teams for instance, cluster clouds checker and spot into one unified cloud up selling motion and we've seen good momentum.

Integrated team I think particularly spot and inter cluster. There is good synergy in terms of customer buyer and buying motion that we hope to exploit over the next few quarters, it's too early to call. It a success yet.

In terms of the product portfolio.

Some of the functionality of cloud checker into spot already for compliance and you should see us build bringing more of those capabilities into spot with regard to cloud storage.

Listen I think the most important work that we're doing is to be closely aligned with the hyper scaler.

<unk> scaled cloud providers and some of the key application.

Motions that are going on.

Or.

Chip design or Vmware and I think that what we are going to do as we head into FY 'twenty four is even more closely align our hyperscale.

Hyperscale sales resources with those buying motions.

Great. Thanks.

Thanks, Peter next question.

The next question will come from Shannon Cross with Credit Suisse. Please go ahead.

Thank you very much I'm wondering how should we think about the impact of your 8% head count reduction on your top line I know you mentioned a couple of areas.

But can you provide some more details on where are the cuts were made and how much of it was I don't know.

The proverbial back Opex versus revenues okay.

Head Count and then I have a follow up thank you.

I think those costs are factored into our guidance for this quarter and when we guide next year.

You should expect us to you know.

Factored those into the guidance.

Roughly speaking we focused our resources on the biggest market opportunity and the places that we impacted or less significant contributors to revenue for us I think in the cloud portfolio as well as in cloud apps.

Made some decisions that will have impacts to <unk> going forward, but I think that those are in the spirit of let's focus on the best markets and the best opportunities our guidance for the quarter and vintages those changes Mike do you want to add anything.

No I think that's a great answer it's all baked in.

And we did across the board, we tried to focus where we didn't have productivity or revenue issues as George said, a little bit of.

Outside of that we feel good.

We are.

We focused on the right areas.

I guess, where there any cuts in hybrid cloud and then my second question and what drove the year over year increase in stock based comp.

Given all of the pressure that you're seeing thank you.

In the hybrid cloud as I noted in my comments to be impacted aster data store.

We're able to solve the kubernetes use case better through a combination of Astra control, which we continue to invest in and on tap rather than a completely separate architecture like Astra data store and then we had a small business and solid fire that we continued to sustain but we don't plan to grow going forward.

Just Asia and on your question on stock based comp every six months, we have to do a look back on our ESP program and there was about an $11 million I'll call. It catch up entry in the quarter two to take into account the lower price of those purchases and you'll see that typically every six months when we do our <unk>.

Depending on the price movement of the stock during that period of time.

So that catch up is done now and assuming your stock stays where it is that there won't be another catch up.

50, or $60 million level going forward just to be clear.

So if it stays in the run rate it won't drop down and what happens in six months is dependent on where the stock prices at that purchase date.

Okay. Thank you.

Scott Thanks, Shannon next question.

The next question will come from Nihon <unk> with Northland. Please go ahead.

Yes. Thank you.

What has been the year over year demand trend in the month of February relative to the January quarter, Hasnt worsened as implied by the guidance even with the C series now available.

Yeah.

And certain parts of Europe , particularly UK and Germany have not performed as well as we are concerned about how spend how robust spending will be there in the short term.

Okay and what's the postmortem on why you guys were late with the lower capacity product on all flash arrays.

We have.

Hybrid flash arrays that serve those use cases, we believe that we could continue to support those use cases with hybrid flash a.

A few months ago, we a few quarters ago.

Good about our lineup now it is the most comprehensive in terms of functionality used cases guarantees and price and capacity points in the market.

Okay. Thank you.

Thanks, Tal next question the.

The next question will come from Ananda Baruah with loop capital. Please go ahead.

Hey, Thanks, guys appreciate it.

Hey, George just.

Sort of circling back to your remarks about concentration with financial services and service provider.

Do you feel the company has greater greater exposure to those end markets than then.

And your key competitors and is there anything that you can do with that you're focused on to try to diversify that exposure and then I have a quick follow up thanks.

And they are forward leaning and there's lots of benefits to having those customers, but when they are in a down cycle. It does impact our business over the years, we've done a few things to expand our business I think one we.

To invest in the commercial segment, it's too early to call that a broad push but we've seen good results. We've also brought in the number of enterprise customers.

<unk> has been the single most.

This vehicle for new customer additions for us and I'm very pleased with that route to market that we've enabled over the past few years.

That's great context, and the quick follow up is both you and Mike in your in your.

Earmark.

Mike I think in the prepared remarks in years in response to your question made reference to mix shift and in all flash in 'twenty four sorry, not next year, an industry shift to all flash in 'twenty.

Wondering is that something that you guys see as being distinct from what current trend is D.

Do you see a break in the trend and that's it so an amplification tread.

I think broadly speaking as we have said in past cycles. When the price of NAND comes down you see a mix shift towards plus based system.

Based system costs has been more steady than sort of up and down like flash. So that's the broad trend in our case, we expect that shift to also benefit from the fact that we know.

To complete lineups high performance flash, which will benefit from Nan.

And capacity Flash, which will also benefit from that.

Yes.

I got it I appreciate the context. Thank you.

Next question.

Our last question will come from Kyle Mcnealy with Jefferies. Please go ahead.

Hi, Thanks, very much for the question.

Can you talk a little bit about the positive impact you expect to have from AI on the business.

What's the positive impact will come from is it a higher mix of high performance low latency. All flash is the sheer data growth of both those factors and.

Do you think we'll have to get past the near term softer macro environment that <unk> been talking about through 'twenty three.

Until we see some kind of material new AI workload growth. Thanks.

AI workloads continue to grow in parts of the market that are more resilient to commodity cycle. So for example life science certain elements of financial services industries that are more counter cyclical have done well and we continue to see that moving forward.

AI workloads, especially those that do image and audio analysis for example in life Sciences.

Cancer detection of various types of diagnostic cases are perfectly suited to net I mean, we store a large number of files at a very high performance system and so we are benefiting from those use cases today and certainly at the range of AI tool chain.

It continues to grow we expect that to be a more material contributor to our business going forward.

Okay. Thanks, that's helpful.

Thanks, Kyle I'm going to pass it back to George for some closing comments.

Great.

Our strategy is aligned to the long term secular growth trend of data driven digital and cloud transformation.

The address key long term priorities for our customers with strong positions in each of our key markets.

And have demonstrated success in controlling the elements within our control.

Over the course of market Street, we've been through several challenging macroeconomic period.

We have used to sharpen our focus.

New opportunity and emerge in a better position.

We are committed to doing that again.

You can expect us to.

Prudent stewards of the business tightly managing the elements within our control.

Reinvigorate efforts across the company in support of our storage business.

And build a more focused approach to our public cloud business.

We'll give you updates on our progress in coming quarters. Thank you.

This conference.

<unk> is now concluded. Thank you for attending today's presentation you may now disconnect.

Q3 2023 NetApp Inc Earnings Call

Request a DemoDemo

NTAP

NetApp

Earnings