Q3 2024 NetApp Inc Earnings Call
Operator: Good day, and welcome to NetApp's third quarter of fiscal year 2024 earnings call. All participants will be in listen-only mode.
Good day and welcome to the third quarter of fiscal year 'twenty 'twenty four earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star keys, followed by zero.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Kris Newton, Vice President, Investor Relations. Please do so.
After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Kris Newton Vice President Investor Relations. Please go ahead.
Kris Newton: 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 NetApp.com. During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects, including, without limitation, our guidance for the fourth quarter and fiscal year 2024, our expectations regarding future revenue, profitability, and shareholder returns, and other growth initiatives and strategies. These statements are subject to various risks and uncertainties, which may cause our actual results to differ materially. For more information, please refer to the documents we file from time to time with the SEC and on our website, including our most recent Form 10-K and Form 10-Q. We disclaim any obligation to update our forward-looking statements and projections.
Kris Newton: 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 now that dot com. During today's call. We will make forward looking statements and projections with respect to our financial outlook and future prospects, including without limitation.
Kris Newton: Our guidance for the fourth quarter and fiscal year 2024, our expectations regarding future revenue profitability and shareholder returns and other growth initiatives and strategies. These statements are subject to various risks and uncertainties, which may cause our actual results to differ materially for more information.
Kris Newton: Please refer to the documents we file from time to time with the SEC and on our website, including our most recent Form 10-K and Form 10-Q, we disclaim any obligation to update our forward looking statements and projections.
Kris Newton: During the call, all financial measures presented will be non-GAAP unless otherwise indicated. Reconciliations of GAAP to non-GAAP estimates are available on our website. I'll now turn the call over to George. Thanks, Kris. Good afternoon, everyone.
Kris Newton: During the call all financial measures presented will be non-GAAP, unless otherwise indicated reconciliations of GAAP to non-GAAP estimates are available on our website I'll now turn the call over to George.
George Kurian: Thanks, Chris Good afternoon, everyone. Thank you for joining us on our Q3 FY 'twenty four call.
George Kurian: Thank you for joining us on our Q3 FY24 call. I'm pleased to report that we delivered exceptional performance across the board, despite an uncertain macro environment. Revenue was above the midpoint of our guidance, driven by the momentum of our expanded All Flash product portfolio. This strength, coupled with continued operational discipline, yielded company all-time highs for consolidated gross margin, operating margin, and EPS for the second consecutive quarter.
George Kurian: I'm pleased to report that we delivered exceptional performance across the board despite an uncertain macro environment.
George Kurian: Revenue was above the midpoint of our guidance driven by the momentum of our expanded all flash product portfolio.
George Kurian: This strength coupled with continued operational discipline yielded company all time highs for consolidated gross margin operating margin and EPS for the second consecutive quarter.
George Kurian: Entering FY24, we laid out a plan to drive better performance in our storage business and build a more focused approach to our public cloud business, while managing the elements within our control in an uncertain macroeconomy to further improve our profitability. These actions have delivered strong results to date, support our raised outlook for the year, and enhance our position for the long term. Only NetApp delivers a comprehensive architecture based on a single operating system that supports any application or data type.
George Kurian: Entering FY 'twenty four we laid out a plan to drive better performance in our storage business and build a more focused approach to our public cloud business.
George Kurian: While managing the elements within our control in an uncertain macro economy to further improve our profitability.
George Kurian: These actions have delivered strong results to date.
George Kurian: Support our raised outlook for the year and enhanced our position for the long term.
George Kurian: Only net app delivers a comprehensive architecture.
George Kurian: Based on a single operating system that supports any application or data type.
George Kurian: spans on-premises and multiple cloud environments, and is available in traditional CAPEX or as a service procurement model. Our unified data solutions address some of the biggest priorities IT organizations face today, such as Modernizing Legacy Infrastructure, Improving Resiliency Against Ransomware Attacks, and Building Scalable High-Performance Data Pipelines for AI Workloads.
George Kurian: Spans on premises and multiple cloud environments and its available in traditional capex or as a service procurement models.
George Kurian: Our unified data solutions address some of the biggest priorities I T organizations face today.
Modernizing legacy infrastructure, improving resiliency against ransomware attacks and building scalable high performance data pipelines for AI workloads.
George Kurian: The consistent operations, common management tools, integrated data services, and unique and proven capabilities for hybrid cloud of our unified storage architecture provide customers the ability to simplify at scale and lower storage costs. Our silo-free approach to unified data storage is clearly resonating with customers, driving healthy demand for our products and services, and positioning us well to deliver long-term growth. Turning to the results of the quarter.
George Kurian: The consistent operations common management tools integrated data services and unique and proven capabilities for hybrid cloud off our unified storage architecture provide.
George Kurian: <unk> provides customers the ability to simplify its scale and lower storage costs.
George Kurian: Our silo free approach to unify data storage is clearly resonating with customers driving healthy demand for our products and services and positioning us well to deliver long term growth.
George Kurian: Turning to the results of the quarter we.
George Kurian: We delivered robust year-over-year performance in our hybrid cloud segment with revenue growth of 6% and product revenue growth of 10% driven by momentum from our newly introduced all-flash products and the go-to-market changes we made at the start of the year. Strong customer demand for our industry-leading all-flash solutions drove all-flash growth of 21% year-over-year to an all-time high annualized revenue run rate of $3.4 billion. In Q3, our all-flash business expanded to approximately 60% of hybrid cloud segment revenue. As Mike will detail, we expect a sustainable step up in our baseline product gross margin going forward with a continued revenue shift to all-flash. The AFFC Series All Flash Arrays again exceeded our expectations, delivering new customers to NetApp customers and numerous wins over the competition.
George Kurian: We delivered robust year over year performance in our hybrid cloud segment with revenue growth of 6% and product revenue growth of 10% driven by momentum from our newly introduced all flash products and the go to market changes, we made at the start of the year.
George Kurian: Strong customer demand for our industry, leading all flash solutions drove all flash growth of 21% year over year to an all time high annualized revenue run rate of $3.4 billion.
George Kurian: In Q3, our all flash business expanded to approximately 60% of hybrid cloud segment revenue.
As Mike will detail, we expect a sustainable step up in our baseline product gross margin going forward with the continued revenue shift to all flash.
George Kurian: The F F. C series, all flash arrays, again exceeded our expectations delivering new to netapp customers and numerous wins over the competition.
George Kurian: As customers modernize legacy 10K hard disk drives and hybrid flash environments, we are displacing competitors' installed bases with our all-flash solutions, driving share gain. Our newly introduced ASA families of SAN-optimized, high-performance, and capacity-oriented all-flash arrays have also outperformed our expectations. We are excited about the enormous potential in the nearly $20 billion sand market. Our modern all-flash SAN arrays, backed by industry-leading data availability and efficiency guarantees, are well positioned to redefine the competitive landscape.
George Kurian: As customers modernize legacy turnkey hard disk drives and hybrid flash environments. We are displacing competitors installed bases with our all flash solutions driving share gains.
George Kurian: Our newly introduced E. S E families of San optimized high performance and capacity oriented all flash arrays also outperformed our expectations. We're excited about the enormous potential in the nearly $20 billion sand market.
George Kurian: Our modern all flash salaries backed by industry, leading data availability and efficiency guarantees are well positioned to redefine the competitive landscape in.
George Kurian: In Q3, we had numerous competitive takeouts across a broad set of workloads and vertical markets, as customers leveraged our CD series and ASA products to modernize their legacy infrastructures and deploy new applications like artificial intelligence. We continue to see strong interest in our advanced portfolio of ransomware protection solutions. We help customers take proactive steps to protect, detect, and recover their data. Competitive solutions focus only on data recovery, but NetApp keeps data protected and secured from the start with products designed to block cybersecurity risks and mitigate the high cost of downtime. ONTAP is the first enterprise-class storage solution validated by the NSA for the Commercial Solutions for Classified Program, demonstrating the strength of our state-of-the-art data protection and cybersecurity solutions.
George Kurian: In Q3, we had numerous competitive take outs across the broad set of workloads and vertical markets as customers leverage our C series and the S. C products to modernize their legacy infrastructures and deploy new applications like artificial intelligence.
George Kurian: We continued to see strong interest in our advanced portfolio of Ransomware protection solutions.
George Kurian: We have customers take proactive steps to protect detect and recover their data.
George Kurian: Competitive solutions focused only on data recovery.
George Kurian: But net app keeps data protected and secured from the start with products designed to block cyber security risks and mitigate the high cost of downtime.
George Kurian: On top is the first enterprise class storage solution validated by the NSA for the commercial solutions for classified program demonstrating the strength of our state of the art data protection and cyber security solutions.
George Kurian: We saw good momentum in AI with dozens of customer wins in the quarter, including several large NVIDIA SuperPod and BasePod deployments. We help organizations with use cases that range from unifying their data in modern data lakes, to deploying large model training environments, and to operationalizing those models into production environments. To best take advantage of generative AI capabilities, customers are looking to augment foundational models with their own data. Our high-performance, scalable, unified data storage systems create intelligent data pipelines that allow customers to capture, aggregate, and prepare their data for AI. NetApp delivers the data management capabilities for security, performance, and simplicity that enterprises require for their Gen AI workflow. We continue to advance our position with the development of Gen AI-driven cloud and on-premises solutions in partnership with industry leaders. Demand for consumption options is also growing as some customers look to increase budget flexibility in an ongoing uncertain macro and higher interest rate environment. However, this was not a universal mandate.
George Kurian: We saw good momentum in AI with <unk>.
George Kurian: Dozens of customer wins in the quarter, including several large Nvidia Super pod and baseboard deployments.
George Kurian: We help organizations and use cases that range from unifying the edina in modern data lakes.
George Kurian: Deploying large model training environments.
George Kurian: And to operationalize those models into production environments.
George Kurian: To best take advantage of generally to be I capabilities.
George Kurian: Customers are looking to augment foundational models with their own data.
George Kurian: Our high performance scalable unified data storage systems create intelligent data pipelines that allow customers to capture aggregate and prepare their data for AI.
George Kurian: Net app delivers the data management capabilities for security performance and simplicity that enterprises require for their journey I workflows.
George Kurian: We continue to advance our position with the development of Jenny I, driven cloud and on premises solutions in partnership with industry leaders.
George Kurian: Demand for consumption options is also growing as some customers look to increase budget flexibility in an ongoing uncertain macro and higher interest rate environment.
George Kurian: However, this does not a universal mandate.
George Kurian: Our unified data storage solutions are available as CAPEX, As-a-Service, and Cloud Native Office, providing customers with the widest range of buying options, enabling them to meet their budget requirements. Keystone, our storage as a service offering, delivered another strong quarter with revenue growing triple digits from Q3 a year ago. Keystone is a great solution for customers who want a cloud-like operating model on premise.
George Kurian: Our unified data storage solutions are available as Capex as a service and cloud native offerings, providing customers with a wider range of buying options, enabling them to meet their budget requirements Keystone our storage as a service offering delivered another.
George Kurian: Strong quarter with revenue growing triple digits from Q3, a year ago.
George Kurian: Keystone is a great solution for customers, who want a cloud like operating model on premises.
George Kurian: For customers who are ready to move to the cloud, we uniquely partner with the leading hyperscalers to deliver cloud-native storage services. Public cloud segment revenue was $151 million, up 1% year over year. First-party and hyperscaler marketplace storage services remain our priority and are growing rapidly, with the ARR of these services up more than 35% year over year. These offerings are highly differentiated and tightly aligned to customer buying preferences.
George Kurian: For customers, who are ready to move to the cloud we uniquely partner with the leading hyper scalar <unk> to deliver cloud native storage services.
George Kurian: Cloud segment revenue was $151 million up 1% year over year.
George Kurian: First party and hyper scaler marketplace storage services remain a priority and are growing rapidly with the E. R. R of DS services up more than 35% year over year.
These offerings are highly differentiated and tightly aligned to customer buying preference, we continued to deepen our hyperscale of partnerships and deliver growth in customer count capacity revenue and there are with this part of the portfolio.
George Kurian: We continue to deepen our hyperscaler partnerships and deliver growth in customer count, capacity, revenue, and ARR with this part of the portfolio. As I outlined last quarter, we are taking action to sharpen our approach to our public cloud business. As part of this plan, we exited two small services in the quarter.
George Kurian: As I outlined last quarter, we are taking actions to sharpen our approach to our public cloud business as a part of this plan we.
We exited two small services in the quarter.
George Kurian: We also began the work of refocusing Cloud Insights and Instacluster to complement and extend our hybrid cloud storage offering, and integrating some stand-alone services into the core functionality of Cloud Volumes to widen our competitive mode. In Q4, we anticipate approximately $20 million in ARR Edwins from unrenewed subscriptions. This will create minimal revenue impact and should be largely offset by growth in first-party and marketplace services.
George Kurian: We also began the work of refocusing cloud insights admins to cluster to complement and extend our hybrid cloud storage offerings.
George Kurian: And integrating some standalone services into.
George Kurian: Into the core functionality of cloud volume to widen our competitive moat.
In Q4, we anticipate approximately $20 million in ear are headwinds for a man renewed subscriptions.
George Kurian: This will create minimal revenue impact and should be largely offset by growth in first party and marketplace services.
George Kurian: We will continue refining our focus in fiscal year 25, building a stronger base from which to grow. Our hyperscaler partnerships and natively integrated storage services position us to address the new and emerging Gen AI opportunities in the cloud. A leading open source developer of Gen AI tools, data sets, and models is leveraging AWS's FSx for NetApp ONTAP as a part of its offering. The customer was looking for a high-performance and resilient file storage solution to train extensive AI ML workloads. FSXN gave them a scalable solution with performance storage for intensive AI model training. As a fully managed service, FSxN removes operational burdens, allowing their DevOps teams to focus on business value activities.
George Kurian: We will continue refining our focus in fiscal year 'twenty five building, a stronger base from which to grow.
George Kurian: Our hyperscale of partnerships and natively integrated storage services position us to address the new and emerging Gen AI opportunity in the cloud.
George Kurian: A leading open source developer of Jenny I too.
George Kurian: Datasets and models is leveraging Aws's FSX four net up on tap as a part of its offerings.
George Kurian: The customer was looking for a high performance and resilience.
George Kurian: <unk> storage solution to train extensive AI ml workloads, FSX and give them a scalable solution with performance storage for intensive AI model training.
George Kurian: As a fully managed service after sex and removes operational burdens along.
George Kurian: Boeing their Dev ops teams to focus on business value activities.
George Kurian: In summary, we entered the final quarter of fiscal year 24 in a much stronger position than we were at the start of the year, despite the ongoing macro uncertainty. A Modern Approach to Unified Data Storage that spans Data Types, price points, and hybrid multi-cloud environments is resonating in the market. We are successfully executing against our top priority, growing in All Flash and Cloud Storage Services. We are well positioned with an expanded TAM, including block storage, and new market opportunities like AI to drive continued growth and share gain. We are moving to a higher product margin profile, supported by growth in all flash products, and we will continue to maintain the operating discipline that has yielded record profitability. I'm very pleased with our momentum and very confident in our ability to deliver positive outcomes for customers and stockholders. Finally, I want to make you aware of our June 11th Investor Day, where we will provide an update on our long-term strategy and business model. Now, I'll turn the call over to Mike.
George Kurian: In summary, we entered the final quarter of fiscal year 'twenty four in a much stronger position than we were at the startup the year. Despite the ongoing macro uncertainty.
George Kurian: A modern approach to unify data storage, which spans data types and price points and hybrid multi cloud environments is resonating in the market.
George Kurian: We are successfully executing against our top priorities.
George Kurian: Growing all flash and cloud storage services.
George Kurian: We are well positioned with an expanded tam, including block storage and new market opportunities like AI to drive continued growth and share gains.
We are moving to a higher product margin profile supported by growth in all flash products and we will continue to maintain the operating discipline that has yielded a record profitability.
George Kurian: I'm very pleased with our momentum and very confident in our ability to deliver positive outcomes for customers and stockholders.
George Kurian: Finally, I want to make you aware of our June 11, Investor Day, where we will provide an update on our long term strategy and business model.
George Kurian: Now I'll turn the call over to Mike.
Michael J. Berry: Thank you, George, and good afternoon, everyone. As a reminder, all the numbers I will discuss today are non-GAAP unless otherwise noted. Our focus and strong execution again delivered record-setting results, reaching all-time highs across key profitability measures, including consolidated gross margin, product gross margin, operating margin, net income, and EPS. Before I discuss the financial details, let me walk you through the key themes for the quarter. As George noted, we continue to see positive results from our new all-flash products and the go-to-market changes we implemented at the start of the fiscal year. The momentum from our industry-leading flash portfolio, coupled with our operational discipline, drove both top and bottom-line growth in the quarter. Q3 Consolidated Gross Margin of 73% and Product Gross Margin of 63% were both at all-time highs for the second consecutive quarter. Gross Margin Leverage and Operating Discipline drove Operating Margin of 30% and EPS of $1.94, both also setting company records for the second consecutive quarter. Q3 operating cash flow came in at $484 million, and free cash flow was $448 million.
Michael J. Berry: Thank you George and good afternoon, everyone. As a reminder, all numbers I will discuss today are non-GAAP unless otherwise noted.
Michael J. Berry: Our focus on strong execution again delivered record setting results, reaching all time highs across key profitability measures, including consolidated gross margin product gross margin operating margin net income and EPS.
Speaker Change: Before I discuss the financial details, let me walk you through the key themes for the quarter.
Speaker Change: As George noted, we continue to see positive results from our new all flash products.
Speaker Change: And the go to market changes, we implemented at the start of the fiscal year the momentum from our industry, leading flash portfolio, coupled with our operational discipline drove both top and bottom line growth in the quarter.
Speaker Change: Q3, consolidated gross margin of 73% and product gross margin of 63% were both at all time highs for the second consecutive quarter gross margin leverage on the operating discipline drove operating margin of 30% and EPS of $1 94.
Speaker Change: Also setting company records for the second consecutive quarter.
Speaker Change: Q3, operating cash flow came in at $484 million and free cash flow was $448 million, we expect operating cash flow for the full year to be at least $1.3 billion tracking relatively in line with net income.
Michael J. Berry: We expect operating cash flow for the full year to be at least $1.3 billion, tracking relatively in line with net income. The strong execution of our priorities of winning in flash and growing first-party cloud services is clearly paying off. Given our strong execution of results that met or beat our guidance ranges, while driving record-setting profitability measures for the second consecutive quarter, we are once again raising our full-year revenue and EPS guidance. Looking ahead, we're even more confident in our position to drive long-term revenue growth and profitability. Now, to the details of the quarter.
Speaker Change: The strong execution of our priorities are winning in flash and growing first party cloud services are clearly paying off.
Speaker Change: Given our strong execution, our results that met or beat our guidance ranges, while driving record setting profitability measures for the second consecutive quarter. We are once again, raising our full year revenue and EPS guidance. Looking ahead, we are even more confident in our position to do.
Speaker Change: The long term revenue growth and profitability now to the details of the quarter.
Michael J. Berry: Q3 billings increased 7% year-over-year to $1.7 billion, and revenue increased 5% year-over-year to $1.6 billion, driven by momentum in our entire FlashArray product family. Hybrid cloud revenue increased 6% year-over-year to $1.5 billion, and product revenue increased 10% year-over-year to $747 million. Support revenue grew 2% year-over-year to $631 million.
Speaker Change: Q3, billings increased 7% year over year to $1.7 billion in revenue increased 5% year over year to $1.6 billion driven by momentum in our all flash array product families.
Speaker Change: Hybrid cloud revenue increased 6% year over year to $1.5 billion in product revenue increased 10% year over year to $747 million.
Speaker Change: Support revenue grew 2% year over year to $631 million. We are pleased with the success of moving their responsibility for the majority of our renewals. So the customer success team implemented as a part of our go to market bonkers.
Michael J. Berry: We are pleased with the success of moving the responsibility for the majority of our renewals to the customer success team implemented as a part of our go-to-market focus. Public cloud revenue grew 1% year over year to $151 million. As expected, growth was driven by our first party and marketplace cloud storage services, offset by declines in subscription services. Now for our operating results. Q3 Consolidated Gross Margin was 73%.
Speaker Change: Public cloud revenue grew 1% year over year to $151 million as expected growth was driven by our first party and marketplace cloud storage services offset by declines in subscription services now for our operating results.
Speaker Change: Q3, consolidated gross margin was 73%.
Michael J. Berry: Gross profit margin dollars increased 14% year over year to $1.2 billion, driven by strong growth in product gross profit dollars. Q3 product gross margin of 63% was 250 basis points higher than the high end of our guide, primarily driven by a better than expected mixed shift to all flash products and pricing discipline in what remains a cost-sensitive environment. Operating expenses of $682 million increased 5% year over year and declined slightly from Q2, as expected.
Speaker Change: Gross profit margin dollars increased 14% year over year to $1.2 billion driven by strong growth of product gross profit dollars Q3 product gross margin of 63% was 250 basis points higher than the high end of our guide primarily.
Speaker Change: Driven by better than expected mix shift to all flash products.
Speaker Change: And pricing discipline in what remains a cost sensitive environment operating expenses of $682 million increased 5% year over year and declined slightly from Q2 as expected.
Michael J. Berry: As a result of operating leverage and discipline management, Q3 operating profit dollars increased 30% year over year to $485 million, and operating margin increased 580 basis points from a year ago to 30%, a record for the second consecutive quarter. EPS grew 42% year-over-year to a record high of $1.94. Our tax rate was 18% lower than expected due to an adjustment of our full-year tax rate.
Speaker Change: As a result of operating leverage and disciplined management Q3 operating profit dollars increased 30% year over year to $485 million and operating margin increased 580 basis points from a year ago to 30% a record for us.
Speaker Change: The second consecutive quarter.
Speaker Change: EPS grew 42% year over year to a record high of $1 94.
Speaker Change: Our tax rate was 18% lower than expected due to an adjustment of our full year tax rate normalizing for a tax rate of 21.5% EPS would still have been a record high of $1 86 Q.
Michael J. Berry: Normalizing for a tax rate of 21.5%, EPS would still have been a record high of $1.86. Q3 operating cash flow of $484 million was up 28% year-over-year, and free cash flow was up 40% year-over-year, driven by solid billings and profitability. DSO was 45 and inventory terms were 14, both consistent with expectations, year to date operating cash flow of $1.1 billion, an increase of 23% year over year. During the quarter, we returned $203 million to stockholders through share repurchases and cash dividends, ending the quarter with approximately $526 million in net cash.
Speaker Change: Q3, operating cash flow of $484 million was up 28% year over year and free cash flow was up 40% year over year, driven by solid billings and profitability.
Speaker Change: DSO was 45 and inventory turns were 14, both consistent with expectations.
Year to date operating cash flow of $1.1 billion increased 23% year over year.
Speaker Change: During the quarter, we returned $203 million to stockholders through share repurchases and cash dividends ending the quarter with approximately $526 million in net cash.
Michael J. Berry: Year to date, we have generated $963 million in free cash flow and returned more than 100% to stockholders. Our balance sheet remains healthy. Total deferred revenue as of the end of Q3 was $4.1 billion, down 2% year-over-year.
Speaker Change: Year to date, we have generated $963 million in free cash flow and returned more than 100% to stockholders.
Speaker Change: Our balance sheet remains healthy total deferred revenue as at the end of Q3 was $4.1 billion down 2% year over year, we ended the quarter with approximately $2.9 billion in cash and short term investments.
Michael J. Berry: We ended the quarter with approximately $2.9 billion in cash and short-term investments. Before moving to Q4 and fiscal 24 guidance, I would like to spend a few minutes discussing our product gross margin expectations going forward. We have seen price increases on NAM from suppliers, and these increases will impact all industry participants. The mixed shift to our higher-margin all-flash products will partially offset the headwinds from these price increases going forward. As a result of our shift to all-flash, we expect product gross margin to expand to the upper 50% to 60% from our historical norm of approximately 55%. Please note that in any given quarter, commodity prices, product mix, and the pricing environment will cause product growth margin to fluctuate from this new baseline. That being said, I want to make sure to reiterate this point.
Speaker Change: Before moving to Q4 and fiscal 'twenty for guidance I would like to spend a few minutes discussing our product gross margin expectations going forward.
Speaker Change: We have seen the price increases on NAND from suppliers and these increases will impact all industry participants.
Speaker Change: The mix shift to our higher margin all flash products will partially offset the headwinds from these price increases going forward.
Speaker Change: As a result of our shift to all flash, we expect product gross margin to expand to the upper 50% to 60% from our historical norm of approximately 55%.
Speaker Change: Please note in any given quarter commodity prices product mix and the pricing environment will cause product gross margin to fluctuate from this new baseline.
Speaker Change: That being said I want to make sure to reiterate this point.
Michael J. Berry: Even with the increase in commodity costs, we fully expect our product gross margins to expand to the upper 50% to 60% level, driven by the shift to our all-flash portfolio. Now, let's turn to guidance. As George noted, we are pleased with the results of our focus and continued operational discipline. Given our better-than-expected results and our improved outlook for Q4, we are again raising our fiscal 24 revenue guidance to a range of $6.185 to $6.335 billion, or $6.26 billion at the midpoint. We expect to see continued strength in all flash products and hyperscaler first party and marketplace services. Fiscal 24 consolidated gross margin is expected to be in the range of 71 to 72 percent.
Speaker Change: Even with the increase in commodity costs, we fully expect our product gross margins to expand to the upper 50% to 60% level driven by the shift to our all flash portfolio.
Speaker Change: Now, let's turn to guidance as George noted we are pleased with the results of our focus and continued operational discipline.
Speaker Change: Given our better than expected results and our improved outlook for Q4, we are again, raising our fiscal 'twenty for revenue guidance to a range of $6.185 billion to $6.335 billion or 6.26.
Speaker Change: At the midpoint, we expect to see continued strength in all flash products, and Hyperscale or first party and marketplace services.
Speaker Change: Fiscal 'twenty four consolidated gross margin is expected to be in the range of 71% to 72%.
Michael J. Berry: Product gross margin is expected to be approximately 60% driven by the continued favorable mix shift to all flash products. Operating margin is expected to be approximately 27%, and EPS is expected to be in the range of $6.40 to $6.50 with the assumption of net interest income of approximately $40 million and a share count of $212 million. Our four-year tax rate is projected to be 20%.
Speaker Change: Product gross margin is expected to be approximately 60% driven by the continued favorable mix shift to all flash products.
Speaker Change: Operating margin is expected to be approximately 27% and EPS to be in the range of $6 40 to $6 50.
Speaker Change: With the assumption of net interest income of approximately $40 million and share count of $212 million.
Speaker Change: Our full year tax rate is projected to be 20%.
Michael J. Berry: We expect operating cash flow for the full year to be at least $1.3 billion. In Q4, we expect revenue to range between $1.585 and $1.735 billion, which at the midpoint of $1.66 billion implies an increase of 5% year over year. We expect Q4 consolidated gross margin to be roughly 71% and product gross margin to be approximately 60%.
Speaker Change: We expect operating cash flow for the full year to be at least $1.3 billion. In Q4, we expect revenue to range between 1.585 and $1.735 billion, which.
Speaker Change: Which at the midpoint of $1.66 billion implies an increase of 5% year over year.
Speaker Change: We expect Q4 consolidated gross margin to be roughly 71% and product gross margin to be approximately 60%.
Michael J. Berry: Operating margin is projected to be in the range of 27 to 28 percent. Implied in this guidance, we expect operating expenses to increase from Q3 due mainly to higher incentive compensation, the timing of marketing programs, and targeted investment to drive key product roadmap items. Our tax rate is expected to be 20%, and EPS is expected to be in the range of $1.73 to $1.83.
Speaker Change: Operating margin is projected to be in the range of 27% to 28%.
Speaker Change: Implied in this guidance, we expect operating expenses to increase from Q3, due mainly to higher incentive compensation, the timing of marketing programs and targeted investment to drive key product roadmap items.
Our tax rate is expected to be 20% and EPS is expected to be in the range of $1 73 to $1 83.
Michael J. Berry: Also, please note that our purchase commitments for NAN for fiscal 25 demand will impact our cash flow and balance sheet in Q4, which is included in our updated cash flow forecast and will result in inventory turns being in the 8 to 10 times range. In closing, I want to thank our customers, partners, employees, and stockholders for their unwavering commitment and investment in NetApp. We continue to prove our ability to manage the elements within our control, and our solid top-line results demonstrate the value that customers realize from our products and services. Our innovative portfolio is well-aligned to priority IT investments, and we remain committed to delivering sustainable, long-term value for our stock market. I'll now turn the call over to Kris to open the Q&A. Okay, Kris?
Speaker Change: Also please note that our purchase commitments for Nan for fiscal 'twenty, five demand will impact our cash flow and balance sheet in Q4, which is included in our updated cash flow forecast and will result in inventory turns to be in the eight to 10 times range.
Speaker Change: In closing I want to thank our customers partners employees and stockholders for their unwavering commitment and investment in net out we continue to prove our ability to manage the elements within our control and our solid topline results demonstrate the value that customers realized from a pre.
Speaker Change: <unk> and services.
Speaker Change: Our innovative portfolio is well aligned to priority investments and we remain committed to delivering sustainable long term value for our stockholders.
Speaker Change: I'll now turn the call over to Chris to open the Q&A Chris.
Kris Newton: Thanks, Mike. Operator, let's begin the Q&A. Thank you very much. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key.
Chris: Thanks, Mike operator, let's begin the Q&A.
Chris: Thank you very much we will now begin the question and answer session.
Chris: To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw. Your question you May Press Star then two.
Operator: To withdraw your question, you may press star then 2. We will pause momentarily to assemble our roster. Today's first question comes from Meta Marshall with Morgan Stanley. Please go ahead.
Chris: We will pause momentarily to assemble our roster.
Meta A. Marshall: Today's first question comes from meta Marshall with Morgan Stanley. Please go ahead.
George Kurian: Great, thank you. And congrats on the quarter. I guess, George, you went into a lot of detail just around what you're seeing on the AI side. I guess, if you could just get a sense of when you're seeing the timing of maybe people making investments versus, And then maybe, as a follow-up question, just what you're seeing in terms of the competitive environment, just in terms of kind of innovative thinking around AI solutions. Thank you. I think we're in the early phases of the next-gen AI opportunity. As you know, we have been in the AI market for a long time. And I've seen a lot of examples of proven use cases. In predictive AI, we are starting to see the early phases of generative AI.
Meta A. Marshall: Great. Thank you and congrats on the quarter I guess.
Meta A. Marshall: Georgia went into a lot of detail just around what you're seeing on the AI side I guess, if you could just get a sense of when you are saying the timing of maybe people making investments versus.
Speaker Change: I'm kind of.
Speaker Change: The various stages of am I and then maybe just as a follow up question just what you're seeing in terms of the competitive environment. Just in terms of kind of innovative thinking around AI solutions. Thanks.
Speaker Change: Thank you for your question.
Speaker Change: They are in the early phases of the shell AI opportunity as you know we have been in the AI market for a long time elapsed scheme.
Speaker Change: Lot of examples.
Speaker Change: <unk> use cases in productivity.
Speaker Change: We're starting to see the early phases of a generator.
George Kurian: And what I mean by that is customers collecting and unifying their data and starting to augment the foundational models with their own data so that it is more relevant to their business. We expect that to continue for several months or a year, and we think that the deployment of production models and the movement from training to inferencing will become more relevant as we head into next year. With regard to the work that we have seen, we had a really strong quarter in the flash business, and we've got several eight-figure deals in Q3. One of the world's largest oil and gas companies built their AI supercomputer, NetApp. One of the world's largest genomics companies is relying on our technology to speed up genomic analysis with NVIDIA and NetApp.
Speaker Change: And what I mean by that is customers collecting and unifying the data and starting to augment the foundational model.
Speaker Change: With their own data so that it is more relevant to their business.
Speaker Change: We expect that to continue for several months or a year and we think that the deployment of production models and movement from training to inferencing becomes more relevant as we head into next year with regard to.
Speaker Change: With regard to the work that we have seen we had a really strong quarter in the flash business and we've got several eight figure deals in Q3, one of the worlds largest oil and gas companies build their AI supercomputer.
Speaker Change: One of the world's largest genomics company is relying on our technology, just eat up genomic analysis with Nvidia and net at all of them.
George Kurian: One of the world's largest media companies is using us to drive some of the early phases of their generative AI work. And we also have examples in the public cloud, where one of the world's largest open-source model providers is using NetApp's cloud technology to enable their customers to access and train their models. So we've got really many different examples of success.
Speaker Change: The world's largest media companies are using us to drive some of the early phases of data generation of AI or and we also have examples in the public cloud.
Speaker Change: One of the world's largest open source model providers is using net apps cloud technology to enable their customers to access that train their models. So we've got.
Speaker Change: Many different examples of success I think if you draw on our strength and scale and performance.
George Kurian: I think if you draw on our strength is scale and performance. SuperPOD certification, the fact that we can build a hybrid cloud data pipeline, and the data management capabilities that we've had for many years that allow you to do things like model versioning, security for, you know, your mission-critical data, and be able to deploy and connect data pipelines from production back into training. So I feel really good about our strength in the AI market. It's early days for Gen AI, and we're doing the work to expand our opportunity there. Great, thank you.
Superpowers certification.
Speaker Change: Fact that we can build a hybrid cloud data pipeline and data management capabilities that we've had for many years that allow you to do things like model burgeoning security for mission.
Mission critical data and be able to deploy and connect data pipelines from production back into training. So I feel really good about our strength in the market. It's early around Gen AI and Beaver, we're doing the work to expand our opportunity there.
Speaker Change: Great. Thank you.
George Kurian: Thank you. The next question is from Krish Sankar with TD Cohen. Please go ahead. Hey, guys, this is Eddie on behalf of Krish.
Speaker Change: Thank you. The next question is from Krish Sanka with TD Cowen. Please go ahead.
Krish Sankar: Hey, guys. This is Eddie for Chris Congrats on the great execution here George I think many people sell underappreciated how filed services is an AI beneficiary. For example, if you set up an AWS pacemaker account developers can have plenty of power services options, including net after tax.
George Kurian: Congratulations on the great execution here. George, I think many people still under-appreciate how file services is an AI beneficiary. For example, if you set up an AWS SageMaker account, developers can have plenty of file services options, including NetApp's FSx.
George Kurian: So maybe talk about what differentiates FSx versus other file services and what kind of customers you attract, and what use cases it is used for. And if you can touch on how big ANF and FSx are within the public cloud, that would be great. I do have another question, please. First of all, I think that unstructured data is the vast majority of the value in generative AI. Generative AI really operates on documents and objects and videos and images and a variety of those data sets.
So maybe talk about what differentiates FSX versus other file services.
Krish Sankar: And what kind of customers you attract what used cases that used for and if you can touch on how big a N F and F attacks are within public cloud.
Speaker Change: That'll be great I do have another question. Please.
Speaker Change: First of all I think that.
Speaker Change: Structured data is the vast majority of the value in January to be a generator of AI really operates on documents and objects and videos and images.
Speaker Change: A variety of those.
Speaker Change: Data sets and as you know Netapp has a huge percentage of the enterprises unstructured data stored on our systems, we help them in a few different ways. One way that we help them is if their data science team that building AI training.
George Kurian: And as you know, NetApp has a huge percentage of the enterprise's unstructured data stored on our systems. And we help them in a few different ways. One way that we help them is if their data science team that's building AI training and building some of their models wants to start in the public cloud, you can very quickly and easily take data from your enterprise environment securely into the public cloud and use it in the public cloud.
Speaker Change: And building some of their models wants to start in the public cloud you can very quickly and easily take data from your enterprise environment securely into the public cloud and use it in the public cloud.
George Kurian: Second, as you know, we have very high-performance scale-out solutions like the one that we refer to on the call, where one of the world's largest open source model providers is using our high-performance scale-out SSXN solutions on Amazon to do model training. And then the third is in the enterprise itself; if the enterprise wants to scale that production environment, we have certifications with NVIDIA, for example, that allows them to quickly build a super pod with us, train it, and then deploy the trained models into production. So we feel very, very confident about the expanding opportunity in front of us. We've had several good wins, and we are investing to expand our opportunity in this space. That's very helpful, George.
Speaker Change: And as you know we have very high performance scale out solutions like the one that we referred to on the call with one of the world's largest open source model providers is using our high performance scale out <unk> solutions on Amazon to do model training.
Speaker Change: And then the third is in the enterprise itself of the enterprise wants to scale back production environment. We have certifications with Nvidia for example that allows them to quickly build a super pod with US train it and then deploy the trained models into production. So we feel very very confident.
Speaker Change: And about the expanding opportunity in front of US we've had several good wins and we're investing to expand our opportunity in this space.
Speaker Change: That's very helpful. George Thank you and one for Mike quickly can you refresh our memory about how customer behavior have historically changed when land prices increase aggressively in short periods of time like do they usually reduced purchases of all flash arrays and go more to hybrid or is not a small person.
George Kurian: Thank you. And one for Mike, quickly, can you refresh, please, our memory about how customer behavior has historically changed when NAND prices increase aggressively in short periods of time? Like, do they usually reduce purchases of all flash arrays and go more to hybrids? Or is NAND a small percentage of the bill of materials today because of the very low price, where a 50% increase in NAND prices, for example, will not meaningfully change the system price you guys charge customers? That's it for me.
So the bill of materials today.
Michael J. Berry: We have a very low pricing, we're a 50% increase in milk prices for example will not meaningfully change the system price you guys charge customers and that's it for me. Thank you.
Michael J. Berry: Thank you. Yeah, Eddie, hey, there's a lot of questions in there. What we'd say is a couple things. Remember, customers budget based on dollars, and that's the way that they purchase. We haven't seen anything like the last year in terms of really NAD prices declining as much as they did.
Michael J. Berry: Yeah, Hey, there was a lot of questions in there what would you say, it's a couple of things remember customers budget based on dollars and that's the way that they purchase we haven't seen anything like it in the last year in terms of really NAND prices declining as much as they did more than anything we think that that has made.
Michael J. Berry: More than anything, we think that this has made SSD flash technology more affordable. All the benefits that you get in terms of environmental and economics as well as energy now make that a much better economic decision for them. So that's really the change that we've seen short term. Other short term changes really don't change the market that much because, again, these are long term decisions companies are making. And just to add to that, SSDs are not 50%. They're less than 50% of our bill of materials or probably anybody else's bill of materials.
Michael J. Berry: That's D flash technology more affordable all the benefits that you get around environmental all of a sudden economics as well as energy now I'll make that a much better economic decision for them. So that's really the change that we're seeing short term other short term changes really don't change the market that much because again. These are these are.
Michael J. Berry: Long term decisions of companies are making.
Michael J. Berry: And just to add to that ssds are not 50% they are less than 50% of our bill of.
Michael J. Berry: Cheerios or probably anybody else's bill of materials.
Michael J. Berry: Thank you. The next question comes from Samik Chatterjee with J.P. Morgan. Please go ahead. Hey, thanks for the question. This is Joe Cardoso from SOMIC.
Samik Chatterjee: Thank you. The next question comes from stomach Chatterji with J P. Morgan. Please go ahead.
Samik Chatterjee: Hey, Thanks for the question. This is Joe Cardoso on for Sonic Yes.
George Kurian: Yes, so the first one for me, it seems like you continue to see strong momentum with the C-series and the other new flash products that you guys have introduced, and they even appear to be outperforming your expectations in each quarter. So just curious if you could talk about how momentum for those products has tracked through 3Q and into 4Q so far. It doesn't sound like you're seeing any signs of that momentum slowing down, but can you just confirm that? And do you expect that we're still very much in the early innings of these product cycles with your customers? And then I have a follow-up question. Thanks.
Samik Chatterjee: So first one for me you. It seems like you continue to see strong momentum with the C series and the other new flash products that you guys have introduced no name.
Joe Cardoso: Even appear to be outperforming your expectation in each quarter. So just curious if you could talk to how momentum for those products had chat through <unk> and into four to today to date it doesn't sound like you're seeing any signs of that momentum slowing down.
Joe Cardoso: Can you just confirm that and do you expect that we're still very much in the early innings of these product cycles with your customers and then I have a follow up thanks.
George Kurian: Yeah, maybe I can address that in three ways. I think the c-series product cycle is to modernize both traditional hybrid flash systems, as well as deploy new private cloud environments, and we are seeing strong advantages there. That's the first use case.
Joe Cardoso: Yeah.
Speaker Change: Yes, maybe I can address that in three in three ways I think the C series product cycle is to modernize both traditional hybrid flash systems.
Speaker Change: Well as deploy new private cloud environments, and we are seeing strong advantages there.
Speaker Change: The first use case and you can see we do not see any end to that you know the 10-K drive transition is a multiyear transition. We're in the early stages of that on the private cloud side I think some of the changes in licensing some of the software vendors have had renewed.
George Kurian: And you can see we do not see any end to that. The 10k drive transition is a multi-year transition. We're in the early stages of that. On the private cloud side, I think some of the changes in licensing that some of the software vendors have renewed interest in our technology as a vehicle to give them back and give customers a path to the future. The second opportunity is the ASA product family. You know, NetApp has had a long history in the block storage space.
Speaker Change: Interest in our technology.
Speaker Change: He got to give them give customers a path to the future. The second opportunity is the <unk> product family. You know net App has had a long history in the in the block storage space, we've had tens of thousands of customers using our technology to the block workloads and.
George Kurian: We've had 10s of 1000s of customers using our technology to block workloads, and we're in the early innings of bringing out a package solution that's focused solely on the block market. And we've been pleased with both of those use cases. And then the third area, of course, which is set for rapid expansion and growth, is AI. And we feel really, really good about the focus and execution.
Speaker Change: We are in the early innings of bringing out a package solution that focus solely on the block market and we've been pleased with both of those.
Speaker Change: Use cases, and then the third area of course, which is a.
Speaker Change: Rapid expansion and growth is AI and I.
Speaker Change: I feel really really good with the focus on execution every time, we've set a set of targets internally be eaten them and we've raised them externally and so we've got strong momentum, we're going to stay focused and disciplined in our execution going forward.
George Kurian: Every time you've set a set of targets internally, we've beaten them, and we've raised them externally. And so we have strong momentum; we're going to stay focused and disciplined in our execution going forward. Got it. I appreciate the color there, George.
Speaker Change: Got it I appreciate the color there George and then just as my second one.
George Kurian: And then, just like my second one, it appears the appetite from customers to consume storage more on a consumption basis is increasing, based on, you know, our checks with the channel, as well as comments from you and your peers. I know you touched on the driver being in some part due to this uneven macro that we're seeing, but are you seeing anything else as a driver there? Like the maturity around the offerings or the go-to-market motion? You know, the reason I'm asking is that it just feels like it wasn't too long ago when the opportunity here felt more theoretical, and there was not as much appetite coming from customers. So I would just be interested to hear, like, has anything changed on that front? Thank you. I think there are probably two or three things.
Speaker Change: The appetite from customers to consume storage more on a consumption patients is increasing based on our.
Speaker Change: Our checks with the channel as well as comments from you and your peers I know you touched on the driver being in some part due to the sudden need the macro that we're seeing but are you seeing anything else. That's a driver there like the maturity around the offerings our go to market motion.
Speaker Change: The reason I'm asking it just feels like it wasn't too long ago, when the opportunity here felt more theoretical and there was not as much appetite coming from our customers. So it would just be interested to hear like has anything changed on that front. Thank you.
Speaker Change: I think there's probably two or three things I think the maturity of the offerings I think customers comfort around how they would procure cloud like models I think the second is the increase in interest rates that on the margin cause of certain customers do you think about capex.
George Kurian: I think the maturity of the offerings, and I think customers' comfort around how they would procure cloud-like models. I think the second is the increase in interest rates that, on the margin, causes certain customers to think about CapEx versus OpEx. And then, of course, are the customers that are in transition from one environment to another. For example, when you're in a data center transition, and you've got a portion of the life of a data center environment that needs to be continued, moving to an as-a-service model is a good transition point. We have offered as-a-service for many years, but clearly, the most flexible, the fastest, and the easiest way to build an elastic environment is around a true public cloud.
Speaker Change: Expresses opex and then the third of course is the.
Speaker Change: Customers that are in transition from one environment to another for example, when you're in a data center transition and you've got you know a portion of the life of a data center environment that needs to be continued moving to an as a service model is a good transition point when you have offered as a service for <unk>.
Speaker Change: Any years clearly the most flexible.
Speaker Change: And the easiest to build an elastic environment is around public cloud. We also have solutions with co location providers like Equinix.
George Kurian: We also have solutions with co-location providers like Equinix that allow customers to get a full cloud-like opportunity in a co-location environment connected to the public cloud. And our Keystone service in customers' data centers had another really strong quarter. We are up year-to-date almost by triple digits, you know, including this past quarter. So we see strong momentum in that category. And we do not see a mandate for it, but it's a nice, you know, new way for us to address a set of customer buying preferences.
Speaker Change: As the customer to get a full cloud like opportunity in a colocation environment connected to the public cloud and our Keystone serviced in the customers' data centers.
Speaker Change: Really strong quarter, we are up year to date almost.
Speaker Change: More than triple digits, you know, including this past quarter. So we see strong momentum in that category and we do not see a mandate for it but it's a nice you know new way for us to address the set of customer buying preferences.
Speaker Change: Yeah.
George Kurian: I appreciate the question. Thank you. As a reminder, to ask a question, you may press star, then 1 on your telephone keypad.
Speaker Change: Great I appreciate the question.
Speaker Change: Thank you as a reminder to ask a question you May Press Star then one on your telephone keypad.
Operator: The next question today comes from Mehdi Hosseini with SIG. Please go ahead. Yes, thanks for taking my question. George, I just want to better understand the current and competitive landscape for the file storage market, especially given the AI application, and I have a follow-up. It's always been competitive.
Speaker Change: The next question today comes from Mehdi Hosseini with S. A G. Please go ahead.
Mehdi Hosseini: Yes. Thanks for taking my question George I, just wanted to better understand the current.
The competitive landscape for supply the storage market, especially given the AI application and I have a follow up.
Mehdi Hosseini: It's always been competitive there are different vendors that you know come and go in the market I think if you look at the installed base of unstructured data that becomes the vehicle to build data pipelines for AI and ml applications net up.
George Kurian: There are different vendors that, you know, come and go in the market. But I think if you look at the installed base of unstructured data, that becomes the vehicle to build data pipelines for AI and ML applications, NetApp has a very strong position. And we have the only solutions that allow customers to build hybrid cloud pipelines to build solutions that are super scalable and high-performance but also have the security protection and data management that AI will need as these models get scaled. So I feel really good about our position and look forward to continuing to expand our presence in that market. Maybe, perhaps, I could rephrase my question.
Mehdi Hosseini: It has a very strong position and we have the only solution that allow customers to build hybrid cloud pipelines to build.
Mehdi Hosseini: Solutions that are Super scalable and high performance, but also have the security protection and data management that AI will lead as these models get scale. So feel really good about our position and look forward to continuing to expand our presence in that market.
Maybe perhaps I could rephrase my question, Mike just the races product gross margin to 60%, which is pretty much what you're guiding for the January quarter. You also increasing use of QM see so should we anticipate.
George Kurian: Mike just raised his product cost margin to 60%, which is pretty much what you're guiding for the January quarter. You're also increasing the use of QMC. So should we anticipate some flexibility with pricing that QLC gives you by remaining competitive with your competitors? Because I don't see gross margins already at where the new target is. So where do we go from here?
Speaker Change: Some flexibility with pricing the QC gives you, but remaining competitive with your competitors because I don't see gross margins already.
Speaker Change: With the new targets, so where do we go from here.
George Kurian: Listen, I think that first of all, the mixed shift from hard drives to flash in our business continues. And it's an important, you know, kind of underlying factor that gives us confidence that we are, as Mike said, raising the structural baseline product gross margin, as Mike said, from the mid-50s, which has been a historic norm, to the upper 50s and up to 60%. The mix shift is the most important lever in that equation.
Michael J. Berry: Listen I think that first of all the mix shift from hard drives to flash.
Michael J. Berry: Our business continues and it's an important you know kind of underlying factor that gives us confidence that we are you know.
Michael J. Berry: Raising the structural baseline product gross margin as Mike said from the mid fifties, which has been our historic norm to the upper fifties and up to 60%.
Michael J. Berry: The mix shift is the most important lever in that equation. The second of course is the value of our on cap software and the ongoing management of the commodity supply chain I think all of those factor in I think that we are uniquely positioned with our operating system to <unk>.
George Kurian: The second, of course, is the value of our ONTAP software and the ongoing management of the commodity supply chain. I think all of those factor in. I think that we are uniquely positioned with our operating system to benefit from using QLC in a broad range of applications. Currently, only one other vendor has QLC-based all-flash arrays, and it gives us an opportunity to target other vendors who don't have QLC support.
Michael J. Berry: Jennifer from using <unk> in a broad range of applications currently only another one other vendor has Q O C based all flash arrays.
Michael J. Berry: And it gives us an opportunity to go target other vendors, who don't have qld support so we feel really good about our solution and.
George Kurian: So we feel really good about our solution. And I would tell you that AI and all of these enterprise applications are not just about price. They're about value.
Michael J. Berry: You know I would tell you that AI in all of these enterprise applications are not just about price right there about value and we built.
George Kurian: And we've built real good value for our customers over many years. Thank you. The next question comes from Asiya Merchant with Citigroup. Please go ahead. Hi, good afternoon.
Michael J. Berry: Good value for our customers over many years.
Speaker Change: Thank you.
Speaker Change: Yes.
Asiya Merchant: The next question comes from Austria merchant with Citigroup. Please go ahead.
Asiya Merchant: Hi, Good afternoon. This is Mike can be used for us here at city.
George Kurian: This is Mike Cadiz for AASI at Citi. So my one question is, given the ongoing progress in the AI field, given ongoing security and data sovereignty concerns by many companies, is there anything notable in your customer conversations regarding AI model placements, whether on prem or in the cloud, or any other architecture preferences that they may have? Listen, I think that data is the foundation on which AI is built, and if you look at what enterprises are doing today, they are augmenting foundational models with their own data to bring the relevance of AI to their business and their organizational needs. As a result, issues like malicious injection of bad data into a data landscape can cause huge impacts on AI. The ability to maintain data security, Privacy, and Lineage are all conversations that are happening regardless of the regulatory environment, and they will only get stronger as regulations get enforced, like you are seeing, for example, in the European Union.
Michael J. Berry: So my one question is given ongoing in N V. A I feel given ongoing security and data sovereignty concerns by by many companies.
Michael J. Berry: Is there anything notable in your customer conversations regarding AI model placements, whether on prem or in the cloud or any other architectural preferences.
Michael J. Berry: They have.
Michael J. Berry: Yeah.
Speaker Change: Listen I think that data is the foundation on which <unk> built and if you look at what enterprises are doing today.
Speaker Change: We are augmenting.
Speaker Change: Foundational models with their own data to bring the relevance of AI to their business and their organizational needs as a result issues like malicious injection of bad data into a data landscape can cause huge impacts.
Speaker Change: On AI.
Speaker Change: The ability to maintain data security.
Speaker Change: Privacy.
Speaker Change: And lineage is are all conversations that are happening regardless of the regulatory environment and they will only get stronger as the regulations get enforced like you are seeing for example in the European Union. This given the need to have data management across.
George Kurian: This gives the need to have data management across the life cycle of AI extreme importance, and we are exceptionally well positioned having the capabilities to build secure private environments in the public cloud as well as in customers' data centers. Okay. Thank you very much. Have a good day.
Speaker Change: The lifecycle of AI extremely important and we are exceptionally well positioned having the capabilities to build secure private environments in the public cloud as well as in customers' data centers.
Speaker Change: Okay got it. Thank you very much have a good day.
Speaker Change: Thank you. The next question comes from Neil How Chet Chuck Siegel with Northland Capital markets. Please go ahead.
George Kurian: Thank you. The next question comes from Nehal Chokshi with Northland Capital Markets. Please go ahead.
Michael J. Berry: Oh, yeah, thanks. Congratulations on the strong results here. Mike, can you give us some early thoughts on fiscal year 25? And, you know, what are the key things we should be thinking about when modeling fiscal year 25? Yeah, thanks for the question, Nehal. Sorry about that.
Speaker Change: Yeah. Thanks.
Speaker Change: That's on the strong results here Mike.
Speaker Change: Mike can you give us some early thoughts on fiscal year 'twenty five and that's you know what are the key things, we should be thinking about when modeling fiscal year 'twenty five here.
Michael J. Berry: Yes, thanks for the question.
Unknown Attendee: Oh, sorry about that so when going into fiscal 'twenty five we've talked about it hey, we felt really good about the momentum that we have in Q3 as well as the Guy. That's certainly built into Q4, we've talked about the momentum around C series George talked about all of the industry trends that are that are also tailwind for us and when you look at all of the.
Michael J. Berry: So when going into Fiscal 25, we've talked about it, hey, we feel really good about the momentum that we have in Q3, as well as the guidance that we built into Q4. We've talked about the momentum around C-Series. George talked about all the industry trends that are also tailwinds for us. And when you look at all of the priorities that our customers are looking at, we feel like we're really well positioned. We've given you a good view of where we think our product gross margins will land. The support business continues to be an important driver of profitability as well. And we will continue to be prudent around our investment to make sure that we drive growth. We want to do that. And we want to make sure that we are disciplined in our spending.
Unknown Attendee: Priorities that our customers are looking at we feel like we're really well positioned we've given you a good view of where we think.
Unknown Attendee: Product gross margins will land.
Unknown Attendee: <unk> business continues to be an important driver of profitability as well and we will continue to be prudent around our investment to make sure that we drive growth we want to do that we want to make sure that we are disciplined in our spending but hey, there are some things that we also need to do and want to do to be able to continue to drive that.
Michael J. Berry: But hey, there's some things that we also need to do and want to do to be able to continue to drive the top line. I think we've done a lot of great work around the cloud to be in a much better position for next year. George talked about the 35% plus growth in cloud storage and first-party marketplace. And Eddie asked that question as well.
Unknown Attendee: Topline.
Unknown Attendee: We've done a lot of great work around cloud to be in a much better position for next year, George talked about the 35% plus growth in cloud storage and first party marketplace and.
Unknown Attendee: And he asked that question as well and you know in the quarter cloud storage continues to grow as a percentage. It's now closer to 65% from a revenue perspective, so that's where the growth will be and then and we will continue to do the right things around return of capital to shareholders. We always wanted to leave flexibility or investments well we all.
Michael J. Berry: And in the quarter, cloud storage continues to grow as a percentage. It's now closer to 65% from a revenue perspective. So that's where the growth will be. And then, hey, we will continue to do the right things around the return of capital to shareholders. We always want to leave flexibility for investments, but we also want to make sure that we're mindful of our share count. So without trying to guide 25, that's probably the best Reader's Digest version I can give you.
Unknown Attendee: So I wanted to make sure that we're mindful of our share count so without trying to guide 25 that's.
Probably the best Reader's Digest version I can give you.
Michael J. Berry: That's fantastic. If I may, how should we think about the support revenue? You know, you're coming off four quarters of a year of your product revenue declines. Now that you're back into a year of your growth on product revenue, how long do you expect it to take for the support revenue to start to, you know, fuck back up? Yeah, great question.
That's fantastic.
Unknown Attendee: How should we think about the support revenue.
Unknown Attendee: Coming off four quarters of yogurt product revenue declines now that you're back into year over year growth on the product revenue how long do you expect the support for our support revenue start to pick back up.
Speaker Change: Yeah, Great question, and we look at there's a lot of it's like so the last two quarters, we've seen deferred revenue actually declined year over here a couple of things to keep in mind that what you're seeing on the balance sheet total deferred and it also includes includes cloud that has declined a little bit more than the support business in the last two quarters.
Michael J. Berry: And we look at this a lot, obviously. So in the last two quarters, we've seen deferred revenue actually decline year over year. A couple things to keep in mind that what you see on the balance sheet is total deferred. It also includes cloud, which has declined a little bit more than the support business in the last two quarters. 90% plus of support will come off the ballot sheet.
Speaker Change: 90% plus of support will come off the balance sheet. So you can take a hard look at that but what we've also seen is a different trend where instead of tech refreshes, we've seen a lot of customers renew their support for up to a year and that has also help continue to drive support revenue you don't see that as much in deferred but the big drive.
Michael J. Berry: So you can take a hard look at that. But what we've also seen is a different trend, where instead of tech refreshes, we've seen a lot of customers renew their support for up to a year. And that has also helped continue to drive support revenue. You don't see that as much in deferred.
Michael J. Berry: But the big driver will be growth in product revenue driving additional support revenue, the multi-year support. You'll see that in billings, you'll see that in deferred revenue. So we feel good about being able to get that growth and support. I think it was 2% this year, hopefully at least that and going forward.
Or it will be growth in product revenue drives.
Speaker Change: Additional support revenue with the multiyear support you'll see that in billings, you'll see that in deferred revenue. So we feel good about being able to get that growth and support I think where it was 2%. This year hopefully at least that and going forward if product revenue and product revenue growth support revenue should follow it it'll be a little bit of a lagging indicator a couple.
Michael J. Berry: If product revenue grows, support revenue should follow. It'll be a little bit of a lagging indicator for a couple quarters, but it will definitely follow because of the business. Fantastic.
Speaker Change: Quarters, but it will definitely follow because of the business Paul.
Michael J. Berry: Thank you. Thank you. Pardon me. The next question comes from Ananda Baruah with Loop Capital. Please go ahead.
Paul: Fantastic. Thank you.
Speaker Change: The next deal.
Speaker Change: Pardon. The next question comes from Ananda Baruah with loop capital. Please go ahead.
George Kurian: Yeah, good afternoon, guys. Thanks for taking the question. Yeah, congrats. I mean, congrats on a strong number of quarters here and really good ongoing execution. And I guess, George, that's, I guess, where I'd like to ask, I guess, the first question is, and I'm sorry, if you spoke to some of this, I was, there were a few calls going on tonight.
Ananda Prosad Baruah: Yeah. Good afternoon, guys. Thanks for taking the question.
Ananda Prosad Baruah: Yeah, Congrats and congrats on a.
Ananda Prosad Baruah: Strong number of quarters here in a really good ongoing execution.
Ananda Prosad Baruah: And I guess, George that's I guess, where I'd like to ask I guess, the first question is and sorry, if you spoke to some of this that we've got there's a few calls going on Tonight. So I came on late but.
George Kurian: So I came on late, but to what degree, the last couple quarters or so, do you think that's a strong product? Growth that you guys have put up. I'm going to try to ask you to parse this to the degree it's parsable, and that is the result of new product features, you know, the kind of new products. Thanks for attending. I guess the second part of the question is, I think I heard you make mention of you think there's like a tail to this going forward and, I mean, it's part of what you're saying is that you think the product demands are going to be, www.youtube.com.au Yeah, listen. I think first of all, the macro has stayed relatively consistent the whole time. It is uncertain, and it's not getting worse, but it is not the fundamental reason for the improvement in results.
Ananda Prosad Baruah: To what degree the last you know couple.
Ananda Prosad Baruah: A couple of quarters or so do you think that's a strong product.
Ananda Prosad Baruah: Growth that you guys put up.
Ananda Prosad Baruah: Right.
Ananda Prosad Baruah: And then they try to ask you to parse this to the degree possible is resolved.
Ananda Prosad Baruah: New product features new product.
Ananda Prosad Baruah: Things that customers are doing beginning to do sort of differently with their data it sounds like it sounds like not really a material generally identified yet.
Ananda Prosad Baruah: But if.
Ananda Prosad Baruah: If you could parse it anyway to parse it I would think that would be helpful and then.
Speaker Change: I guess the second part of the question is I think I heard you make next year do you think there is like a tail to that.
Speaker Change: Going forward and.
Speaker Change: D a.
Speaker Change: It's part of what you're saying is that you think.
Speaker Change: That demand.
Speaker Change: So the outlook begins to look a lot different.
Speaker Change: We go through calendar 'twenty, four and maybe even beyond I know, that's a lot, but I appreciate that thanks.
Speaker Change: Yeah listen I think first of all the macro has stayed relatively consistent the whole time. It is uncertain, it's not getting worse, but it is not the fundamental reason for the improvement in results there.
George Kurian: The second is the two biggest reasons for improving our results. One is product, and the second is focusing go to market execution. Let me hit on product.
Speaker Change: Second is the two biggest reasons.
Speaker Change: Our reasons for improving our results one is product and the second is focused and go to market execution.
Speaker Change: Let me hit on product in terms of product, we brought the world's best operating system.
George Kurian: In terms of product, we brought the world's best operating system to two or three major new opportunities. We brought it to a price point in the all-flash market that we had not addressed before with the QLC flash offerings. We brought the world's best operating system to a block storage opportunity that is multi-billion dollars, multiple tens of billions of dollars that we had never built a purpose-built block storage product for. And we are continuing to see an expanding range of AI opportunities as customers are doing both training as well as building context called retrieval augmented generation drag. And so all of those have driven improvements in our results. I think the other part of the equation would be to recognize the benefits that we've had from focusing on go-to-market. We have prioritized two areas. The hyperscaler, you know, marketplace, and first-party cloud storage services in the public cloud.
Speaker Change: Two or three major new opportunities, we brought it to a price point when the all flash market like Vietnam addressed before with the QL see flash offerings.
Speaker Change: We brought the world's best operating system.
Speaker Change: <unk> block storage opportunity that multibillion dollars multiple tens of billions of dollars that we had never built a purpose built block storage product for and we are continuing to see an expanding range of AI opportunities as customers are doing both training as well.
Speaker Change: Well as building context called retrieval augmented generation drag and so all of those have driven improvements in our results.
Speaker Change: I think the other part of the equation would be to.
Speaker Change: Recognize the.
Speaker Change: The benefits that we've had from focus in our go to market, we have prioritized two areas there.
Speaker Change: Scalar marketplace, and first party cloud storage services and public cloud and we are focused on our all flash portfolio.
George Kurian: And we are focused on our all flash portfolio as the two major priorities, and we've had strong results in both of them. And I'm very pleased with the results. That's a great context.
Speaker Change: At the two major priorities and we've had strong results in both of them and I'm very pleased with the results.
Speaker Change: That's great context I appreciate that.
Michael J. Berry: I appreciate that. And just a quick follow up for Mike here. Mike, you talked about attaching in some context.
Just a quick follow up for Mike here Mike.
Speaker Change: Mike you talked about talked about attaching some contact and I guess I just wanted to ask you.
Michael J. Berry: And I guess I just wanted to ask you, with the operating margins already in the high 20s, philosophically, is there any reason why, with everything you have going on with mix and attach over time, you couldn't, you couldn't touch 30% operating margin? So we did this quarter, Ananda, so hey, I'm sorry, you know, you know, it's funny, I haven't, yeah, I apologize, I have to, with all the numbers out, I actually didn't. That's a miss on me. So, well, let me just ask you then, let's start there, like, Transcript by Rev.com Page of Yeah, and no apologies necessary.
Michael J. Berry: But the operating margins already in the high 20 philosophically is there any reason why with everything you have going on with mix and attach every time you couldn't touch 30% operating margin.
Michael J. Berry: Yeah.
Michael J. Berry: So we did this corner.
Michael J. Berry: So oh, sorry, yeah, yeah, it's funny I haven't yeah I apologize.
Speaker Change: All the numbers out of that.
Speaker Change: That's that's an assignment so well let me just ask you that that's got there like any I mean should we just expect mix up then going forward I mean.
Speaker Change: How are you thinking about like shelling the margins in the P&L or doing something else with the with your op income dollars as Mexico continues to work in your favor.
Michael J. Berry: I know you folks are busy today, so hey, we're super excited about the 30% margin. And a lot of that there's like, hey, it's all 12,000 employees that helped us achieve that number. We've got it to 27 to 28% in Q4.
Speaker Change: Yeah.
Speaker Change: Apologies about this area I know you folks are busy today. So we're super excited about the 30% margin.
Speaker Change: And a lot of that was I'd say, it's all 12000 employees that helped us on that number we've guided to 27 or 28% for what I would say is is that we very much want to continue to be able to grow the business and even as the CFO I know hey, we need to invest in some areas. There is some product investments that we need to make we want to make.
Michael J. Berry: What I would say is that we very much want to continue to be able to grow the business. And even as a CFO, I know, hey, we need to invest in some areas, there's some product investments that we need to make. We want to make sure that the go-to-market continues to have sales capacity. We've said it at the last Analyst Day, and we'll say it again, which is that we want to invest, but our goal is always to grow OpEx at a lower rate than revenue to drive the margins up. Where those go really depends, I think, on a couple things. One is how well we can continue to grow product revenue. That's obviously a big piece. And that then drives storage, which was Nahal's question around, I'm sorry, around support, which is a big piece. So, you know, we don't have a target in mind.
Speaker Change: Sure that the go to market continue to add sales capacity, we set it at the last analyst day, we'll say it again, which is we want in basketball, where our goal is always to grow opex at a lower rate than revenue to drive the margins up where those go really depends I think on a couple of things one is how well we can continue to grow our product revenue.
Speaker Change: I'm going to say a big piece.
Speaker Change: And that then drives storage, which once the halls question around our I'm, sorry around support which is a big piece. So you know we don't have a target in mind and quite frankly, the other thing I just wanted to make sure and underline. This is Paul gross product gross margins and operating margins and we love the margin percentages.
Michael J. Berry: And quite frankly, the other thing I just want to make sure and underline is this is both gross product, gross margins, and operating margins. Hey, we love the margin percentages, but we love the dollars more. And so our goal is to be able to drive dollars, that may mean that hey, margins stay relatively consistent, or they go up or down in a quarter. Our goal is to drive more revenue, more gross margin dollars, and more operating income, which then goes to EPS. So I don't want to give you a target now. We'll talk about this a little bit in June. There is that trade-off. Thank you. No, that's super helpful.
Speaker Change: Loved the dollars more and so our goal is to be able to drive dollars that may mean that hey margins stay relatively consistent or they go up or down in a quarter. Our goal is to drive more revenue more gross margin dollars more operating that then goes to EPS. So I don't want to give you a target now we'll talk about this a lot in June.
Speaker Change: There is a trade off.
Speaker Change: No that's super helpful. Thanks, a lot like <unk>.
Michael J. Berry: Thanks a lot, Mike. Thanks. Thanks, Ananda. Thank you. As a reminder, to ask a question, you may press star, then 1 on your telephone keypad. The next question is from Amit Daryanani with Evercore ISI. Please go ahead. Hi, thank you for the question. This is Irvin Liu on behalf of Amit Daryanani.
Speaker Change: Thanks Amanda.
Speaker Change: Thank you.
Speaker Change: As a reminder to ask a question you May Press Star then one on your telephone keypad.
Speaker Change: The next question is from Amit Dayal with Evercore ISI. Please go ahead.
Speaker Change: Hi, Thank you for the question. This is irvin Liu on for Amit I'm, George you mentioned, new customer wins, resulting from the displacement of competitor a 10-K hard disk drive and hybrid deployments with C series, but can you give us a sense on what's the upsell opportunity. It looks like first of all of your other product lines such as a series.
George Kurian: George, you mentioned new customer wins resulting from the displacement of competitor 10K hard disk drives and hybrid deployments with C-series, but can you give us a sense of what the upsell opportunity looks like for some of your other product lines, such as A-series and public cloud services, particularly with these new customers? Listen, we always start with one environment, and then we can cross sell other environments to the customer. I think what we have seen quite clearly in the market is that the idea of having multiple different operating systems and storage landscapes in a customer is causing cost, complexity, and security vulnerabilities. And the idea of going to one consistent architecture across multiple landscapes is clearly seeing resonance with customers. And I think that as we have got, you know, obviously both unified as well as, you know, block-focused offerings across high-performance AFFs, A-series, as well as more value-oriented C-series products, we see opportunity to not only win one part of a customer's footprint but, over time, win all of their footprint. The work that we have done in the public cloud allows us to penetrate accounts that we don't have a relationship with using the public cloud sales motion.
Speaker Change: Public cloud services are particularly with these new customers.
Speaker Change: Listen we always start with one environment and then we can cross sell other environments into the customer I think what we have seen quite clearly in the market is that the idea of having multiple different operating systems and storage lansky.
Speaker Change: When a customer is causing cost complexity and security vulnerabilities and the idea of going to one consistent architecture across multiple landscape is clearly seeing residents and customers and I think that as we have got you know obviously.
Both unified as well as you know block focused offerings.
Speaker Change: Ross High performance E S.
Speaker Change: E series as well as more value oriented C series products, we see opportunity to not only win one part of our customers' footprint, but over time when all of their footprint.
Speaker Change: The work that we've done in public cloud allows us to penetrate accounts that we don't have a relationship with using the public cloud sales motion and as we have shared many times the number of new to Netapp customers in the public cloud sales motion is very strong and we're excited about that.
George Kurian: And as we have shared many times, the number of new NetApp customers in the public cloud sales motion is very strong, and we are excited about that. We continue to see good progress on that front, even this past quarter. Thanks. I also have one follow-up. Just on the dip in your mix of U.S. public sector revenue, was there anything to call out here just in terms of government IT spending? It's just normal seasonality.
Speaker Change: We continue to see good progress on that front, even this past quarter.
Speaker Change: Thanks, I also had a one follow up just on the dip in your mix of U S. Public public sector revenue was there was there anything to call out here just in terms of government spending.
Speaker Change: It's just normal seasonality I think public sector actually was a strong number for us across the globe are you know and.
George Kurian: I think the public sector actually was a strong number for us across the globe, you know, and nothing other than normal seasonality for us. Got it. That's all I had.
Speaker Change: Nothing other than normal seasonality for us.
George Kurian: Thank you. All right. Thanks, Ervin. I'm going to pass it back to George now for some closing comments. Thank you, Kris.
Got it that's all I had thank you.
Speaker Change: Alright, Thanks, Irvin I'm going to pass it back to George now for some closing comments.
George Kurian: Thank you, Chris Let me reiterate my strong confidence in our position to drive continued growth and profitability. Despite the uncertain macro we've sharpened our focus improved our execution and successfully introduce new products.
George Kurian: Let me reiterate my strong confidence in our position to drive continued growth and profitability, despite the uncertain macro. We've sharpened our focus, improved our execution, and successfully introduced new products that expand our addressable market. Capacity Flash, Block Storage, and AI all represent enormous opportunities for us. We are performing well in these areas and expect continued growth. We have taken the actions needed to improve the health of our cloud business, creating a healthier business to drive growth in fiscal year 25. We are capitalizing on our share gain opportunity and will maintain the operating discipline that has yielded record profitability. Thank you for your time today, and I hope to see you at our June 11th Investor Day. The conference has now concluded. Thank you for your participation. You may now disconnect your lines.
George Kurian: Spanned our addressable market.
George Kurian: Capacity flash block storage and AI all represent enormous opportunities for us we are performing well in this area and expect continued growth.
George Kurian: We have taken the actions needed to improve the health of our cloud business, creating a healthier business to drive growth in fiscal year 'twenty five.
George Kurian: Capitalizing on our share gain opportunity and will maintain the operating discipline that has yielded a record profitability. Thank you for your time today and I hope to see you at our June 11th Investor Day.
Speaker Change: The conference has now concluded. Thank you for your participation you may now disconnect your lines.
Speaker Change: [music].