Q1 2025 NetApp Inc Earnings Call
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Speaker Change: Good day and welcome to the net app first quarter of fiscal year 2025 earnings call. All participants will be in listen only mode. Should he need assistance, please signal a conference specialist by pressing the star key, followed by zero.
Speaker Change: 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 and Fester Relations. Please go ahead.
Kris Newton: Hi everyone, thanks for joining us with me today, our CEO, George Kurian, and CSO Mike Berry. This is Call of Being Wetcast Live and we'll be available to replay on our website at netapp.com.
Speaker Change: During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects.
Speaker Change: including without limitations our guidance for the second quarter in fiscal year 2025, our expectations regarding future revenue, profitability, and shareholder returns, and other growth initiatives and strategies.
Speaker Change: These statements are subject to various risks and uncertainties which may cause our actual result to differ materially.
Speaker Change: For more information, please refer to the documents we filed from time to time with the SEC and on our website, including our most recent Form 10K in Form 10Q. We disclaimer any obligation to update or forward-looking statements and projections.
Speaker Change: During the call, all financial measures presented will be non-gap unless otherwise indicated. Reconciliation of GAP to non-gap estimates are available on our website, on now trying to call over to George.
George Kurian: Welcome everyone. We started FY25 Strong, building on our momentum exiting last fiscal year.
George Kurian: In Q1, we delivered 8% year-over-year revenue growth and set records for 1st quarter operating margin in the EPS.
George Kurian: These results are a testament to our strong execution.
George Kurian: in a continued uncertain macroeconomic environment.
Speaker Change: are on favoring confidence in the customer benefits.
Speaker Change: of the highly differentiated NetApp intelligent data infrastructure platform and our discipline management of the business.
Speaker Change: As a result, we are raising our FY25 outlook for both revenue and profit.
Speaker Change: As we said during our recent investor day, we are focused on our uniquely differentiated solutions in flash, block, cloud storage and AI.
Speaker Change: The address markets which are bolstered by both secular and company specific tailwinds and represent our biggest opportunities to fuel revenue growth and increase market share.
Speaker Change: In Q1, the experienced notable momentum across all these areas, evidence that our value proposition is resonating.
Speaker Change: This focus coupled with our dedication to innovation drives my confidence in our continued success.
Unknown Executive: Good day, and welcome to the NetApp first quarter of fiscal year 2025 earnings call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero.
Speaker Change: Customers choose NetApp because we help them address their most important data challenges.
Speaker Change: Leveraging the power of public and hybrid clouds to rapidly deploy new applications.
Unknown Executive: After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.
Speaker Change: Unified their data for AI, simplify cloud integration and strengthen data protection.
Chris Nguyen: I would now like to turn the conference over to Chris Nguyen, Vice President and Fester Relations. Please go ahead.
Speaker Change: We uniquely deliver a comprehensive and integrated storage and data management platform.
Chris Nguyen: Hi, everyone. Thanks for joining us with me today are CEO George Kurian and CSO Mike Berry. This call is being webcast live and will be available for replay on our website at netapp.com.
Speaker Change: Giving our customers the power to unify all their data for any application anywhere and the ability to seamlessly and consistently manage it.
Chris Nguyen: 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 second quarter and fiscal year 2025, 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 filed from time to time with the SEC and on our website, including our most recent form 10K, inform 10Q. We disclaim any obligation to update our forward looking statements and projections.
Speaker Change: while ensuring data remains secure and protected.
Speaker Change: We again delivered robust year-over-year performance in our hybrid cloud segment with revenue growth of 8% and product revenue growth of 13% driven by strength in all slash storage.
Speaker Change: Broadbase demand across our all-flash storage portfolio propels our all-flash rate annualized revenue run rate to 3.4 billion dollars up 21% year over year.
Speaker Change: At the start of Q1, we introduced the new AFF A-C-D family of High Performance All Slash Arrayed.
Chris Nguyen: During the call, all financial measures presented will be non-gap unless otherwise indicated.
George Kurian: Reconciliation of gap to non-gap estimates are available on our website on now turn the call over to George. Thank you Chris.
Speaker Change: capable of powering the most demanding environment.
Speaker Change: from today's Mission Critical Applications to tomorrow's Jenny I Workloads.
George Kurian: Welcome everyone. We started FY 25 strong building on our momentum exiting last fiscal year. In Q1, we delivered 8% year-over-year revenue growth and set records for first quarter operating margin and ETS. These results are a testament to our strong execution in a continued uncertain macroeconomic environment are on favoring confidence in the customer benefits of the highly differentiated net app intelligent data infrastructure platform. And our discipline management of the business. As a result, we are raising our FY 25 outlook for both revenue and profit.
Speaker Change: Delivering the advanced data management industry leading ransomware protections and cloud integration that modern workloads require, the new AFFAC series, so positive customer reception and perform ahead of our expectations.
Speaker Change: Both are capacity flash and block optimized all flash array families exhibited strong growth year over year, addressing an expanded term and driving share games.
Speaker Change: In Q1, we had numerous competitive takeouts.
Speaker Change: Across the broad set of workloads and vertical markets, as customers leveraged our CCMEs and the SA products to modernize the legacy infrastructures and deploy new applications like artificial intelligence.
George Kurian: As we said during our recent investor day, we are focused on our uniquely differentiated solutions in flash, block, cloud storage and AI. They address markets which are bolstered by both secular and company specific tailwinds and represent our biggest opportunities to fuel revenue growth and increased market share. In Q1, we experience notable momentum across all these areas. Evidence that our value proposition is resonating. This focus coupled with our dedication to innovation drives my confidence in our continued success.
Speaker Change: The AFA enabled us to capture a new-to-net-up customer, displacing a legacy block storage competitor at a European-based manufacturer.
Speaker Change: The compelling price performance of the ASA, together with its modern architecture and comprehensive software capabilities, helps the customers realize saving as they refresh their sand environment.
Speaker Change: This is the first step in a larger relationship as the customer plans to purchase additional ASA systems to replace the remaining competitive footprint and evaluate our public cloud services.
George Kurian: Customers choose net app because we help them address their most important data challenges leveraging the power of public and hybrid clouds to rapidly deploy new applications, unified their data for AI, simplified cloud integration and strengthen data protection. Action, We uniquely deliver a comprehensive and integrated storage and data management platform, giving our customers the power to unify all their data for any application anywhere and the ability to seamlessly and consistently manage it while ensuring data remains secure and protected.
Speaker Change: Keystone, our storage as a service offering, was again a highlight this quarter with revenue growing over 60% from Q1 a year ago.
Speaker Change: He's shown give customers the operational agility and reduce financial risk they need to manage in a dynamic environment.
Speaker Change: A good example of this is a leading automotive supplier that chose Keystone to help address rapidly changing storage demands created by ongoing transformation of the automotive market.
Speaker Change: Keystone gives them the flexibility to manage rapid growth, but also the ability to shrink based on changing circumstance.
George Kurian: We again delivered robust year over year performance in our hybrid cloud segment with revenue growth. The growth of 8% and product revenue growth of 13% driven by strength in all flash storage, broad base demand across our all flash storage portfolio propelled our all flash array annualized revenue run rate to $3.4 billion up 21% year over year. At the start of Q1, we introduced the new AFF A series family of high performance all flash arrays capable of powering the most demanding environments from today's mission critical applications to tomorrow's Gen AI workloads delivering the advanced data management industry leading ransomware protection and cloud integration that modern workloads require.
Speaker Change: A.I. is the cornerstone of many of my customer conversations, reinforcing net-app position as a proven data infrastructure platform provider and thought leader in this phase.
Speaker Change: Customers are selecting NetApp as their partner at every stage of the AI life cycle because of our high performance all-flash storage, unique cloud integration and extensive data management capabilities.
Speaker Change: These capabilities support a wide range of needs from data preparation, model training and tuning to retrieve a logmented generation or rag and influencing.
Speaker Change: and addressed the requirements for responsible AI, including model and data versioning as well as data governance and privacy.
Speaker Change: While we believe the large opportunity for Enterprise AI is still ahead of us, we are seeing good momentum today with our AI business performing well ahead of our expectations.
George Kurian: The new AFF A series saw positive customer reception and performed ahead of our expectations. Both our capacity flash and block optimized all flash array families exhibited strong growth year over year addressing an expanded 10 and driving share games. In Q1, we had numerous competitive takeouts across a broad set of workloads and vertical markets as customers leveraged our ccv and the essay products to modernize the legacy infrastructures and deploy new applications like artificial intelligence.
Speaker Change: In Q1, we had over 50 AI and did a late modernization win.
Speaker Change: I'll give you just a couple of examples.
Speaker Change: We were selected by another of the world's largest oil and gas companies for their AI and high performance compute workloads.
Speaker Change: are all flash storage, will power the customer's AI environment, servicing more than 40,000 CPU cores and GPUs which runs simulations and 3D virtualization workloads.
George Kurian: The ASA enabled us to capture a new to net app customer displacing a legacy block storage competitor at a European based manufacturer. The compelling price performance of the ASA together with its modern architecture and comprehensive software capabilities helps the customers realize saving as they refresh their sound environment. This is the first step in a larger relationship as the customer plans to purchase additional ASA systems to replace the remaining competitor footprint and evaluate our public cloud services.
Speaker Change: Additionally, we made it practical for a leading financial services institution.
Speaker Change: to consolidate the benefits of data into a single data lake for AI and analytics workloads, including fraud detection, credit scoring and portfolio management, and improving the productivity of their data sciences.
Speaker Change: Both instances are examples of our deep understanding of and experience in AI workloads Together with our Intelligent Data Infrastructure platform, help drive customer preference For net-app infrastructure to service their growing AI requirements.
George Kurian: Keystone our storage as a service offering was again a highlight this quarter with revenue growing over 60% from Q1 a year ago. Keystone gives customers the operational agility and reduced financial risk they need to manage in a dynamic environment. A good example of this is a leading automotive supplier that chose keystone to help address rapidly changing storage demands created by ongoing transformation of the automotive market. Keystone gives them the flexibility to manage rapid growth but also the ability to shrink based on changing circumstances.
Speaker Change: We continue to advance our strong position with the development of Gen. A.I. Cloud and on-premises solutions in partnership with industry leaders.
Speaker Change: In Q1, in partnership with Lenovo, we announce the full stack OVX system, optimized for any eye and design to support RIDE.
Speaker Change: Additionally, we introduced new capabilities designed for cloud AI workloads.
Speaker Change: We integrated the NetApp Gen AI toolkit with Microsoft Azure NetApp file, giving customers the ability to generate unique, high quality and also relevant results.
Speaker Change: from Jenny I. Projects by combining their proprietary data with pre-trained these two models.
George Kurian: Stance, AI is the cornerstone of many of my customer conversations, reinforcing NetApp's position as a proven data infrastructure platform provider and talk leader in this space. Customers are selecting NetApp as their partner at every stage of the AI life cycle, because of our high performance all flash storage, unique cloud integration, an extensive data management capability. These capabilities support a wide range of needs from data preparation, model training and tuning to retrieve a logmented generation or RAG and infancy and address the requirements for responsible AI, including model and data versioning as well as data governance and privacy.
Speaker Change: in conjunction with AWS.
Speaker Change: We released a reference architecture for Amazon Bedrock to help customers implement rag-and-able workflows that bring proprietary data stored on Amazon FSX for NetApp on Tap into the Agene AI data pipelines.
Speaker Change: Genia is a truly hybrid workload and only NetApp has the breadth of production services to reduce the complexity.
Speaker Change: Resources and Risk for Customers, in managing these strategic workloads across increasingly complex hybrid multi-cloud environments.
Speaker Change: Public Cloud segment revenue was $159 million, up to 3% year over year. Our highly differentiated first party and high-prescalor marketplace storage services, remainder focus and top priority.
George Kurian: While we believe the large opportunity for enterprise AI is still ahead of us, we are seeing good momentum today with our AI business performing well ahead of our expectation. In Q1, we had over 50 AI and data lake modernization wins. I'll give you just a couple of examples. We were selected by another of the world's largest oil and gas companies for their AI and high performance compute workloads. Our all flash storage will power the customer's AI environment, servicing more than 40,000 CPU cores and GPUs which run simulations and 3D virtualization workloads.
Speaker Change: These services continue to grow rapidly, increasing roughly 40% year over year, and performing ahead of our expectations at each of our hyperscaler partners.
Speaker Change: As we are flying down previous calls, we expect the headwinds from subscriptions of it to lessen over the course of FY25, allowing the strength of our first party and marketplace storage services to shine through.
Speaker Change: Our rapid innovation in cloud storage services, broadening workloads, support, capabilities, price and performance points, continues to solidify our leadership position.
George Kurian: Additionally, we made it practical for a leading financial services institution to consolidate petabytes of data into a single data lake for AI and analytics workloads, including fraud detection, credit scoring and portfolio management and improving the productivity of their data sciences. Both instances are examples of how our deep understanding of and experience in AI workloads, together with our intelligent data infrastructure platform, help drive customer preference for NetApp infrastructure to service their growing AI requirements.
Speaker Change: In Q1, we again announce the capabilities of AWS FSX for NetApp on app.
Speaker Change: Boosting scalability and performance
Speaker Change: to address evolving business name.
Speaker Change: Microsoft recognized the unique value, Wii and Cap Gemini brain.
Speaker Change: with its 2024 partner of the Year Award in the Migration to Azure category for our work in moving a large Asian retail customer to Azure, which included Azure NetApp files.
Speaker Change: Our strong human performance continues the momentum from last year, saving a confidence path into FY-25.
George Kurian: We continue to advance our strong position with the development of Gen AI Cloud and on-premises solutions in partnership with industry leaders. In Q1, in partnership with Lenovo, we announced a full stack OVX system, optimized for Gen AI and designed to support RAG. Additionally, we introduced new capabilities designed for cloud AI workloads. We integrated the NetApp Gen AI toolkit with Microsoft Azure NetApp file, giving customers the ability to generate unique, high quality and also relevant results from Gen AI projects by combining their proprietary data with pre-trained foundational models.
Speaker Change: The robust growth in our revenue, billing and profitability reflects the increasing alignment of customer needs with our unique solutions.
Speaker Change: We believe our highly differentiated intelligent data infrastructure platform designed for the age of data.
Speaker Change: positions us to capture the growth potential in flash, block, cloud storage and AI from a thing continued success for our shareholders and customers.
Speaker Change: Looking ahead, our priorities are clear. We are well positioned to seize a growing market opportunity.
George Kurian: In conjunction with AWS, we released a reference architecture for Amazon Bedrock to help customers implement RAG enabled workloads that bring proprietary data stored on Amazon FX for NetApp on tap into their Gen AI data pipeline. Jenn AI is a truly hybrid workload and only NetApp has the breadth of products and services to reduce the complexity, resources and risk for customers in managing these strategic workloads across increasingly complex hybrid multi cloud environments.
Speaker Change: As we grow, we will maintain our discipline and operational management to drive leverage throughout our business model.
Speaker Change: In closing, I want to thank the NetApp team for their dedication to delivering exceptional results in an uncertain macro environment.
Speaker Change: I also want to remind you that we are hosting our inside customer conference in Las Vegas next month.
Speaker Change: where we will announce the dances.
Speaker Change: to our Innovation Agenda and showcase how we help our customers make their data infrastructure intelligent for the age of AI. I hope to see you there.
Speaker Change: Before I turn the call over to Mike, I'm sure you've already seen the news of his upcoming retirement.
George Kurian: Public cloud segment revenue was 159 million dollars, up 3% year over year. We are highly differentiated first party and hyperscaler marketplace storage services remain our focus and top priority. These services continue to grow rapidly, increasing roughly 40% year over year and performing ahead of our expectations at each of our hyperscaler partners. As we are applying on previous calls, we expect the headwinds from subscription services to less than over the course of F-25, allowing the strength of our first party and marketplace storage services to shine through.
Speaker Change: Mike has been a great partner to me in our focus on delivering profitable growth and sheer holder value.
Mike Berry: Over the course of this tenure, from FY21 to FY24, he has helped drive revenue growth of 9% and EPS growth of almost 60%.
Mike Berry: In Mike, I have been blessed to have a wife partner from whom I learn much every day, a world-class human being whose trusted friendship has helped us navigate disruption smoothly.
Mike Berry: and who has entertained us with his encyclopedic knowledge of country music.
Mike Berry: I appreciate Michael Mike's commitment to stay through the end of the fiscal year to ensure a seamless transition over to you Mike.
George Kurian: Our rapid innovation in cloud storage services, broadening workload support, capabilities, price and performance points, continues to solidify our leadership position. In Q1, we again enhance the capabilities of AWS FSX for NetApp on tap boosting scalability and performance to address evolving business needs. Microsoft recognize the unique value we and cap Gemini bring with its 2024 partner of the year award in the migration to Azure category for our work in moving a large Asian retail customer to Azure.
Mike Berry: Thanks, George. I greatly appreciate the very nice comments. I'll come back to those comments after I run through the numbers.
Mike Berry: While my family and I are excited about what is to come in our next phase of life, I want to assure everyone that it is business's usual until we name a new CFO. My focus will remain on delivering our plans here and ensuring a smooth, seamless transition.
Speaker Change: We are executed a solid quarter in an uncertain macro environment, hitting or exceeding all of our guidance ranges. We are delivering on our commitments as evident in our solid Q1 results.
George Kurian: This year, which included Azure NetApp files, our strong Q1 performance continues the momentum from last year, paving a confident path into FY 25. The robust growth in our revenue, billing and profitability reflects the increasing alignment of customer needs with our unique solutions. We believe our highly differentiated intelligent data infrastructure platform designed for the age of data, positions us to capture the growth potential in flash, block, cloud storage and AI, promising continued success for our shareholders and customers.
Speaker Change: We made progress towards our long term invested in targets of mid to upper single digit revenue and double digit EPS growth on average through fiscal year 27.
Speaker Change: Before I get into the financial details, let me walk you through the key themes for the quarter. As a reminder, all numbers discussed are nine gap unless otherwise noted.
Speaker Change: Our top line buildings in revenue exceeded our expectations, growing 12% and 8% year over year respectively into one with product revenue growing 13% year over year.
Speaker Change: As expected, Q1 consolidated gross marginal withdrawing at 72% near all-time highs.
George Kurian: Looking ahead, our priorities are clear. We are well positioned to seize a growing market opportunity. As we grow, we will maintain our disciplined operational management to drive leverage throughout our business model. In closing, I want to thank the NetApp team for their dedication to delivering exceptional results in an uncertain macro environment. I also want to remind you that we are hosting our inside customer conference in Las Vegas next month, where we will announce the dances to our innovation agenda and showcase how we help our customers make their data infrastructure intelligent for the age of AI. I hope to see you there.
Speaker Change: Gross Margin leverage in operating discipline drove operating margin of 26% and EPS of a dollar and 56 cents both two one records.
Speaker Change: We returned approximately 170% of free cash flow to stockholders through cash dividends and share repurchases. We're reducing Q1 diluted share count by 2% year over year.
Speaker Change: As we discussed during last quarter's call, we intend to return up to 100% of free cash flow this year.
Speaker Change: Due to solid execution and strong operational management, we outperformed our expectations in the first quarter and expect our continued focus and discipline to deliver year over year revenue growth in each quarter of the year.
George Kurian: Before I turn the call over to Mike, I'm sure you've already seen the news of his upcoming retirement. Thank you very much. Mike has been a great partner to me in our focus on delivering profitable growth and shareholder value. Over the course of his tenure, from FY21 to FY24, he has helped drive revenue growth of 9% and DPS growth of almost 60%. His friendship has helped us navigate disruption smoothly and who has entertained us with his encyclopedic knowledge of country music.
Speaker Change: As a result, we are raising our fiscal year 25 revenue and EPS expectations.
Speaker Change: Now, to the details of the corner.
Speaker Change: Revenue of $1.54 billion in Kris' day percent year over year, above the midpoint of our guidance range.
Speaker Change: Q1 Billings of $1.45 billion increase 12% year over year. This marks our third straight quarter of year over year revenue and billing scrolls, even with an uncertain macro environment continuing to pressure IT spending.
Speaker Change: We are well aligned to customers' priority investments and remain confident that our innovations will drive growth through the rest of fiscal year 25.
Michael Berry: I appreciate Mike's commitment to stay through the end of the fiscal year to ensure a seamless transition over to you, Mike. Thanks George, I greatly appreciate the very nice comments. I'll come back to those comments after I run through the numbers.
Speaker Change: Product revenue of $669 million was up 13% year over year. Support revenue of $631 million grew 3% year over year.
Michael Berry: While my family and I are excited about what is to come in our next phase of life, I want to assure everyone that it is business as usual until we name a new CFO. My focus will remain on delivering our plans here and ensuring a smooth, seamless transition. We executed a solid quarter in an uncertain macro environment hitting or exceeding all of our guidance ranges. We are delivering on our commitments as evident in our solid Q1 results. We made progress towards our long-term investor day targets of mid to upper single-digit revenue and double-digit EPS growth on average through fiscal year 27.
Speaker Change: Public law revenue of $159 million increased 3% from Q1 a year ago, driven by hyper-scale or first-party and marketplace storage services, offset by expected declines in subscription services.
Speaker Change: Q1 consolidated gross margin came in at 72% and was up 160 basis points from a year ago.
Speaker Change: Product Rose Margin was 60% in line with expectations.
Speaker Change: As we discussed on the Q4 call and during the subsequent investor day we have an increasing share of total revenue derived from higher margin and recurring revenue sources which we expect to continue through fiscal year 25.
Michael Berry: Before I get into the financial details, let me walk you through the key themes for the quarter. As a reminder, all numbers discussed are non-gap unless otherwise noted. Our top-line buildings and revenue exceeded our expectations, growing 12% and 8% year-over-year respectively in Q1 with product revenue growing 13% year-over-year. As expected, Q1 consolidated gross margin was strong at 72% near all time highs. Gross margin leverage and operating discipline drove operating margin of 26% and EPS of $1.56 both Q1 records.
Speaker Change: We have made strategic purchase commitments to lock NSSB supply and mitigate rising prices in the future, which continues to give us confidence in our product gross margins for fiscal year 25.
Speaker Change: Our recurring support business continues to be highly profitable with gross margins of 92%.
Speaker Change: Q1 public call gross margins improved to 71% from 68% in the prior fiscal year 24 fourth quarter.
Speaker Change: During fiscal year 25, we expect to continue to make progress on our public cloud gross margins towards our long-term target of 75 to 80%.
Michael Berry: We returned approximately 170% of free cash flow to stockholders through cash dividends and share repurchases reducing Q1 diluted share count by 2% year-over-year. As we discussed during last quarter's call, we intend to return up to 100% of free cash flow this year. Due to solid execution and strong operational management, we outperformed our expectations in the first quarter and expect our continued focus and discipline to deliver year-over-year revenue growth in each quarter of the year. As a result, we are raising our fiscal year 25 revenue and EPS expectations.
Speaker Change: Operating expenses of $714 million was up 2% year over year and decline 1% from 2% for fiscal year 24.
Speaker Change: Q1 again highlighted the strength of our business model and discipline operational execution with operating margin of 26% ahead of expectations.
Speaker Change: EPS of $1.56 was also above the high end of our guidance driven by higher revenues, operating margins, and interest income, and a slightly lower tax rate.
Speaker Change: operating cash flow was $341 million in Q1, a decrease of 25% year over here, driven by higher annual incentive compensation payouts and payments for strategic SSD purchases.
Michael Berry: Now to the details of the quarter. Revenue of $1.54 billion increased 8% year-over-year above the midpoint of our guidance range. Q1 billings of $1.45 billion increased 12% year-over-year. This marks our third straight quarter of year-over-year revenue and billings growth even with an uncertain macro environment continuing to pressure IT spending. We are well aligned to customers' priority investments and remain confident that our innovations will drive growth through the rest of fiscal year 25.
Speaker Change: Partially, I'll set by higher customer collections from higher buildings.
Speaker Change: and K1 DSL decreased the 40 and inventory turns were 8.
Speaker Change: Free cash flow to Kris 28% and you're over year to $300 million due to lower operating cash flow.
Speaker Change: During the quarter, we returned $57 million to stockholders through share, repurchases, and cash dividends, ending the quarter with approximately $600 million in net cash.
Michael Berry: Product revenue of $669 million was up 13% year over year. Support revenue of $631 million grew 3% year over year. Public law revenue of $159 million increased 3% from Q1 a year ago. Driven by hyper-scale or first-party and marketplace storage services, offset by expected declines in subscription services. Q1 consolidated growth margin came in at 72% and was up 160 basis points from a year ago. Product growth margin was 60% in line with the expectations.
Speaker Change: We have approximately $1 billion remaining on our existing repurchase authorization.
Speaker Change: Our Biology remains healthy, we ended the quarter with approximately $3 billion in cash and short-term investments.
Speaker Change: Q1 deferred revenue was $4.2 billion down less than a half a percent year over year, a smaller decline than in each of the past three quarters.
Speaker Change: We expect continue to improvement in our deferred revenue growth during fiscal year 25 as we drive building growth.
Michael Berry: As we discussed on the Q4 call and during the subsequent investor day, we have an increasing share of total revenue derived from higher margin and recurring revenue sources, which we expect to continue through fiscal year 25. We have made strategic purchase commitments to lock in SSD supply and mitigate rising prices in the future, which continues to give us confidence in our product growth margins for fiscal year 25. Our recurring support business continues to be highly profitable with growth margins of 92%.
Speaker Change: We are adding our PO as a new disclosure this quarter, as it is a leading indicator of future growth in our business.
Speaker Change: Keystone, our storage as a service offering, continues to gain traction in the market, broadening our relevance to customer use cases, and is becoming a more meaningful part of our business.
Speaker Change: RPO, which includes unbuilt commitments, was $4.5 billion in Q1.
Speaker Change: Now, turning the guidance starting with the four year.
Speaker Change: While we continue to believe that macro indicators are uncertain, our continued execution gives us confidence in our business going forward.
Michael Berry: Q1 public law gross margins improved to 71% from 68% in the prior fiscal year 24 fourth quarter. During fiscal year 25, we expect to continue to make progress on our public law gross margins towards our long-term target of 75 to 80%. Operating expenses of $714 million was up 2% year-over-year and declined 1% from Q4 fiscal year 24. Q1 again highlighted the strength of our business model and discipline operational execution with operating margin of 26% ahead of expectations.
Speaker Change: To that end, we are raising our revenue guidance for the full year to between 6.48 billion and 6.68 billion dollars in revenue representing 5% year over year growth at the midpoint.
Speaker Change: We expect fiscal year 25 consolidated gross margin to be 71 to 72% and our operating margin to be 27 to 28% both unchanged from prior expectations.
Speaker Change: We are raising our net interest income expectations to $50 million driven by higher interest income.
Michael Berry: EPS of $1.56 was also above the high end of our guidance driven by higher revenues operating margins and interest income and a slightly lower tax rate. Operating cash flow was $341 million in Q1 a decrease of 25% year-over-year driven by higher annual incentive compensation payouts and payments for strategic SSD purchases. Partially offset by higher customer collections from higher buildings. In Q1, DSO decreased to 40 and inventory turns were 8. Free cash flow decreased 28% year-over-year to $300 million due to lower operating cash flow.
Speaker Change: We now expect our tax rate for the full year to be 20 to 21%.
Speaker Change: As a result, we expect EPS to be in the range of $7 to $7.20 which at the midpoint implies 10% year-over-year growth.
Speaker Change: Turning now to our second quarter guidance, we expect Q2 revenue to range between 1.565 billion and $1.715 billion, which at the midpoint implies 5% growth year over year.
Speaker Change: We expect you to consolidate a gross margin to be 71 to 72% in operating margin to be approximately 28%.
Michael Berry: During the quarter, we return $507 million to stockholders through share purchases and cash dividends and in the quarter with approximately $600 million in net cash. We have approximately $1 billion remaining on our existing repurchase authorization. Our biology remains healthy. We ended the quarter with approximately $3 billion in cash and short term investments. Q1 deferred revenue was $4.2 billion, down less than a half a percent year over year, a smaller decline in each of the past three quarters. We expect continued improvement in our deferred revenue growth during fiscal year 25, as we drive buildings growth.
Speaker Change: We expect that interest income to be approximately $15 million in the quarter. Our tax rate to be between 20 and 21% and EPS in the range of $1.73 to $1.83.
Speaker Change: In closing, I want to thank our employees, customers, and investors for their commitment and investment in net out.
Speaker Change: I am confident in our ability to help our customers successfully achieve their digital and cloud transformation goals.
Speaker Change: We are well aligned to priority IT investments and are committed to deliver sustainable, long-term value for our stakeholders.
Speaker Change: Finally, before we go on the Q&A, I would like to add some personal comments on my announcement.
Michael Berry: We are adding our PO as a new disclosure of this quarter, as it is a leading indicator of future growth in our business. Keystone, our storage as a service offering, continues to gain traction in the market, broadening our relevance to customer use cases and is becoming a more meaningful part of our business. Our PO, which includes unbuilt commitments, was $4.5 billion in Q1.
Speaker Change: It has been an honor and a privilege to lead such a dynamic and visionary organization over the last four and a half years.
Speaker Change: I am so proud to be part of the NetApp team and being able to play a role in helping NetApp grow and deliver on its promise of profitable growth.
Speaker Change: I am committed to ensuring a smooth transition and will continue to lead the finance organization until an appropriate successor is identified.
Michael Berry: Now, turning the guidance, starting with the full year. While we continue to believe that macro indicators are uncertain, our continued execution gives us confidence in our business going forward. To that end, we are raising our revenue guidance for the full year to between $6.48 billion and $6.68 billion in revenue, representing 5% year over year growth at the midpoint. We expect fiscal year 25 consolidated gross margin to be 71 to 72%, and our operating margin to be 27 to 28%, both unchanged from prior expectations.
Speaker Change: Like all companies, NetApp continues to evolve and I am excited to welcome a new CFL who will help take NetApp to the next level and execute against a strategic roadmap we laid out at our recent investor day.
Speaker Change: I want to thank all of you for your continued support of NetApp and look forward to the continued success in the business.
Speaker Change: That being said, I want to reiterate that it is business as usual for now, and I look forward to seeing many of you out our upcoming investor events.
Speaker Change: please take it away for Q&A. Thanks, Mike. Operator, let's begin the Q&A.
Michael Berry: We are raising our net interest income expectations to $50 million driven by higher interest income. We now expect our tax rate for the full year to be 20 to 21%. As a result, we expect EPS to be in the range of $7 to $7.20, which at the midpoint implies 10% year over year growth.
Speaker Change: [inaudible]
Speaker Change: We will now begin the question and answer session. To ask the question, you may press star then one on your touchstone phone. If you were using a speaker phone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster.
Speaker Change: Episode 2
Michael Berry: Turning now to our second quarter guidance, we expect Q2 revenue to range between $1.56 billion and $1.715 billion, which at the midpoint implies 5% growth year over year. We expect Q2 consolidate a gross margin to be 71 to 72%, and operating margin to be approximately 28%. We expect net interest income to be approximately $15 million in the quarter, our tax rate to be between 20 and 21%, and EPS in the range of $1.73 to $1.83.
Speaker Change: i
Speaker Change: The first question comes from Kris Sankar with TD Colin. Please go ahead.
Kris Sankar: Your hi, thanks for taking my question and congrats on the song themselves. And my congrats on the retirement and thanks for all your help towards the south side and the bicell we are going to miss you.
Kris Sankar: Um...
Speaker Change: and my first question is for Mike on the highest man's pricing.
Speaker Change: from a demand or a top line standpoint, is that impacting the demand for all slasks?
Speaker Change: and from a craft standpoint, how to think about it in fact on those margins. Because I understand you made the strategic nan purchases, but how many quarters do you think that lower-nant price purchase can carry you through? I'm going to have a follow-up for George.
George Kurian: and thank you for the kind of comments I appreciate it. So let's do the last one for us. So as we've talked about, we've purchased a large majority of our man, forecasted for fiscal 25. We feel really good about the position that we're in there.
Michael Berry: In closing, I want to thank our employees, customers and investors for their commitment and investment in NetApp. I am confident in our ability to help our customers successfully achieve their digital and cloud transformation goals. We are well aligned to priority IT investments, and are committed to deliver sustainable long-term value for our stockholders.
George Kurian: How much of it may go in the next year really depends on what happens in the rest of 25 plus.
George Kurian: will keep our eye on the market. We may decide to do more three guys. We'll see how the market goes.
Speaker Change: back to your first course in a binder standing, correctly as...
Michael Berry: Finally, before we go on to Q&A, I would like to add some personal comments on my announcement. It has been an honor and a privilege to lead such a dynamic and visionary organization over the last four and a half years. I am so proud to be part of the NetApp team and being able to play a role in helping NetApp grow and deliver on its promise of profitable growth. I am committed to ensuring a smooth transition and will continue to lead the finance organization until an appropriate successor is identified.
Speaker Change: Hey, I don't, at this point, as we've always talked about customers, budget, and dollars, and from our standpoint, the market really hasn't changed too much. So we have not seen much of a change in demand. Based on that, we'll see how it goes for the rest of fiscal 25, but up to this point, no real changes.
George Kurian: got it, got it, thanks Mike and the George quick question for you. You know, earlier this year you released the AFA series, it's like a great product, it got it at the Unified.
Speaker Change: File, Block, and Object Storage for Customers, can you just update us?
Speaker Change: How is the product performing and you know I understand new products take a while to translate into sales How is the auto flow pipeline looking like and any kind of customer pushback?
Michael Berry: Like all companies, NetApp continues to evolve and I am excited to welcome a new CFL who will help take NetApp to the next level and execute against the strategic roadmap we laid out at our recent investor day. I want to thank all of you for your continued support of NetApp and look forward to the continued success in the business. That being said, I want to reiterate that it is business as usual for now and I look forward to seeing many of you at our upcoming investor events.
Speaker Change: for using a unified product versus their best of lead solution. Any feedback on their will be helpful. Thank you, George.
Speaker Change: We have been very pleased with the introduction of the AFF A series.
Speaker Change: which is the...
Speaker Change: Unifying storage product line, like you talked about, we introduced a set of models at the high end of the product family.
Kris Newton: Krish, please take it away for Q&A. Thanks Mike, operator, let's begin the Q&A. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you were using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two.
Speaker Change: and the adoption rates have been strong as you know they go through a certification process.
Speaker Change: and in the largest customers that take the little wild, but we're seeing all the right activity in terms of...
Speaker Change: Proof of concepts, qualifications, and certifications underway. We've had several wins in customers that are employing new environments that would be happy to choose a new product. It's a compliment the C-Series Unified Storage Products.
Unknown Executive: At this time, we will pause momentarily to assemble our roster.
Speaker Change: and the C-C-Reeds is for General Purpose Workloads.
Speaker Change: The ACB is for high performance demanding workloads like transactional databases, AI workloads that demand low latency, consistently, and a lot of I.O.
Krish Sankar: The first question comes from Krish Sankar with TD Cohen. Please go ahead. Hi, thanks for taking my question and congrats on the strong results.
Krish Sankar: And Mike, congrats on the retirement and thanks for all your help towards the south side of the by-set. We are going to miss you.
Speaker Change: and both of those in turn complement the block optimized ASA family, which serves only block workloads, where we also strong uptick, so I'm very pleased overall our flash business performed really, really well in the quarter, as you saw with 21% year-on-year growth.
Michael Berry: And my first question is from Mike, on the highest man pricing from a demand or top line standpoint, is that impacting the demand for all flash? And from a cost standpoint, how do you think about its impact on those margins? Because I understand you made the strategic man purchases. But how many quarters do you think that lower man price purchase can carry you through?
George Kurian: Thank you, George.
Speaker Change: Our next question comes from some each strategy with JP Morgan. Please go ahead.
Michael Berry: And then I'll follow up for George. Sure. Hey, Krish, thanks for the question and thank you for the kind of comments I appreciate it.
Sumeet Suri: Hi, thanks for taking my questions and...
Michael Berry: So let's do the last one first. So as we've talked about, we've purchased a large majority of our man forecasted for fiscal 25. We feel really good about the position that we're in there. How much of it may go into next year really depends on what happens in the rest of 25. Plus, we'll keep our eye on the market. We may decide to do more pre-bites.
Speaker Change: Before I ask my question again, Mike, thanks for working with us, so close.
Newton: and Newton.
Mike Berry: I know there's some time but it's just great working with it.
Speaker Change: Thank you.
Speaker Change: is a couple of us as well. I guess if I can start for the question, George, I had a more of a question on the comments that you had ready to uncertain macro and how that's a bad thing. When I look at the...
Michael Berry: We'll see how the market goes back to your first question if I understand it correctly is. Hey, I don't at this point, as we've always talked about customers budget in dollars. And from from our standpoint, the market really hasn't changed too much. So we have not seen much of a change in demand based on that. We'll see how it goes for the rest of fiscal 25. But up to this point, no real changes. Got it, got it. Thanks, Mike.
Greshen: from Greshen of Revenue here, which you've been doing a great job on sort of executing to plan the sequential trends of pretty much in line with seeslady that you've seen historically. It does look custom, was it back to spending in a more sort of...
Speaker Change: Normal Fashion. So when you think about how the uncertain lacquer was impacting your customer's appetite to spend, what you really seeing in terms of what would have even concern you because you're on track to do the call revenue at this point, trends look pretty sequential in line with season ID. So just curious, what is the, what are you seeing in terms of your customer's appetite too?
George Kurian: And then George, quick question for you. You know, earlier this year, you released the ASAA series. It's like a great product as it unifies file block and object storage for customers. Can you just update us? How is the product performing? And you know, I understand new products take a while to translate into into sales. How is the order flow pipeline looking like? And any kind of customer push back for using a unified product versus their, you know, the best of the solution. Any feedback on that will be helpful.
Speaker Change: Spending a normal fashion is anything that's giving you some hesitation on that front and I have a follow up. Thank you.
Speaker Change: Yeah, overall I think there are, you know, while the economy has progressed from this time a year ago, there are still a good amount of geopolitical risks.
Speaker Change: and we are waving the interest rate, you know, changes that.
Speaker Change: seem to be nearer than they were when they entered the quarter, so feel like
George Kurian: Thank you, George. We have been very pleased with the introduction of the AFF-A series, which is the unifying storage product line, like you talked about. We introduced a set of models at the high end of those of the product family. And the adoption rates have been strong. As you know, they go through a certification process. And in the largest customers that takes a little while. But we're seeing all the right activity in terms of proof of concepts, qualifications and certifications underway.
Speaker Change: Overall, things are progressing in the right way, though there is still a good amount of especially geopolitical uncertainty.
Speaker Change: with regard to what we saw in the quarter, we saw broad-based strength in our product lines and in the Asia-Pac and European markets.
Speaker Change: Where our teams did really well. We saw some.
Sloan: You know, Sloan is...
Sloan: in the US public sector, especially the several part of the public sector business.
Sloan: because of the continued.
Sloan: Project Challenges with the Continuing Resolution. You and I have performed well, what we see across all these markets is that customers are prioritizing spend on strategic projects.
George Kurian: We've had several wins in customers that are deploying new environments that would be happy to choose a new product. In complements, the C series unifying storage products, you know, the C series is for general purpose workloads. The A series is for high performance demanding workloads like transactional databases, AI workloads that demand low latency consistently and a lot of IO. And both of those in turn complement the block optimized ASA family, which serves only block workloads, where we also straw strong optics are very pleased. Overall, our flash business performed really, really well in the quarter as you saw with 21% year on year growth.
Unknown Executive: Thanks, George.
Sloan: and so that part of our business continues to do really well and I'm encouraged by the alignment of our solutions to that. What we haven't yet seen is large-scale data-fender refreshes, which would signal a broader base economic recovery and confidence in the business.
Speaker Change: and in terms of when you talk about AI work loads and you talk about sort of AI is truly going to be more of a hybrid sort of environment play with both public cloud and
Speaker Change: sort of your hybrid solutions. And you talked about in the prepare remarks ASA driving some of those winds as well.
Speaker Change: How do you think about physical 25 in the context of what contribution you are expecting from?
Samik Chatterjee: Our next question comes from Samik Chatterjee with JP Morgan. Please go ahead. Hi, thanks for taking my questions. And before I ask my question, again, Mike, thanks for working with us so closely. And I know there's some time, but it was great working with you best of luck as well. It does look customers are back to spending in a more sort of normal fashion. So when you think about how the uncertain macro is impacting your customers appetite to spend, what are you really seeing in terms of what would even concern you because you're on track to do record revenue at this point, trends look pretty sequential in line with C's Laddy. So just curious, what are you seeing in terms of your customers appetite to spend in a normal fashion? Is there anything that's giving you some hesitation on that front? And I have a follow-up. Thank you.
Speaker Change: These wins that are more specific to customers saying these are point to be dedicated towards their AI deployments or AI workloads both covering sort of public cloud and I've read how you think about what that looks like for your fiscal year. Thank you.
Speaker Change: Yeah, let me hit on, you had two points in there. One is, I think broadly speaking, the rate of innovation in the software applications that drive AI is very high, particularly in the public cloud.
Speaker Change: with broader frameworks that combine data-based data warehouses, data lakes.
Speaker Change: together with AI models are progressing in a really rapid rate. So what we see within our customers is many of them want to use the tools on the public cloud, the application.
Speaker Change: together with data that might sit in their data center environment or in the public cloud and we are able to make that entire workflow much, much more secure and easy to manage, which is a part of the reason why we thought strength.
George Kurian: Yeah, overall, I think there are, while the economy has progressed from this time a year ago, there are still a good amount of geopolitical risks. And we are waiting to be interested, you know, changes that seem to be nearer than they were when we entered the quarter. So it feels like overall things are progressing in the right way, though there is still a good amount of especially geopolitical uncertainty. With regard to what we saw in the quarter, we saw a broad-based strength in our product lines and in the Asia-Pac and European markets where our teams did really well.
Speaker Change: both in the data, you know, foundation for AI.
Speaker Change: as well as in the cloud storage portfolio, where we're seeing our ability to create a no-silent unified architecture come through for us. With regard to how we see it play out through the year, listen on cloud, we have said that.
Speaker Change: He seems strong results for multiple quarters now with our cloud storage portfolio.
Speaker Change: Those have been masked by some of the challenges we have noted, and that we are seeing lessening as a headwind from the subscription part of our business, so we expect flowers to return to a pattern of consistent growth.
George Kurian: We saw some, you know, slowness in the US public sector, especially the federal part of the public sector business because of the continued budget challenges with the continuing resolution. US Enterprise performed well. What we see across all these markets is that customers are prioritizing spend on strategic projects. And so that part of our business continues to do really well and I'm encouraged by the alignment of our solutions to that. What we haven't yet seen is large-scale data central refreshes, which would signal a broader-based economic recovery and confidence in the business.
Speaker Change: through the rest of the year.
Speaker Change: with regard to the storage portfolio, listen, we're one quarter into the year. We had a really, really strong flash quarter. I'm encouraged. We've raised guidance for the full year. We have very, very confident heading to the rest of the year. I will tell you more of the year played out.
Speaker Change: Thank you, thanks for the, on the rest of the thinking.
Speaker Change: The next question comes from Simon Leopold with Raymond James, please go ahead.
Victor Chu: Hi, this is Victor Chu in Versailles. Can you just provide some color around the squintial improvement in public clad of this quarry? Kind of what was the driver behind the strike there? How should we think about the sustained million trajectory of the improvement from that this point goes forward?
George Kurian: Conor, Conor, Conor, and in terms of when you talk about AI workloads and you talk about sort of AI is truly going to be more of a hybrid sort of environment play with both public cloud and sort of your hybrid solutions. And you talked about in the prepared remarks, ASA, driving some of those wins as well. How do you think about fiscal 25 in the context of what contribution you're expecting from these wins that are more specific to customer most saying these are going to be dedicated towards their AI deployments or AI workloads, both covering sort of public cloud and hybrid.
Mike Berry: Hey Victor, it's Mike, sure. Happy to do that. So as George talked about in his remarks, we saw really strong girls in our first party in marketplace cloud storage business. We talked a lot about that in our investor day in terms of that growth. So that crew 40% a year over year.
Speaker Change: If you think I'll look at the rest of the portfolio as he talked about as well, hey, we are expecting subscription services to still be a little bit of a headwind. No moderating as we go through the year.
George Kurian: How are you thinking about what that looks like for your fiscal years. Thank you. Yeah, let me hit on you had two points in there. One is I think broadly speaking, the rate of innovation in the software applications that drive AI is very high, particularly in the public cloud. We have broader frameworks that combine databases, data warehouses, data lakes together with AI models are progressing at a really rapid rate. So what we see within our customers is many of them want to use the tools on the public cloud, the application together with data that might sit in their data center environment or in the public cloud.
Speaker Change: So all in all, we do expect cloud revenue to accelerate from a growth perspective as we go through the year, led by the strength and first party in marketplace. And also the subscription services being a little bit less of a headwind as we get through some of those business changes that we are making.
Speaker Change: Okay, so the strength was largely in line with what you were expecting for the most part.
Speaker Change: It was a cloud in the first party of marketplace were while we were expecting and even a little bit better quite frankly. So, we've seen some really nice growth in that business and again, as we look forward, we expect that to continue and actually accelerate because of the strength of those products.
Speaker Change: Okay, that's all. Just a quick follow. How should we think about, you know, a follow-up in the last question. How should we think about the mix of the type of customer behind the initial?
George Kurian: And we are able to make that entire workflow much, much more secure and easy to manage, which is a part of the reason why we saw strength both in the data, you know, foundation for AI, as well as in the cloud storage portfolio where we're seeing our ability to create a no silo unified architecture come through for us. With regard to how we see it play out through the year, listen on cloud, we have said that we've seen strong results for multiple quarters now with our cloud storage portfolio.
Speaker Change: AI contributions. Are you seeing demand from enterprises or is it biased towards kind of a high-press scale cloud type operators? How do we think about where the demand is coming from initially and how that evolves over time as the type of AI workloads evolve?
Speaker Change: Most of our demand is from large enterprises.
Speaker Change: Some of which operate as internal service providers.
Speaker Change: but most of the demand is from very large enterprises.
Speaker Change: There's a mix of use cases
Speaker Change: across data links and data foundations for AI, fine-tuning and model training as well as the first phases of interest thing. So we've seen a good blend of all of those use cases.
George Kurian: Those have been masked by some of the challenges we have noted and that we are seeing lessening as a headwind from the subscription part of our business. So we expect cloud to return to a pattern of consistent growth through the rest of the year. With regard to the storage portfolio, listen, we have one quarter into the year. We had a really, really strong flash quarter. I'm encouraged. We've raised guidance for the full year. We are very, very confident heading to the rest of the year and we'll tell you more as the year plays out. Okay. Great. Thank you. Thanks for the response. Thank you.
Speaker Change: Thank you.
Speaker Change: Again, if you have a question, please press star then 1.
Speaker Change: The next question comes from Stephen Fox with Fox Advisors, please go ahead.
Stephen FOX: Hi, good afternoon and I congratulate you on your retirement.
Stephen FOX: I guess just in terms of thinking about competitive dynamics, George.
George Kurian: It seems like you called out, like you mentioned, a broad set of sort of positives that could be winning market share. Can you sort of give us a sense versus...
Simon Leopold: The next question comes from Simon Leopold with Raymond James. Please go ahead. Hi, this is Victor Chewing for Simon. Can you just provide some color around the squint children's movement in public cloud this quarter? You know, kind of what was the driver behind the strike there? And how should we think about the sustainability trajectory of the improvement from this point going forward?
Speaker Change: Now versus 90 days ago where you've seen the most games and why and where maybe you're more confident going forward on share games. Thanks a lot.
Speaker Change: Listen, I think what we've seen is our focus and execution continues to get better and better.
Speaker Change: and we make good progress on that in the second half of last year.
Michael Berry: Hey, Victor, it's my chair happy to do that. So as George talked about in his remarks, we saw really strong growth in our first party and marketplace cloud storage business. We talked a lot about that at our investor day in terms of that growth. So that grew 40% year over year. If you take a look at the rest of the portfolio as he talked about as well, hey, we are expecting subscription services to still be a little bit of a headwind.
Speaker Change: and then that momentum continues so I feel really, really good about where we are.
Michael Berry: No moderating as we go through the year. So all in all, we do expect cloud revenue to accelerate from a growth perspective as we go through the year led by the strength and first party and marketplace. And also the subscription services being a little bit less of a headwind as we get through some of those business changes that we are making. Okay, so the strength was kind of largely in line with what you were expecting for the most part?
Speaker Change: with regard to the portfolio, you know, our cloud storage portfolio continues to gain traction. We've got more workloads, more price points, more customers, and integration into a broader and broader set.
Speaker Change: of the high schoolers environment, so I feel really, really good about the innovation portfolio there.
Speaker Change: with regard to the flash portfolio, really strong result across the board. We had, you know, in the block storage part of that portfolio, which is pure share gain against competition.
Speaker Change: We are demonstrating the price performance leadership against the high end product.
Speaker Change: of our competitors, as well as the price performance and features that leadership against the mid-range products of our competitors. So it's really good about the wins that we're seeing across the board.
Michael Berry: It was a cloud and first party marketplace were what we were expecting and even a little bit better quite frankly. So we've seen some really nice growth in that business. And again, we as we look forward, we expect that to continue and actually accelerate because of the strength of those products. Okay, that's all point. Just a one quick follow. How should we think about, you know, I don't know. A follow up on the last question.
Speaker Change: Thank you.
Speaker Change: Next question comes from Amit Daryani with Evercore. Please go ahead.
Amit Daryani: and thanks for being my question. I have to as well. George, maybe to start with, you folks are seeing some really good growth on the all-flash array side. I think it's up 21% of the squatter. Can you just talk about, is this cyclical recurring demand or is it a game or?
Michael Berry: How should we think about the mix of the type of customers behind the initial AI contributions? Are you seeing demand from enterprises or is it biased towards kind of a hyper scale, you know, cloud type operators? How do we think about where the demand is coming from initially and how that evolves over time as the type of AI workloads evolve? Most of our demand is from large enterprises, some of which operate as internal service providers, but most of the demand is from very large enterprises.
Speaker Change: uses converting your install base, perhaps more to its all slides. So, understand what's driving this trend here and then crucially, what even the durability of this 20% plus growth is on the all-fire side as you go forward.
Speaker Change: This is the third successive quarter of high rates of our flash growth.
Speaker Change: Double Degas, and we feel really good about the portfolio. We just let me hit a couple of the points you raised, which is, we are seeing a broad set of new to net up customers.
Michael Berry: There is a mix of use cases across, you know, data links and data foundations for AI fine tuning and model training as well as the first phases of interesting. So we've seen a good blend of all of those use cases. That's helpful. Thank you. Again, if you have a question, please press star then one.
Speaker Change: and Newton-net-up flash-customers.
Speaker Change: with the broad import folio that we have.
Speaker Change: Roughly, 50, 50, make so completely new to NetApp, have never had NetApp as well as.
Speaker Change: A broad set of customers who are buying our flash products for the first time.
Stephen FOX: The next question comes from Stephen Fox with Fox advisors.
Speaker Change: So I feel that's a good leading indicator of continued momentum in the portfolio.
George Kurian: Please go ahead. Hi, good afternoon and Mike congrats on your retirement. I guess just in terms of thinking about competitive dynamics George, it seems like you called out, like you mentioned a broad set of sort of positives that could be winning market share.
Speaker Change: with regard to the installed base getting upgraded, we have said that a part of the cycle of Q and C flash is the refresh or the migration of a very, very large.
George Kurian: Can you sort of give us a sense versus now versus 90 days ago where you're seeing the most games and why and where maybe you're more confident going forward on share games. Thanks a lot. Listen, I think what we've seen is our focus and execution continues to get better and better and you know, we make good progress on that in the second half of last year and then that's momentum continues. So I feel really, really good about where we are with regard to the portfolio.
Ken K: Ken K install base of hard drive.
Ken K: Both ours as well as our competitors to that flash product portfolio and so it's a mix of
Ken K: You know, Louis Towns, you didn't have flash accounts.
Ken K: as well as some of the install days getting refreshed. And I think if you just look at it, right?
Ken K: The total installed base of 10KD Rice is the Norman.
Ken K: It was roughly from a volume perspective.
Ken K: somewhere around 35% to 40% of the total storage market for a very long period of time. And so there's a huge install base to go refresh. So if you ask me, we are in the second inning of a dining ball game.
George Kurian: You know, our cloud storage portfolio continues to gain traction, right? We've got more workloads, more price points, more customers and integration into a broader and broader set of the height of scalers environment. So I feel really, really good about innovation portfolio there. But with regard to the flash portfolio really strong results across the board, we had, you know, in the block storage part of that portfolio, which is pure share gain against competition, we are demonstrating the price performance leadership against the high end product of our competitors as well as the price performance and features that leadership against the mid range products of our competitors. So I feel really good about the wins that we're seeing across the board. Thank you.
Speaker Change: for a Fendi Don't Want In Gums of Hour.
Speaker Change: One final comment, the strength of our customer edition says that even this...
Speaker Change: Even with all of the growth of our flash, the overall install base grew so that the penetration of flash into our install base stage study, border on border.
Speaker Change: That's really helpful, George, and then my colleagues and my congrats as well on your retirement. Could you just be able to touch on how should we think about product growth margin from the 60% chip code that you had in Q1, really for the rest of the fiscal year, maybe just maybe any parameters and how to think about product growth margin that you go through the year would be helpful. Thank you.
George Kurian: Sure, and I bet everybody, hey, thanks for the comments, so I appreciate it, we've got a lot of work to do, you're going to see me for a little while, so I do appreciate it.
Amit Daryani: Next question comes from Amit Daryani with Effor Corps. Please go ahead. Yep, good afternoon, thanks for being my question, I have two as well. You know, I guess, George, maybe to start with, you know, you folks are seeing some really good growth on the all-flash array side. I think it's up 21% this quarter. Can you just talk about, you know, is this cyclical recovering demand or is it share gains or you just converting your install base, perhaps more towards all-flash?
Speaker Change: and I'm product course margins. As we said last quarter, we do expect it to come down a little bit as we go through the quarter as we work down the pre-bies.
George Kurian: Just try to understand what's driving this trend here, and then crucially, what even the durability of this 20% plus growth is on the all-flash side as you go forward? This is the third successive quarter of high rates of all-flash growth, double digits, and we feel really good about the portfolio, which just let me hit a couple of the points you raised, which is, we are seeing a broad set of new to NetApp customers and new to NetApp flash customers with the broad and portfolio that we have.
Speaker Change: So we were right about a 60% this quarter. Again, we said for the full year that as we said here today, we're still comfortable with that upper 50s to 60 for the full year basis.
Speaker Change: So, no real change I met in the trajectory of what we expect through the rest of the year, that we, anything different that we talked about last quarter.
George Kurian: Roughly 50-50 mix of completely new to NetApp have never had NetApp as well as a broad set of customers who are buying our flash products for the first time. So I feel that's a good leading indicator of continued momentum in the portfolio with regard to the install base getting upgraded. We have said that a part of the cycle of QLC flash is the refresh or the migration of a very, very large 10K install base of hard drive, both hours as well as our competitors to that flash product portfolio.
Speaker Change: So I want to just add, you know, during the course of the quarter, we saw as we see in the history of the storage industry. Some of our competitors did take pricing up.
Speaker Change: and so that's a leading indicator of actions that the broader industry would take in a inflationary commodity environment.
Speaker Change: We thank you very much.
Speaker Change: Thank you.
Speaker Change: Next question comes from Medi-Hosening with SIG. Please go ahead.
Medi-Hosening: Yes, that excuse me, thanks for taking the question.
Speaker Change: Want to go back to...
George Kurian: George commentary, you talked about it, or flashery.
Speaker Change: record 3400, actually year where you're growth of 21 percent, not a record, but by George, consistent with the prior question, every time we get to these kind of a 20% plus growth.
Speaker Change: The Concern is, okay, when is he going to deaccelerate?
Speaker Change: and I understand that you laid out your targets for FY 27.
George Kurian: And so it's a mix of new accounts, new to NetApp flash accounts as well as some of the install base getting refreshed. And I think if you just look at that drive, the total install base of 10K drives is enormous. It was roughly from a volume perspective somewhere around 35% to 40% of the total storage market for a very long period of time. And so there's a huge install base to go refresh.
Kurisi: but Kurisi at the acceleration in FY26 especially over all the spending environment were to remain constrained and then a more broader upgrade cycle will come in in FY27 and then Kovisi, Dakarovid.
Speaker Change: Michael materializing, because given what we have seen over the past 20 years, every time you had this kind of a strong growth, it swallowed by the acceleration. I want to understand what is the confidence and I have to follow up.
Amit Daryani: So if you ask me, we are in the second inning of an ironing ball game. In terms of our one final comment, the strength of our customer addition says that even with all of the growth of our flash, the overall install base grow so that the penetration of flash into our install base is steady, quarter on quarter. God, that's really helpful, George.
Speaker Change: I think two or three things, right? I think one is.
Speaker Change: is a lot broader than what we've had in the past.
Speaker Change: and I would point that out by the fact that we now have flash products across all the price points in the market.
Speaker Change: as well as custom offerings for block storage.
Speaker Change: where we previously would only sell unified storage. And so I feel really good about having a much fuller product portfolio, as well as the pace of innovation and leadership that we have in areas like data security is pretty clearly underwritten in the market.
Unknown Executive: And then my Alex and my congrats as well on your retirement.
Michael Berry: Could you just maybe just touch on how should we think about product growth margins from the 60% zip code that you had in Q1 really for the rest of the fiscal year? Just maybe any parameters on how to think about product growth margins as we go through the year would be helpful. Thank you. Sure. And I'm at it. Everybody. Hey, thanks for the comments. I appreciate it. We got a lot of work to do.
Speaker Change: The second is...
Speaker Change: You know, where we are today is in a market where the pure play storage players are outperforming the integrated system vendors. And so you look at a broad range of the, you know, integrated system vendors. They have struggled now for many quarters in the storage business.
Michael Berry: You're going to see me for a little while. I do appreciate it. Hey, I'm proud across margins. As we said last quarter, we do expect it to come down a little bit as we go through the quarter as we work down the pre buys. So we were right about at 60% this quarter. Again, we said for the full year that as we said here today, we're still comfortable with that upper 50s to 60 for the full year basis.
Speaker Change: and it remains to be seen whether that is a strategic focus for them going forward.
Speaker Change: and so when I look at our position relative to other players in the market, I feel really good.
Speaker Change: I would not call the current environment a, you know, rosy spending environment right and we have done well for multiple orders now in a fairly choppy macroeconomic environment. I'm hopeful that if the macro stabilizes especially the geopolitical environment stabilizes.
Michael Berry: So no real change on it and in the trajectory of what we expect through the rest of the year that we anything different than we talked about last quarter. I would just add, you know, during the course of the quarter, we saw as we see in the history of the storage industry, some of our competitors did take pricing up, and so that the leading indicator of actions that the broader industry would take in a inflationary commodity environment. Thank you very much. Thank you.
Speaker Change: We should see some more spending come through which would be benefit to our business.
Mehdi Hosseini: Next question comes from Mehdi Hosseini with SIG, please go ahead. Yes, excuse me. Thanks for taking the question. I want to go back to George's commentary, you talked about it, or flash array record 3400 actually year were your growth of 21% another record, but by Georgia.
Speaker Change: You'll see you grow as a percentage of our total makes it roughly half right now as a percentage of the flash business. And so you should see that grow as a percentage of the total flash business.
Speaker Change: Great, thank you and my best of luck with you in your next endeavor.
George Kurian: Consistent with the prior question, every time we get to this kind of a 20% plus growth, the concern is, okay, when is it going to deaccelerate, and I understand that you laid out your targets for FY27, but could we see a deacceleration in FY26, especially if overall the spending environment were to remain constrained and then a more broader upgrade cycle would come in in FY27. I see that kind of a cycle materializing because given what we have seen over the past 20 years, every time you had this kind of a strong growth, it's followed by deacceleration, I want to understand what is the confidence and I have a follow up.
Maddie: Thank you, Maddie.
Speaker Change: Our next question comes from Aaron Rakers with Wells Fargo. Please go ahead.
Speaker Change: and this is Jake on for Aaron. I can grasp on the quarter and thanks for the question. I was just hoping you could double-click a little bit on the Enterprise Demand, your Stingray Eye Products. It sounds like it's still pretty early days for AI inference and wondering, um...
Speaker Change: You know what ending of adoption you think we're in and what's the competitive landscape like there?
Speaker Change: Yeah, I think, you know, we are in the early innings of the AI landscape from a storage perspective.
Speaker Change #100: I think you are seeing the fact that AI is so far.
Speaker Change #101: The AI Applications Requires a specific computing architecture.
George Kurian: I think two or three things, right, I think one is our portfolio is a lot broader than what we've had in the past, and I would point that out by the fact that we now have flash products across all the price points in the market, as well as custom offerings for block storage, where we previously would only sell unified storage. And so I feel really good about having a much fuller product portfolio, as well as the pace of innovation and leadership that we have in areas like data security is pretty purely underwritten in the market.
Speaker Change #101: which is why you're seeing the compute buildout happening.
Speaker Change #101: but from a storage and data standpoint, you know, people are using their proprietary data with these AI models and so as we said consistently, we're in the early inning. It is when...
Speaker Change #101: that influencing trend as well as large-scale generation of data coming to play and that you really see the inflection and data storage. I think what we are seeing right now is everybody's getting their data ready?
Speaker Change #101: for AI.
Speaker Change #101: and so they're all trying to unify their data, figure out what data they need for particular types of applications, getting their hybrid cloud pipelines working so that they have AI applications in the cloud, they can connect their data to it and so we're seeing a lot of getting data ready.
Speaker Change #101: which is often in the form of a data link or some kind of data infrastructure that brings together all of their data and we're very well positioned for that.
George Kurian: And so when I look at our position relative to other players in the market, I feel really good. I would not call the current environment a, you know, rosy spending environment, right, and we have done well for multiple quarters now in a fairly choppy macro economic environment. I'm hopeful that if the macro stabilizes, especially the geopolitical environment stabilizes, we should see some more spending come through, which would be benefit to our business.
Speaker Change #101: We hold a huge amount of the unstructured data in the world, and so we are naturally a part of any generated AI use case requires data that often sits on us. And the two examples we gave you on the earnings call are classic examples. One is a large number.
Speaker Change #101: Financial Services Institution that is trying to summarize.
Speaker Change #101: all of the unstructured data.
Speaker Change #101: that they have in the various applications.
Speaker Change #101: and so they work with us and a set of AI application vendors to feed all of that into their data, into their LLM.
George Kurian: Thank you. Thanks for additional insight to a repeat question and just one quick follow up for me. How should I think about the mix of NAND that are using in terms of QLC versus other technology and how the QLC mix would trend over the next couple of quarters? UNC should grow as a percentage of our total makes its roughly half right now as a percentage of the of the flash business and so you should see that grow as a percentage of the total flash business. Great. Thank you.
Speaker Change #101: We are expecting, you know, inferencing is expected to be the preponderant majority of the storage market.
Speaker Change #101: for AI and the Enterprise AI landscape.
Speaker Change #101: It's about 80% maybe 90% of the total market, and rag is expected to generate about 8x more data than the data that is fed into the rag pipeline. So there's a lot of new generation going to happen when and if these applications become mainstream.
Speaker Change #102: Great, thank you.
Mehdi Hosseini: I might best of luck with you in your next endeavor. Thank you, Mehdi.
Speaker Change #102: Our next question comes from Ananda Burra with Loop Capital. So please go ahead.
Aaron Rakers: Our next question comes from Aaron Rakers with Wells Fargo. Please go ahead. Hi, this is Jake on for Aaron congrats on the quarter and thanks for the question. I was just hoping you could double click a little bit on the enterprise demand you're seeing for AI products. It sounds like it's still pretty early days for AI inference and wondering what ending of adoption you think we're in and what's the competitive landscape like there.
Ananda Burra: Hey, yeah, good afternoon, guys, thank you for taking the question. Yeah, and Mike's congratulations will miss working with you but put job well done obviously.
Ananda Burra: I guess George, I just have one, you know piggybacking up the LNC. So, infront thing is 80% of the storage marker that I've taken over time.
Speaker Change #104: Can you, the comments you made about rag a moment ago and the growth there, the date, the date again, it's going to turn off there. Like how does that, I guess, is that like in the other 10% of the opportunity or does that actually, in some way, feed and amplify?
George Kurian: Yeah, I think, you know, we are in the early innings of the AI landscape from a storage perspective. I think you are seeing the fact that AI so far, the AI applications requires a specific computing architecture, which is why you're seeing the compute build out happening. But from a storage and data standpoint, you know, people are using their proprietary data with these AI models and so as we said consistently, we're in the early innings.
Speaker Change #105: and the Emperor thing opportunity and they can use us from mind us.
Speaker Change #106: You guys, you guys, you just mentioned access to data install, they can be back out. But can you also remind us?
Speaker Change #107: from a capability perspective.
George Kurian: It is when that interesting trend as well as large scale generation of data come into play that you really see the inflection and data storage. I think what we are seeing right now is everybody is getting their data ready for AI. And so they're all trying to unify their data, figure out what data they need for particular types of applications, getting their hybrid cloud pipelines working so that they have AI applications in the cloud, they can connect their data to it.
Speaker Change #108: how you stack up.
Speaker Change #109: to the other companies that could sort of have a play in, in say, infreting and rags. And then also, could you include your thoughts on how you step out relative to say that in WECA and EDN? Just the level of what's at that point, thank you.
George Kurian: And so we're seeing a lot of getting data ready, which is often in the form of a data lane or some kind of data infrastructure that brings together all of their data and we're very well positioned for that. We hold a huge amount of the unstructured data in the world. And so we are naturally a part of any generator AI use case requires data that often sits on us. And the two examples we gave you on the earnings call are classic examples once a large, you know, financial services institution that is trying to summarize all of the unstructured data that they have in the various applications.
Speaker Change #110: So let me get this three questions in there. You know, on the first one, the comment about where do we see the large, you know, multiplicative effect of...
Speaker Change #111: Ragn vectorization of data, it is actually part of the inferencing data growth. And so we see that when you create...
Speaker Change #111: Structure on top of unstructured data.
Speaker Change #111: for inferencing, it actually grows the amount of data that you store quite significantly. And so that fits into that opportunity that we say, 80% of it is probably inference claim.
Speaker Change #112: with regard to our case ability set, listen, we feel really, really good about our capability set.
Speaker Change #113: I think what we see is, first of all, a lot of experience in AI, we've been in the markets since 2018 with NVIDIA, we have hundreds of customers that do AI with us.
George Kurian: And so they work with us and a set of, you know, AI application vendors to, you know, feed all of that into into their data into their LLM. We are expecting, you know, inferencing is expected to be the preponderant majority of the storage market for AI and the enterprise AI landscape. It's about 80% maybe 90% of the total market and rag is expected to generate about 8x more data than the data that is fed into the rag pipeline.
Speaker Change #113: The second is, you know, to do this kind of large scale AI workloads you need to have.
Speaker Change #113: Scale out file systems.
Speaker Change #113: and Integrated Object, and so the fact that we have an on-depth scaled-out file system with parallel and integrated S3K stability gives us a lot of key.
Speaker Change #113: you know, strength in the market we've got wins in training, we've got wins in data lakes, we've got wins in you know fine tuning and different things, right, so pretty much across the board.
Unknown Executive: So there's a lot of new generation going to happen when and if these applications become mainstream. Great. Thank you.
Ananda Bura: Our next question comes from Ananda Bura with Loop Capital. Please go ahead. Hey, yeah, good afternoon, guys. Thanks for taking the question. Yeah, and Mike, congratulations. We'll miss working with you, but job well done, obviously. I guess, George, stick him right there. I just, I just have one, stick him right there. You know, take you back and up the ones day. So interesting is 80 to 90% of the storage market opportunity over time.
Speaker Change #113: We are also unique in the market.
Speaker Change #113: with the hybrid cloud pipelines. There is no one else in the market that can do what we do. Literally no one else because of the native integration that we have. And I would just close by saying, come to NetApp Insight.
Speaker Change #114: We have an awesome set of innovations that will showcase how real customers are using our technology to solve real AI problems today and over the next 12 months we got an awesome set of capabilities that build on all the hard work we've done so far.
Ananda Bura: Can you, the comments you made about Ragamom? I'm going to go and the growth there, the data, the data getting thrown out there. Like, how does that, I guess, is that like in the other 10% of the opportunity or does that actually in some way feed and amplify the interesting opportunity? And then can you just remind us, you guys, you guys, you just mentioned access to data install based on you got a cab.
Speaker Change #114: i
Speaker Change #115: That's super helpful. I'm going to do a quick follow-up. This is me, like just giving all the capabilities to look about George. Does that suggest that you believe the company could have an amplified chair position in Jenny I storage, you know, going to look when that kicks in.
Ananda Bura: But can you also remind us, you know, from a capability perspective. How, how you stack up to, to the other companies that, that could be, you know, sort of have a place in, in say, interesting and rag. And then also, could you include your thoughts on how you stack up relative to say that's in wacka and ddn, just the level said that for us.
Speaker Change #116: with GNI, the two market players that have the installed base, Dell and us are super well positioned. We feel extraordinarily good about our capabilities that come to by you'll hear more.
Speaker Change #116: and I thank you all appreciate it.
Speaker Change #117: Our next question comes from Wom's Emo Han with Bank of America. Please go ahead.
Speaker Change #118: Yes, thank you so much for taking the question. George, you just said that you had in all flash, you did not have a new to all flash.
George Kurian: Yeah, so let me hit these three questions in there, you know, on the first one, the comment about, where do we see the large, you know, multiplicative effect of, you know, rag and vectorization of data, it is actually part of the inferencing data growth, right. And so we see that, you know, when you create structure on top of unstructured data for inferencing. It actually grows the amount of data that you store quite significantly.
Speaker Change #119: Can you elaborate a little bit what parts of the old black market are you seeing the most traction between hybrid capacity and performance flash and who do you think you're taking the most share from it?
Speaker Change #120: I think if you look at the overall market
Speaker Change #121: The capacity flash market is the fastest growing.
Speaker Change #121: is because the technology is new, you're seeing the displacement of 10K drives and it's all, you know, you're on your comparison capacity flash market as tailwinds, right? And I think that's where we see the strongest growth.
George Kurian: And so that fits into that opportunity set that we say, hey, you know, 80% of it is probably interesting with regard to, you know, our capability said, listen, we feel really, really good about our capability set. I think what we see is, first of all, a lot of it, we have a lot of experience in AI. We've been in the market since 2018 with Nvidia, we have hundreds of customers that do AI with us.
George Kurian: The second is, you know, to do this kind of large scale AI workloads, you need to have scale out file systems and integrated object. And so the fact that we have an on tap, a scaled out file system with parallel and an integrated S3 capabilities gives us a lot of, you know, strength in the market. We've got wins and training, we've got wins and data lakes, we've got wins and, you know, fine tuning and inferencing, right.
Speaker Change #121: The Performance Flash Market continues to be a growing part of the business. We have done well there, and I feel good about the prospects for our performance Flash Lock products.
Speaker Change #121: which are, you know, a cam expanding opportunity for us.
Speaker Change #122: We compete in that part of the market against frame arranged, right? It could be the tell.
Speaker Change #122: Power Mac for a large frame array from Kittachi or HPE. And essentially the capability that we have is exceptional price performance.
Speaker Change #123: Consistent latency, which makes it easy to run databases and other workloads on our infrastructure, plus a great set of features that allow you to unify your data landscape and take these environments and plug them into the AI workflows that you want.
George Kurian: So pretty much across the board. We are also unique in the market with the hybrid cloud pipeline, right. We do there is no one else in the market that can do what we do literally no one else because of the native integration that we have. And I would just close by saying come to NetApp Insight, we have an awesome set of innovations that will showcase how real customers are using our technology to solve real AI problems today. And over the next 12 months, we got an awesome set of capabilities that build on all the hard work we've done so far. That's super helpful.
Speaker Change #123: and so if you're good about that on the high end, we've also seen good progress in the mid range.
Speaker Change #124: with QLC against a broad range, you know, upgrading our installed base of 10K drive, upgrading other installed bases of 10K drive. And so, since especially compared with our results are strong and so, I feel good about the fact that we stay can share in the market.
George Kurian: Okay, thank you, George
George Kurian: I want from Mike McGratt as well. Can you talk about the drivers for the lower tax rate and if you look at the
Speaker Change #125: Higher Interest Income and Lowered Hacks raid. It does not show much increase of the operational level for operating dollars despite the higher revenue.
George Kurian: I'm going to do a quick follow-up. Does this mean, like just giving all the capability to spoke about George? Does that suggest that you believe the company could have an amplified chair position in Gen. A.I, storage going like when that kicks in? With Gen. A.I, the two market players that have the install base, Dell and us, are super well-positioned. We feel extraordinarily good about our capabilities that come to insight. You'll hear more. Thanks a lot. We appreciate it.
Speaker Change #126: So just wondering what some of the puts in takes there, if there are anything that you'd like to call out and are you still expecting gross margins to step down a little in the second half versus first half or don't that change now because you have these.
Speaker Change #127: Prebiased that you've made during the war. Thank you.
Speaker Change #128: So thank you, Monzie. Thanks for the question. So I'm going to answer the last one first and then I just give me the chance to walk through the puts and takes of guidance. The answer is no, no change to what we said last time in terms of the trajectory of gross margin.
Wamsi Mohan: Our next question comes from Wamsi Mohan with Bank of America. Please go ahead. Yes, thank you so much for taking the question. George, you just said that you had an all-flash, Newton NetApp and Newton all-flash. Can you elaborate a little bit? What parts of the all-flash market are you seeing the most traction between hybrid capacity and performance flash? And who do you think you're taking the most share from that one follow-up?
Speaker Change #128: So hey, let's back up for a second. So we beat the first corner by 11 million in revenue and 11 million in EPS because of the strength and the business and our confidence in it, we then raised it by 30 million in revenue and then 20 cents in EPS.
Speaker Change #128: Let's go left to right first and then we're going to go down because I think this is important. So based on those results in the demand that we see in the visibility in the Q2, we did raise Q2 by about another 10 million. We also raised the second half in revenue as well.
Wamsi Mohan: I think if you look at the overall market, the capacity flash market is the fastest growing. It is because the technology is new. You're seeing the displacement of 10K drives and it all, you're on here compares the capacity flash market as tailwinds. I think that's where we see the strongest growth. The performance flash market continues to be a growing part of the business. We have done well there and I feel good about the prospects for our performance flash loss products, which are a cam expanding opportunity for us.
Speaker Change #129: EPS largely follows that as you go through the year. However, we did understand in OPEX in the first quarter. Therefore, we pushed some of that spend of the second half. Dad answers your question about why you don't see the operational the throughput as much.
Speaker Change #129: and then let's hit your other questions. On the tax rate, it is simply a forecast of projection of income by geo. Our tax rate in the last two years has been 20.9%, 20.3%, we thought it would go up based on the mix of profitability. We now expected to be consistent with last year. And then on the interest income that team has done a lot of great work, making sure that we can invest all of our cash balances. And candidly, they didn't lower range of stuff as we thought they might, and we fund that number up as well.
Wamsi Mohan: We compete in that part of the market against frame arrays. It could be the Dell PowerMax or a large frame array from Hitachi or HPE. Essentially, the capability that we have is exceptional price performance, consistent latency, which makes it easy to run databases and other workloads and our infrastructure, plus a great set of features that allow you to unify your data landscape and take these environments and plug them into the AI workflows that you want.
Speaker Change #129: Dad!
Speaker Change #130: Those are the big movers in guidance and then for the year we've left, importantly, the full year gross margin percentage and operating income percentage is consistent. We're only one quarter in, we still really good about the year, but let us get through the next quarter and then we'll take a look at that as we go through the year.
Wamsi Mohan: I feel good about that on the high end. We have also seen good progress in the mid-range with QLC against a broad range, upgrading our install base of 10K drives, upgrading other install bases of 10K drives. Same suspects we compete with our results are strong and so I feel good about the fact that we've taken share in the market.
Speaker Change #130: So hopefully that helps, that's the outline for guidance for the year, Womsey.
Womsey: Yeah, thank you so much, thanks.
Speaker Change #132: Our final question today comes from David Vaughn with UBS. Please go ahead.
Speaker Change #132: Hi, thanks for saying the question, this is Brian on for David. I'm just wondering on Gen AI is Flash at a TCO today to drive a doctrine of storage or do we need the cost curve to come down further over the next year or so? And then what percentage of shipments and installed base are Flash today? Thank you.
Michael Berry: I want for Mike. Can you talk about the drivers for the lower tax rate and if you look at the higher interest income and lower tax rate, it does not show much increase at the operational level for operating dollars, despite the higher revenue. So just wondering what some of the puts and takes there are if there are anything that you'd like to call out and are you still expecting gross margins to step down a little in the second half versus first half or does that change now because you have these pre buys that you've made during the quarter.
Speaker Change #133: You know, with regard to shipments
Speaker Change #134: Flashes if you look at it roughly 60%.
Speaker Change #134: Oh!
Speaker Change #135: The Hybrid Cloud Revenue
Speaker Change #136: and so it's a little bit higher than that on product revenue so I would just leave it there.
Speaker Change #136: I think with regard to the install base it's still a small part of the total install base.
Speaker Change #136: The majority is about 40%, the majority is...
Michael Berry: Thank you. So thank you, Wamsi. Thanks for the question. So I'm going to answer the last one first and then I just give me the chance to walk through the puts and takes of guidance. The answer is no, no change to what we said last time in terms of the trajectory of gross margin. So hey, let's back up for a second. So we beat the first corner by 11 million in revenue and 11 million EPS because of the strength and the business and our confidence in it.
Speaker Change #137: Still hard drives, right? And we've been selling flashcore, you know how many years? So, it shows the size.
Speaker Change #137: and the fact that our overall install base is growing.
Speaker Change #137: Let me get to your question about AI, with regard to AI.
Speaker Change #138: You know, it depends on what part of the life cycle you're operating in. If you're building a large repository of data, like a data link where you're unifying all the different data types.
Michael Berry: We then raised it by 30 million in revenue and then 20 cents in EPS. Let's go left to right first and then we're going to go down because I think this is important. So based on those results and the demand that we see in the visibility into Q2, we did raise Q2 by about another 10 million. We also raised the second half in revenue as well. EPS largely follows that as you go through the year.
Speaker Change #138: that you want to be able to process in a large language model. The portion of that data that is actively being used with the model is going to be on flash.
Speaker Change #138: Does
Speaker Change #138: You know sort of a practical customer that doesn't want to go to play their environment, we'll keep the archive data sets.
Michael Berry: However, we did understand in the first quarter. Therefore, we pushed some of that spend to the second half. That answers your question about why you don't see the operational the throughput as much. And then let's hit your other questions on the tax rate. It is simply a forecast of projection of income by geo. Our tax rate in the last two years has been 20.9%. 20.3%. We thought it would go up based on the mix of profitability.
Speaker Change #138: for models that they have run for either regulatory reasons.
Speaker Change #139: or for business trajectory reasons, they will keep that on disk-based solutions what we've seen so far. Large scale object repositories that are typically on, you know, kind of disk-based solutions.
Speaker Change #139: If you then move into active model training
Speaker Change #139: and fine tuning, that happens in an all-flash configuration where the active data set is deemed.
Michael Berry: We now expect it to be consistent with last year. And then on the interest income, the team has done a lot of great work, making sure that we can invest all of our cash balances. And candidly, they didn't lower rates of stress as we thought they might hence we've bumped that number up as well. So that's those are the big movers in guidance. And then for the year we've left. Importantly, the full year gross margin percentage and operating income percentage is consistent.
Speaker Change #140: and L.A. L.A.
Speaker Change #140: and then when you move to an inferencing model, inferencing happens wherever you have your business process, right? So you could have it in a data center environment where you could run it on flash, you could have it in a small manufacturing facility where you could probably use this core flash.
Speaker Change #140: and then you could also have it in the cloud. We are seeing many instances of cloud based in front of things that are tools that being used. So it's a broad mix. I hope that gave you, you know, there's no one answer. I hope that gave you a good sense of whether it's a cloud.
Michael Berry: We're only one quarter and we feel really good about the year. But let us get through the next quarter and then we'll take a look at that as we go through the year. So hopefully that helps. That's the outline for guidance for the year.
Unknown Executive: Yeah, thank you so much.
Speaker Change #141: God it, that's helpful. Thank you.
Speaker Change #141: Alright, thank you, Brian. I'm going to pass it back to George for some closing remarks.
George Kurian: and thanks everyone. We have got FY25 of to a strong start because of the strong alignment of our solutions with customers most important data challenges coupled with our focused execution.
David Vaughn: Our final question today comes from David Von with UBS. Please go ahead. Hi, thanks for seeing the question. This is Brian on for David.
George Kurian: I'm just wondering on Gen AI is flash at a TCO today to drive a doctrine of storage or do we need to cost curve to come down further over the next year or so. And then what percentage of shipments and install based are flash today. Thank you. You know with regard to shipments flashes if you look at it roughly 60% of the hybrid cloud revenue. And so it's a little bit higher than that on product revenue. So I would just leave it there.
George Kurian: We are delivering innovation at a fast pace and our well-positioned capture, the growth potential, in the key markets of flash, block, floundstorage and AI.
George Kurian: are relentless focus on the significant opportunities combined with disciplined operational management continues to yield positive outcomes.
George Kurian: I think with regard to the install base, it's still a small part of the total install base. The majority is it's about 40%. The majority is still hard drives, right? And we've been selling flash for you know how many years.
Speaker Change #142: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
George Kurian: So it shows the size and the fact that our overall install base is growing. Let me get to your question about AI with regard to AI. You know depends on what part of the life cycle you're operating in. If you are building a large repository of data like a data lake where you're unifying all the different data types that you want to be able to process in a large language model. The portion of that data that is actively being used with the model is going to be on flash.
Speaker Change #142: i
Speaker Change #142: [inaudible]
George Kurian: The sort of a practical customer that doesn't want to go play their environment will keep the archive data sets for models that they have run for either regulatory reasons or for business trajectory reasons. They will keep that on disk-based solutions what we've seen so far. Large scale object repository that are typically on kind of disk-based solutions. If you then move into active model training and fine tuning, that happens in an all-flash configuration where the active data set is being crunched with an LLM.
George Kurian: And then when you move to an inferencing model, inferencing happens wherever you have your business process. So, you could have it in a data center environment where you could run it on flash, you could have it in a small manufacturing facility where you could probably use disk or flash. And then you could also have it in the cloud. We are seeing many instances of cloud-based inferencing that are tools that being used. So, it's a broad mix.
Unknown Executive: I hope that gives you, and there's no one answer. I hope that gives you a good sense of where the business is at. Got it. That's helpful. Thank you. All right.
Speaker Change #143: and Michael Berry, George Kurian, [inaudible]
Speaker Change #143: and Michael Berry.
Speaker Change #143: and Michael Berry.
Unknown Executive: Thank you, Brian.
Speaker Change #144: Good day and welcome to the net app first quarter of fiscal year 2025 earnings call. All participants will be in listen only mode. Should he need assistance, please signal a conference specialist by pressing the star key, followed by zero.
Speaker Change #144: 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 and Professor Relations. Please go ahead.
Kris Newton: Hi, everyone. Thanks for joining us with me today, our CEO, George Kurian, and CSO Mike Berry. This call is being webcast live and will be available for replay on our website at netapp.com.
Speaker Change #145: During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects.
Speaker Change #145: including without limitations our guidance for the second quarter in fiscal year 2025, our expectations regarding future revenue, profitability, and shareholder returns, and other groups initiatives and strategies.
Speaker Change #145: These statements are subject to various risks and uncertainties which may cause our actual result to differ materially.
Speaker Change #145: For more information, please refer to the documents we filed from time to time with the SEC and on our website, including our most recent form 10K in Form 10Q. We disclaim any obligation to update or forward-looking statements and projection.
Speaker Change #145: During the call, all financial measures presented will be non-gap unless otherwise indicated. Reconciliation of Gap to non-gap estimates are available on our website, on now to the call over to George.
George Kurian: Welcome everyone. We started FY25 Strong, building on our momentum exiting last fiscal year.
George Kurian: In Q1, we delivered 8% year-over-year revenue growth and set records for first quarter operating margin and EPS.
George Kurian: These results are a testament to our strong execution.
George Kurian: in a continued uncertain macroeconomic environment.
Speaker Change #146: are on neighboring confidence in the customer benefits of the highly differentiated net-app intelligent data infrastructure platform and our discipline management of the business.
Speaker Change #146: As a result, we are raising our FY25 outlook for both revenue and profit.
Speaker Change #146: As we said during our recent investor day, we are focused on our uniquely differentiated solution in flash, block, cloud storage and AI.
Speaker Change #146: The address markets which are bolstered by both secular and company specific tailwinds and represent our biggest opportunities to fuel revenue growth and increase market share.
Speaker Change #146: In Q1, the experienced notable momentum across all these areas, evidence that our value proposition is resonating.
Speaker Change #146: This focus coupled with our dedication to innovation drives my confidence in our continued success.
Speaker Change #146: customers choose NetApp because we help them address their most important data challenges, leveraging the power of public and hybrid clouds to rapidly deploy new applications.
Speaker Change #146: Unified their data for AI, simplify cloud integration and strengthen data protection.
George Kurian: I'm going to pass it back to George for some closing remarks. Thank you, Chris. And thanks, everyone. We have got FY25 off to a strong start because of the strong alignment of our solutions with customers most important data challenges, couples with our focused execution. We are delivering innovation at a fast pace and are well positioned to capture the growth potential in the key markets of flash, block, cloud storage and AI. Our relentless focus on these significant opportunities combined with disciplined operational management continues to yield positive outcomes.
Unknown Executive: I hope to see you at NetApp Insight and look forward to updating you on our continued progress on next quarter's call. Thank you.
Speaker Change #146: We uniquely deliver a comprehensive and integrated storage and data management platform.
Speaker Change #146: giving our customers the power to unify all their data for any application anywhere and the ability to seamlessly and consistently manage it.
Speaker Change #146: while ensuring data remains secure and protected.
Speaker Change #146: We again delivered robust year-over-year performance in our hybrid cloud segment with revenue growth of 8% and product revenue growth of 13% driven by strength in all slash storage.
Speaker Change #146: Broadbase demand across our all-flash storage portfolio propelled our all-flash rate annualized revenue run rate to 3.4 billion dollars up 21% year over year.
Speaker Change #146: At the start of Q1, we introduced the new AFF A series family of high performance all
Speaker Change #146: capable of powering the most demanding environment.
Speaker Change #146: from today's Mission Critical Applications to tomorrow's Jenny I Workloads.
Speaker Change #146: Delivering the advanced data management industry leading ransomware protections and cloud integration that modern workloads require, the new AFFACaries saw positive customer reception and performed ahead of our expectations.
Speaker Change #146: Both are capacity flash and block optimized all flash array families exhibited strong growth year over year, addressing an expanded term and driving share games.
Speaker Change #146: In Q1, we had numerous competitive takeouts across a broad set of workloads and vertical markets.
Speaker Change #146: As customers leveraged our C.C.E.E. and the S.A. products to modernize the legacy infrastructures and deploy new applications like artificial intelligence.
Speaker Change #146: The AFA enabled us to capture a new-to-net-up customer, displacing a legacy block storage competitor at a European-based manufacturer.
Speaker Change #146: The compelling strikes performance of the ASA, together with its modern architecture and comprehensive software capabilities, helps the customers realize saving as they refresh their sand environment.
Speaker Change #146: This is the first step in a larger relationship as the customer plans to purchase additional ASA systems to replace the remaining competitor footprint and evaluate our public cloud services.
Speaker Change #146: Keystone, our storage as a service offering, was again a highlight this quarter with revenue growing over 60% from Q1 a year ago.
Speaker Change #147: He's shown gifts customers the operational agility and reduce financial risk they need to manage in a dynamic environment.
Speaker Change #147: A good example of this is a leading automotive supplier that chose Keystone to help address rapidly changing storage demands created by ongoing transformation of the automotive market.
Speaker Change #147: Keystone gives them the flexibility to manage rapid growth, but also the ability to shrink based on changing circumstance.
Speaker Change #147: A.I. is the cornerstone of many of my customer conversations, reinforcing net-app position as a proven data infrastructure platform provider and thought leader in this phase.
Speaker Change #147: Customers are selecting NetApp as their partner at every stage of the AI life cycle because of our high performance all-flash storage, unique cloud integration and extensive data management capabilities.
Speaker Change #147: This capability support a wide range of needs.
Speaker Change #147: from data preparation, model training and tuning.
Speaker Change #147: to retrieve a log-mented generation or rack and influencing and address the requirements for responsible AI including model and data versioning as well as data governance and privacy.
Speaker Change #148: While we believe the large opportunity for Enterprise AI is still ahead of us, we are seeing good momentum today with our AI business performing well ahead of our expectation.
Speaker Change #148: In Q1, we had over 50 AI and data-late modernization wins.
Speaker Change #149: I'll give you just a couple of examples.
Speaker Change #149: We were selected by another of the world's largest oil and gas companies for their AI and high performance compute workloads.
Speaker Change #150: are all flash storage, will power the customer's AI environment, servicing more than 40,000 CPU cores and GPUs which are on simulation and 3D virtualization workloads.
Speaker Change #150: Additionally, we made it practical for a leading financial services institution.
Speaker Change #150: to consolidate the benefits of data into a single data lake for AI and analytics workloads, including fraud detection, credit scoring and portfolio management, and improving the productivity of their data sciences.
Speaker Change #150: Both instances are examples of our deep understanding of and experience in AI workloads together with our intelligent data infrastructure platform, help drive customer preference for net-app infrastructure to service their growing AI requirements.
Speaker Change #150: We continue to advance our strong position with the development of Gen AI cloud and on-premises solutions in partnership with industry leaders.
Speaker Change #150: In Q1, in partnership with Lenovo, we announce the full stack OVX system, optimized for any eye and design to support RIDE.
Speaker Change #150: Additionally, we introduced new capabilities designed for cloud AI workloads.
Speaker Change #150: We integrated the NetApp Gen AI toolkit with Microsoft Azure NetApp File, giving customers the ability to generate unique, high quality and also relevant results.
Speaker Change #151: from Jenny I. Project by combining their proprietary data with pre-trained foundational models.
Speaker Change #151: In conjunction with AWS, we released a reference architecture for Amazon Bedrock to help customers implement Ragonable workflows that bring proprietary data stored on Amazon FSX for NetApp on tap
Speaker Change #151: into the Agene AI data pipeline.
Speaker Change #152: Genia is the truly hybrid workload.
Speaker Change #153: and only NetApp has the breadth of products and services to reduce the complexity, resources and risk for customers, in managing these strategic workloads across increasingly complex hybrid multi-cloud environments.
Speaker Change #154: Public Cloud segment revenue was $159 million, up to 3% year over year. Our highly differentiated first party and high-prescalor marketplace storage services, remainder focus and top priority.
Speaker Change #154: These services continue to grow rapidly, increasing roughly 40% year over year, and performing ahead of our expectations at each of our hyperscale partners.
Speaker Change #154: As we are allowing the previous calls, we expect the headwinds from subscriptions of it to lessen over the course of FY25, allowing the strength of our first party and marketplace storage services to shine through.
Speaker Change #154: Our rapid innovation in cloud storage services, broadening workload support, capabilities, price and performance points, continues to solidify our leadership position.
Speaker Change #154: In Q1, we again announce the capabilities of AWS FSX for NetApp on app.
Speaker Change #154: Boosting scalability and performance
Speaker Change #154: to address evolving business names.
Speaker Change #155: Microsoft recognized the unique value, we and Cap Gemini bring.
Speaker Change #156: with its 2024 partner of the Year Award in the Migration to Azure category for our work in moving a large Asian retail customer to Azure, which included Azure NetApp files.
Speaker Change #156: Our strong human performance continues the momentum from last year, leaving a confidence path into FY25.
Speaker Change #156: The robust growth in our revenue, billing and profitability reflects the increasing alignment of customer needs with our unique solutions.
Speaker Change #156: We believe our highly differentiated intelligent data infrastructure platform designed for the age of data.
Speaker Change #156: positions us to capture the growth potential in flash, block, cloud storage and AI, promising, continued success for our shareholders and customers.
Speaker Change #156: Looking ahead, our priorities are clear. We are well positioned to seize a growing market opportunity. As we grow, we will maintain our discipline and operational management to drive leverage throughout our business model.
Speaker Change #156: In closing, I want to thank the NetApp team for their dedication to delivering exceptional results in an uncertain macro environment.
Speaker Change #156: I also want to remind you that we are hosting our inside customer conference in Las Vegas next month.
Speaker Change #156: where we will announce the dances to our innovation agenda and showcase how we help our customers make their data infrastructure intelligent for the age of AI. I hope to see you there.
Speaker Change #156: Before I turn the call over to Mike, I'm sure you've already seen the news of his upcoming retirement.
Speaker Change #156: Mike has been a great partner to me in our focus on delivering profitable growth and she a older value.
Mike: Over the course of his tenure, from FY21 to FY24, he has helped drive revenue growth of 9% and EPS growth of almost 60%.
Speaker Change #158: In Mike, I have been blessed to have a wife partner from whom I learn much every day, a world-class human being, whose trusted friendship has helped us navigate disruptions smoothly.
Mike: and who has entertained us with his encyclopedic knowledge of country music.
Mike: I appreciate Michael Mike's commitment to stay through the end of the fiscal year to ensure a seamless transition over to you Mike.
Mike: Thanks, George. I greatly appreciate the very nice comments. I'll come back to those comments after I run through the numbers.
Mike: While my family and I are excited about what is to come in our next phase of life, I want to assure everyone that it is business's usual until we name a new CFO. My focus will remain on delivering our plan here and ensuring a smooth, seamless transition.
Speaker Change #159: We are executed a solid quarter in an uncertain macro environment, hitting or exceeding all of our guidance ranges. We are delivering on our commitments as evident in our solid Q1 results.
Speaker Change #159: We made progress towards our long term invested in targets of mid to upper single digit revenue and double digit EPS growth on average through fiscal year 27.
Speaker Change #160: Before I get into the financial details, let me walk you through the key themes for the quarter. As a reminder, all numbers discussed are nine gap, unless otherwise noted.
Unknown Executive: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.
Unknown Executive: [inaudible] Good day, and welcome to the NetApp first quarter of fiscal year 2025 earnings call. All participants will be in listen only mode. 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 has been recorded.
Chris Nguyen: I would now like to turn the conference over to Chris Nguyen, Vice President and Fester Relations. Please go ahead. [inaudible] Customers choose NetApp because we help them address their most important data challenges, leveraging the power of public and hybrid clouds to rapidly deploy new applications, unify their data for AI, simplify cloud integration and strengthen data protection. We uniquely deliver a comprehensive and integrated storage and data management platform, giving our customers the power to unify all their data for any application anywhere and the ability to seamlessly and consistently manage it while ensuring data remains secure and protected.
Chris Nguyen: We again delivered robust year-over-year performance in our hybrid cloud segment with revenue growth of 8% and product revenue growth of 13% driven by strength in all-flash storage. Broad-based demand across our all-flash storage portfolio propelled our all-flash array annualized revenue run rate to $3.4 billion up 21% year-over-year. At the start of Q1, we introduced the new AFF-A series family of high-performance all-flash arrays capable of powering the most demanding environments from today's missions.
Chris Nguyen: [inaudible] Both our capacity-flash and block-optimized all-flash array families exhibited strong growth year-over-year addressing an expanded cam and driving share games. In Q1, we had numerous competitive takeouts across a broad set of workloads and vertical markets as customers leveraged our CCVs and ASA products to modernize the legacy infrastructures and deploy new applications like artificial intelligence. The ASA enabled us to capture a new to NetApp customer displacing a legacy block storage competitor at a European-based manufacturer.
Chris Nguyen: The compelling price performance of the ASA, together with its modern architecture and comprehensive software capabilities, helped the customers realize saving as they refreshed their San environment. This is the first step in a larger relationship as the customer plans to purchase additional ASA systems to replace the remaining competitive footprint and evaluate our public cloud services. Keystone, our storage as a service offering, was again a highlight this quarter with revenue growing over 60% from Q1 a year ago.
Chris Nguyen: Keystone gives customers the operational agility and reduced financial risk they need to manage in a dynamic environment. A good example of this is a leading automotive supplier that chose Keystone to help address rapidly changing storage demands created by ongoing transformation of the automotive market. Keystone gives them the flexibility to manage rapid growth, but also the ability to shrink based on changing circumstance. AI is the cornerstone of many of my customer conversations.
Chris Nguyen: This is a platform for innovation as a proven data infrastructure platform provider and thought leader in this space. Customers are selecting NetApp as their partner at every stage of the AI life cycle because of our high performance all flash storage, unique cloud integration and extensive data management capability. These capabilities support a wide range of needs from data preparation, model training and tuning to retrieve a logmented generation or rag and infancy and address the requirements for responsible AI, including model and data versioning as well as data governance and privacy.
Chris Nguyen: While we believe the large opportunity for enterprise AI is still ahead of us, we are seeing good momentum today with our AI business performing well ahead of our expectation. In Q1, we had over 50 AI and data lake modernization wins. I'll give you just a couple of examples. We were selected by another of the world's largest oil and gas companies for their AI and high performance compute workloads. Our all flash storage will power the customer's AI environment, servicing more than 40,000 CPU cores and GPUs which run simulations and 3D virtualization workloads.
Chris Nguyen: Additionally, we made it practical for a leading financial services institution to consolidate the database of data into a single data lake for AI and analytics workloads, including fraud detection, credit scoring and portfolio management and improving the productivity of their data sciences. Both instances are examples of how our deep understanding of and experience in AI workloads together with our intelligent data infrastructure platform help drive customer preference for net app infrastructure to service their growing AI requirements.
Chris Nguyen: We continue to advance our strong position with the development of Gen AI cloud and on-premises solutions in partnership with industry leaders. In Q1, in partnership with Lenovo, we announced a full stack OVX system optimized for Gen AI and design to support RAG. Additionally, we introduced new capabilities designed for cloud AI workloads. We integrated the NetApp Gen AI toolkit with Microsoft Azure NetApp file, giving customers the ability to generate unique high quality and also relevant results from Gen AI projects by combining their proprietary data with pre-trained foundational models.
Chris Nguyen: In conjunction with AWS, we released the reference architecture for Amazon bedrock to help customers implement rag-enabled workloads that bring proprietary data stored on Amazon FX for NetApp on tap into their Gen AI data pipelines. Gen AI is a truly hybrid workload and only NetApp has the breadth of production services to reduce the complexity. The resources and risk for customers in managing these strategic workloads across increasingly complex hybrid multi-cloud environments. Public Cloud segment revenue was $159 million, up 3% year-over-year.
Chris Nguyen: Our highly differentiated first-party and hyper-scaler marketplace storage services remain our focus and top priority. These services continue to grow rapidly, increasing roughly 40% year-over-year and performing ahead of our expectations at each of our hyper-scaler partners. As we are applying on previous calls, we expect the headwinds from subscription services to lessen over the course of FY 25, allowing the strength of our first-party and marketplace storage services to shine through. Our rapid innovation in cloud storage services, broadening workload support, capabilities, price and performance points, continues to solidify our leadership positions.
Chris Nguyen: In Q1, we again enhance the capabilities of AWS FX for NetApp on tap boosting scalability and performance to address evolving business needs. Microsoft recognized the unique value we and Cap Gemini bring with its 2024 Partner of the Year award in the Migration to Azure category for our work in moving a large Asian retail customer to Azure, which included Azure NetApp files. Our strong Q1 performance continues the momentum from last year, paving a confidence path into FY 25.
Chris Nguyen: The robust growth in our revenue, billing and profitability reflects the increasing alignment of customer needs with our unique solutions. We believe our highly differentiated intelligent data infrastructure platform designed for the age of data positions us to capture the growth potential in flash, block, cloud storage and AI, promising continued success for our shareholders.
George Kurian: Looking ahead, our priorities are clear. We are well positioned to seize a growing market opportunity. As we grow, we will maintain our disciplined operational management to drive leverage throughout our business model. In closing, I want to thank the NetApp team for their dedication to delivering exceptional results in an uncertain macro environment. I also want to remind you that we are hosting our inside customer conference in Las Vegas next month, where we will announce the dances to our innovation agenda and showcase how we help our customers make their data infrastructure intelligent for the age of AI. I hope to see you there.
George Kurian: Before I turn the call over to Mike, I'm sure you've already seen the news of his upcoming retirement. Mike has been a great partner to me in our focus on delivering profitable growth and shareholder value. Over the course of his tenure, from FY21 to FY24, he has helped drive revenue growth of 9% and EPS growth of almost 60%. He's a great partner from whom I learn much every day, a world-class human being whose trusted friendship has helped us navigate disruptions smoothly, and who has entertained us with his encyclopedic knowledge of country music. I appreciate Mike's commitment to stay through the end of the fiscal year to ensure a seamless transition over to you, Mike.
Michael Berry: Thanks, George. I greatly appreciate the very nice comments. I'll come back to those comments after I run through the numbers. While my family and I are excited about what is to come in our next phase of life, I want to assure everyone that it is business as usual until we name a new CFO. My focus will remain on delivering our plans here and ensuring a smooth, seamless transition.
Michael Berry: We executed a solid quarter in an uncertain macro environment, hitting or exceeding all of our guidance ranges. We are delivering on our commitments as evident in our solid Q1 results. We made progress towards our long-term investor-day targets of mid to upper single-digit revenue and double-digit EPS growth on average through fiscal year 27.
Michael Berry: Before I get into the financial details, let me walk you through the key themes for the quarter. As a reminder, all numbers discussed are non-gap unless otherwise noted. Our top-line buildings in revenue exceeded our expectations, growing 12% and 8% year-over-year respectively in Q1, with product revenue growing 13% year-over-year. As expected, Q1 consolidated gross margin was strong at 72% near all time highs. Gross margin leverage and operating discipline drove operating margin of 26% and EPS of $1.56 both Q1 records.
Michael Berry: We returned approximately 170% of free cash flow to stockholders through cash dividends and share repurchases, reducing Q1 diluted share count by 2% year-over-year. As we discussed during last quarter's call, we intend to return up to 100% of free cash flow this year. Due to solid execution and strong operational management, we outperformed our expectations in the first quarter and expect our continued focus and discipline to deliver year-over-year revenue growth in each quarter of the year.
Michael Berry: As a result, we are raising our fiscal year 25 revenue and EPS expectations. Now to the details of the quarter. Revenue of $1.54 billion increased 8% year-over-year above the midpoint of our guidance range. Q1 buildings of $1.45 billion increased 12% year-over-year. This marks our third straight quarter of year-over-year revenue and buildings growth even with an uncertain macro environment continuing to pressure IT spending. We are well aligned to customers' priority investments and remain competent that our innovations will drive growth through the rest of fiscal year 25.
Michael Berry: Product revenue of $669 million was up 13% year over year. Support revenue of $631 million grew 3% year over year. Public law revenue of $159 million increased 3% from Q1 a year ago. Driven by hyper-scale or first-party and marketplace storage services, offset by expected declines in subscription services. Q1 consolidated, Gross Margin came in at 72% and was up 160 basis points from a year ago. Product Gross Margin was 60% in line with the expectations.
Michael Berry: As we discussed on the Q4 call and during the subsequent investor day, we have an increasing share of total revenue derived from higher margin and recurring revenue sources, which we expect to continue through fiscal year 25. We have made strategic purchase commitments to lock in SSD supply and mitigate rising prices in the future, which continues to give us confidence in our product gross margins for fiscal year 25. Our recurring support business continues to be highly profitable with gross margins of 92%.
Michael Berry: Q1 public law gross margins improved to 71% from 68% in the prior fiscal year 24 fourth quarter. During fiscal year 25, we expect to continue to make progress on our public law gross margins towards our long-term target of 75 to 80%. Operating expenses of 714 million dollars was up 2% year over year and decline 1% from Q4 fiscal year 24. Q1 again highlighted the strength of our business model and discipline operational execution with operating margin of 26% ahead of expectations.
Michael Berry: EPS of $1.56 was also above the high end of our guidance driven by higher revenues operating margins and interest income and a slightly lower tax rate. Operating cash flow was 341 million dollars in Q1 a decrease of 25% year over year driven by higher annual incentive compensation payouts and payments for a strategic SSD purchases partially offset by higher customer collections from higher buildings. In Q1 DSO decreased to 40 and inventory turns were 8.
Michael Berry: Free cash flow decreased 28% year over year to 300 million dollars due to lower operating cash flow. During the quarter, we returned 507 million dollars to stockholders through share purchases and cash dividends and in the quarter with approximately 600 million dollars in net cash. We have approximately $1 billion remaining on our existing repurchase authorization. Our biology remains healthy. We ended the quarter with approximately $3 billion in cash and short-term investments. Q1 deferred revenue was $4.2 billion, down less than a half a percent year over a year, a smaller decline than in each of the past three quarters. We expect continued improvement in our deferred revenue growth during fiscal year 25 as we drive buildings growth.
Michael Berry: We are adding our PO as a new disclosure this quarter as it is a leading indicator of future growth in our business. Keystone, our storage as a service offering continues to gain traction in the market, broadening our relevance to customer use cases and is becoming a more meaningful part of our business. Our PO, which includes unbuilt commitments, was $4.5 billion in Q1.
Michael Berry: Now turning to guidance, starting with the full year. While we continue to believe that macro indicators are uncertain, our continued execution gives us confidence in our business going forward. To that end, we are raising our revenue guidance for the full year to between $6.48 billion and $6.68 billion in revenue representing 5% year over year growth at the midpoint. We expect fiscal year 25 consolidated gross margin to be 71 to 72% and our operating margin to be 27 to 28% both unchanged from prior expectations.
Michael Berry: We are raising our net interest income expectations to $50 million driven by higher interest income. We now expect our tax rate for the full year to be 20 to 21%. As a result, we expect EPS to be in the range of $7 to $7.20 which at the midpoint implies 10% year over year growth.
Michael Berry: Turning now to our second quarter guidance, we expect Q2 revenue to range between $1.56 billion and $1.7 billion which at the midpoint implies 5% growth year over year. We expect Q2 consolidate a gross margin to be 71 to 72% and operating margin to be approximately 28%. We expect net interest income to be approximately $15 million in the quarter, our tax rate to be between 20 and 21% and EPS in the range of $1.73 to $1.83.
Michael Berry: In closing, I want to thank our employees, customers and investors for their commitment and investment in NetApp. I am confident in our ability to help our customers successfully achieve their digital and cloud transformation goals. We are well aligned to priority IT investments and are committed to deliver sustainable long-term value for our stockholders.
Michael Berry: Finally, before we go on to Q&A, I would like to add some personal comments on my announcement. It has been an honor and a privilege to lead such a dynamic and visionary organization over the last four and a half years. I am so proud to be part of the NetApp team and being able to play a role in helping NetApp grow and deliver on its promise of profitable growth. I am committed to ensuring a smooth transition and will continue to lead the finance organization until an appropriate successor is identified.
Michael Berry: Like all companies, NetApp continues to evolve and I am excited to welcome a new CFL who will help take NetApp to the next level and execute against the strategic roadmap we laid out at our recent investor day. I want to thank all of you for your continued support of NetApp and look forward to the continued success in the business. That being said, I want to reiterate that it is business as usual for now and I look forward to seeing many of you at our upcoming investor events.
Kris Newton: Kris, please take it away for Q&A. Thanks, Mike.
Unknown Executive: Operator, let's begin the Q&A. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you were using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
Krish Sankar: The first question comes from Chris Sankar with TD Cohen. Please go ahead. Hi, thanks for taking my question and congrats on the strong themselves. And Mike, congrats on the retirement and thanks for all your help towards the south side and the by side we are going to miss you.
Krish Sankar: And my first question is from Mike on the higher man pricing from a demand or a top line standpoint. Is that impacting the demand for all flash and from a cost standpoint, how to think about its impact on those margins? Because I understand you made the strategic man purchases, but how many quarters do you think that lower man price purchase can carry you through? I'm going to follow up for George. Hey, Chris, thanks for the question and thank you for the kind of comments I appreciate it.
Krish Sankar: So let's do the last one first. So as we've talked about, we've purchased a large majority of our man forecasted for fiscal 25. We feel really good about the position that we're in there. How much of it may go into next year really depends on what happens in the rest of 25 plus we'll keep our eye on the market. And we may decide to do more provides. We'll see how the market goes back to your first question if I understand it correctly is.
Krish Sankar: Hey, I don't at this point as we've always talked about customers budget in dollars. And from from our standpoint, the market really hasn't changed too much. So we have not seen much of a change in demand based on that. We'll see how it goes for the rest of fiscal 25. But up to this point, no real changes. Got it, got it. Thanks, Mike.
Michael Berry: And then George, quick question for you. You know, earlier this year, you released the ASAA series. It's like a great product as it unifies file block and object storage for customers. Can you just update us? How is the product performing and you know, I understand new products take a while to translate into into into sales. How is the order of slow pipeline looking like and any kind of customer pushback for using a unified product versus their, you know, the best of the solution.
Michael Berry: Any feedback on the behalfful. Thank you, George. We have been very pleased with the introduction of the AFF-A series, which is the unifying storage product line, like you talked about. We introduced a set of models at the high end of the product family. And the adoption rates have been strong. As you know, they go through a certification process. And in the largest customers that takes a little while. But we're seeing all the right activity in terms of proof of concepts, qualifications and certifications underway.
Michael Berry: We've had several wins in customers that are deploying new environments that would be happy to choose a new product. In complements the C series unifying storage products, you know, the C series is for general purpose workloads. The A series is for high performance demanding workloads, like transactional databases, AI workloads that demand low latency, consistently and a lot of IO. And both of those in turn complement the block optimized ASA family, which serves only block workloads, where we also strong upticks. I'm very pleased. Overall, our flash business performed really, really well in the quarter, as you saw in 21% year on year growth. Thanks, George.
Samik Chatterjee: Our next question comes from Samik Chatterjee with JP Morgan. Please go ahead. Hi, thanks for taking my questions.
George Kurian: And before I ask my question, again, Mike, thanks for working with us so closely. And I know there's some time, but it was great working with you best of luck as well. So just curious, what are you seeing in terms of your customers appetite to spend in a normal fashion? Is there anything that's giving you some hesitation on that front? And I have a follow-up. Thank you. Yeah, overall, I think there are, while the economy has progressed from this time a year ago, there are still a good amount of geopolitical risks.
George Kurian: And we are waiting the interest rate changes that seem to be nearer than they were when we entered the quarter. So it feels like overall things are progressing in the right way, though there is still a good amount of especially geopolitical uncertainty. With regard to what we saw in the quarter, we saw broad-based strength in our product lines and in the Asia-Pac and European markets where our teams did really well, we saw some, you know, slowness in the US public sector, especially the federal part of the public sector business because of the continued, you know, budget challenges with the continuing resolution.
George Kurian: US Enterprise performed well. What we see across all these markets is that customers are prioritizing spend on strategic projects. And so that part of our business continues to do really well and I'm encouraged by the alignment of our solutions to that. But what we haven't yet seen is large-scale data central repretches, which would signal a broader base economic recovery and confidence in the business.
George Kurian: And in terms of when you talk about AI workloads and you talk about sort of AI is truly going to be more of a hybrid sort of environment play with both public cloud and sort of your hybrid solutions. And you talked about in the prepared remarks ASA driving some of those wins as well. I was saying these are going to be dedicated towards their AI deployments or AI workloads, both covering sort of public cloud and hybrid, how you thinking about what that looks like for your fiscal years.
George Kurian: Thank you. Yeah, let me hit on you had two points in there. One is I think broadly speaking, the rate of innovation in the software applications that drive AI is very high, particularly in the public cloud. Where broader frameworks that combine databases data warehouses data lakes together with AI models are progressing at a really rapid rate. So what we see within our customers is many of them want to use the tools on the public cloud, the application together with data that might sit in their data center environment or in the public cloud.
George Kurian: And we are able to make that entire workflow much much more secure and easy to manage, which is a part of the reason why we saw strength both in the data, you know, foundation for AI as well as in the cloud storage portfolio where we're seeing our ability to create a no silo unified architecture come through for us. With regard to how we see it play out through the year, listen on cloud, we have said that we've seen strong results for multiple quarters now with our cloud storage portfolio.
George Kurian: Those have been masked by some of the challenges we have noted and that we are seeing lessening as a headwind from the subscription part of our business. So we expect cloud to return to a pattern of consistent growth through the rest of the year with regard to the storage portfolio. Listen, we have one quarter into the year. We had a really, really strong flash quarter. I'm encouraged. We've raised guidance for the full year. We are very, very confident heading to the rest of the year and we'll tell you more as the year plays out.
Unknown Executive: Great. Thank you. Thanks for the responses.
Unknown Executive: Thank you.
Simon Leopold: The next question comes from Simon Leopold with Raymond James. Please go ahead. Hi, this is Victor Chu for Simon. Can you just provide some color around the squint children's improvement in public cloud this quarter? What was the driver behind the straight there? How should we think about the sustainability and trajectory of the improvement from this point going forward? Hey, Victor. It's my chair happy to do that. So as George talked about in his remarks, we saw really strong growth in our first party and marketplace cloud storage business.
Simon Leopold: We talked a lot about that at our investor day in terms of that growth. So that grew 40% year over year. If you take a look at the rest of the portfolio as he talked about as well, hey, we are expecting subscription services to still be a little bit of a headwind. No moderating as we go through the year. So all in all, we do expect cloud revenue to excel from a growth perspective as we go through the year led by the strength and first party in marketplace.
Simon Leopold: And also the subscription services being a little bit less of a headwind as we get through some of those business changes that we are making. Okay, so the strength was kind of largely in line with what you were expecting for the most part? It was a cloud and first part in marketplace were what we were expecting and even a little bit better quite frankly. So we've seen some really nice growth in that business. And again, as we look forward, we expect that to continue and actually accelerate because of the strength of those products. Okay, that's helpful.
Simon Leopold: Just a one quick follow. How should we think about, you know, I mean, a follow up on the last question. How should we think about the mix of the type of customers behind the initial AI contributions? Are you seeing demand from enterprises or is it biased towards kind of a hyper scale, you know, cloud type operators, you know, how do we think about where the demand is coming from initially and how that evolves over time as the type of AI workloads evolve.
Simon Leopold: Most of our demand is from large enterprises, some of which operate as internal service providers. But most of the demand is from very large enterprises. There is a mix of use cases across, you know, data lakes and data foundations for AI fine tuning and model training as well as the first phases of interest rate. So we've seen a good blend of all of those use cases. That's helpful. Thank you. Again, if you have a question, please press star then one.
Stephen FOX: The next question comes from Stephen Fox with Fox advisors. Please go ahead.
George Kurian: Hi, good afternoon and my congrats on your retirement. I guess just in terms of thinking about competitive dynamics, George, it seems like you called out, like you mentioned, a broad set of sort of positives that could be winning market share. Can you sort of give us a sense versus now versus 90 days ago, where you're seeing the most gains and why and where maybe you're more confident going forward on on share games.
George Kurian: Thanks a lot. Listen, I think what we've seen is our focus and execution continues to get better and better. And, you know, we make good progress on that in the second half of last year and then that momentum continues. So I feel really, really good about where we are with regard to the portfolio. You know, our cloud storage portfolio continues to gain traction, right? We've got more workloads, more price points, more customers and integration into a broader and broader set of the height of scalers environment.
George Kurian: So I feel really, really good about the innovation portfolio there. With regard to the flash portfolio, really strong results across the board, we had, you know, in the block storage part of that portfolio, which is pure share gain against competition, we are demonstrating the price performance leadership against the high end product of our competitors, as well as the price performance and features that leadership against the mid range products of our competitors. So I feel really good about the wins that we're seeing across the board. Thank you.
Amit Daryani: Next question comes from Amit Daryani with Evercore. Please go ahead.
Amit Daryani: Yep, good afternoon, thanks for being my question, I have two as well. You know, I guess, George, maybe to start with, you know, you folks are seeing some really good growth on the all-flash array side. I think it's up 21% this quarter. Can you just talk about, you know, is this cyclical recovering demand, or is it share gains, or you just converting your install base, perhaps more towards all-flash? Just trying to understand what's driving this trend here, and then crucially, what even the durability of this 20% plus growth is on the all-flash side as you go forward?
Amit Daryani: This is the third successive quarter of high rates of all-flash growth, double digits, and we feel really good about the portfolio, with just, let me hit a couple of the points you raised, which is, we are seeing a broad set of new to NetApp customers and new to NetApp flash customers with the broad portfolio that we have. Roughly 50-50 mix of completely new to NetApp have never had NetApp as well as a broad set of customers who are buying our flash products for the first time.
Amit Daryani: So I feel that's a good leading indicator of continued momentum in the portfolio, with regard to the install base getting upgraded. We have said that a part of the cycle of QLC flash is the refresh or the migration of a very, very large 10k install base of hard drive, both hours as well as our competitors to that flash product portfolio. So it's a mix of new accounts, new to NetApp flash accounts, as well as some of the install base getting refreshed.
Amit Daryani: And I think if you just look at it right, the total install base of 10k drives is enormous. It was roughly from a volume perspective somewhere around 35% to 40% of the total storage market for a very long period of time. And so there's a huge install base to go refresh. So if you ask me, we are in the second inning of an ironing ball game. In terms of our, you know, one final comment, the strength of our customer additions says that even with all of the growth of our flash, the overall install base grow so that the penetration of flash into our install base is steady. That's really helpful, George.
Michael Berry: And then Mike, Alex and my congrats as well on your retirement. Could you just maybe just touch on how should we think about product growth margins from the 60% zip code that you had in Q1? Really for the rest of the fiscal year. Just maybe any parameters on how to think about product growth margins that you go through the year would be helpful. Thank you. Sure. And I'm at it. Everybody. Hey, thanks for the comments.
Michael Berry: I appreciate it. We got a lot of work to do. You're going to see me for a little while. I do appreciate it. Hey, I'm trying to cross margins. As we said last quarter, we do expect it to come down a little bit as we go through the quarter as we work down the pre buys. So we were right about at 60% this quarter. Again, we said for the full year that as we said here today, we're still comfortable with that upper 50s to 60 for the full year basis.
Michael Berry: So no real change. I'm in the trajectory of what we expect through the rest of the year that we anything different than we talked about last quarter. I would just add, you know, during the course of the quarter, we saw as we see in the history of the storage industry, some of our competitors did take pricing up, and so that's the leading indicator of actions that the broader industry would take in a inflationary commodity environment. Thank you very much.
Michael Berry: Thank you.
Mehdi Hosseini: Next question comes from Mehdi Hosseini with SIG. Please go ahead. Yes, excuse me.
George Kurian: Thanks for taking the question. I want to go back to George's commentary, you talked about it, or flash array record 3,400, actually, year where your growth of 21%, another record. But by Georgia, consistent with the prior question, every time we get to this kind of a 20% plus growth, the concern is, okay, when is he going to deaccelerate? And I understand that you laid out your targets for FY27, but QVC had deacceleration in FY26, especially if overall the spending environment were to remain constrained.
George Kurian: And then a more broader upgrade cycle would come in in FY27, QVC, that kind of a cycle materializing because given what we have seen over the past 20 years, every time you had this kind of a strong growth, it's followed by deacceleration. I want to understand what is the confidence, and I have a follow-up. I think two or three things, right? I think one is, other portfolio is a lot broader than what we've had in the past.
George Kurian: And I would point that out by the fact that we now have flash products across all the price points in the market, as well as custom offerings for block storage, where we previously would only sell unified storage. And so I feel really good about having a much fuller product portfolio, as well as the pace of innovation and leadership that we have in areas like data security is pretty clearly underwritten in the market.
George Kurian: The second is where we are today is in a market where the pure-play storage players are outperforming the integrated system vendors. And so you look at a broad range of the integrated system vendors. They have struggled now for many quarters in their storage business. And it remains to be seen whether that is a strategic focus for them going forward. And so when I look at our position relative to other players in the market, I feel really good.
George Kurian: I would not call the current environment a, you know, rosy spending environment, right? And we have done well for multiple quarters now in a fairly choppy macroeconomic environment. I'm hopeful that if the macro stabilizes, especially the geopolitical environment stabilizes, we should see some more spending come through, which would be benefit to our business.
George Kurian: Thank you. Thanks for additional insight to a repeat question. And just one quick follow-up for me. How should I think about the mix of NAND that are using in terms of QLC versus other technology and how the QLC mix would trend over the next couple of quarters? ULC should grow as a percentage of our total makes its roughly half right now as a percentage of the of the flash business and so you should see that grow as a percentage of the total flash business. Great, thank you.
Mehdi Hosseini: I might best of luck with you in your next endeavor. Thank you, Mehdi.
Aaron Rakers: Our next question comes from Aaron Rakers with Wells Fargo. Please go ahead. Hi, this is Jake on for Aaron congrats on the quarter and thanks for the question. I was just hoping you could double click a little bit on the enterprise demand you're seeing for AI products. It sounds like it's still pretty early days for AI inference and wondering what ending of adoption you think we're in and what's the competitive landscape like there.
Aaron Rakers: Yeah, I think, you know, we are in the early innings of the AI landscape from a storage perspective. I think you are seeing the fact that AI so far, the AI applications requires a specific computing architecture, which is why you're seeing the compute build out happening. But from a storage and data standpoint, you know, people are using their proprietary data with these AI models and so as respect consistently, we're in the early innings.
Aaron Rakers: It is when that interesting trend as well as large scale generation of data come into play that you'll really see the inflection and data storage. I think what we are seeing right now is everybody is getting their data ready for AI. And so they're all trying to unify their data, figure out what data they need for particular types of applications, getting their hybrid cloud pipelines working so that they have AI applications in the cloud, they can connect their data to it.
Aaron Rakers: And so we're seeing a lot of getting data ready, which is often in the form of a data lake or some kind of data infrastructure that brings together all of their data and we're very well positioned for that. We hold a huge amount of the unstructured data in the world. And so we are naturally a part of any generative AI use case requires data that often sits on us. And the two examples we gave you on the earnings call are classic examples once a large, you know, financial services institution that is trying to summarize all of the unstructured data that they have in the various applications.
Aaron Rakers: And so they work with us in a set of, you know, AI application vendors to, you know, feed all of that into into their data into their LLM. We are expecting, you know, inferencing is expected to be the preponderant majority of the storage market for AI and the enterprise AI landscape. It's about 80% maybe 90% of the total market and rag is expected to generate about 8x more data than the data that is fed into the rag pipeline. So there's a lot of new generation going to happen when and if these applications become mainstream.
Unknown Executive: Great. Thank you.
Ananda Bura: Our next question comes from Ananda Bura with Loop Capital. Hey, yeah, good afternoon, guys. Thanks for taking the question.
George Kurian: Yeah, and Mike, congratulations. We'll miss working with you, but job well done, obviously. I guess George, stick him right there. I just, I just have one, stick him right there. You know, piggybacking off the Wednesday. So interesting is 80 to 90% of the storage market opportunity over time. Can you, the, the comments you made about rag, among them ago, and the growth there, the data, the data getting thrown out there. Like, how does that, I guess, is that like in the other 10% of the opportunity, or does that actually, in some way, feed and amplify the interesting opportunity.
George Kurian: And then can you just remind us, you guys, you guys, you just mentioned access to data install basis, you got a cab. But can you also remind us, you know, from a capability perspective, how, how you stack up to, to the other companies that, that could be, you know, sort of have a place in, in say, interesting and rag. And then also, could you include your thoughts on how you stack up relative to say that's been wack up and D.V.N.
George Kurian: Just a level said that for us, thank you. Yep. So let me get these three questions in there. You know, on the first one, the comment about, where do we see the large, you know, multiplicative effect of, you know, rag and vectorization of data. It is actually part of the inferencing data growth, right. And so we see that, you know, when you create structure on top of unstructured data for inferencing, it actually grows the amount of data that you store quite significantly.
George Kurian: And so that fits into that opportunity set that we say, hey, you know, 80% of it is probably inferencing with regard to, you know, our capability set, listen, we feel really, really good about our capability set. I think what we see is, first of all, a lot of XB have a lot of experience in AI. We've been in the market since 2018 with Nvidia. We have hundreds of customers that do AI with us.
George Kurian: The second is, you know, to do this kind of large scale AI workloads, you need to have scale out file systems and integrated object. And so the fact that we have an on-tap, a scaled out file system with parallel NFS and integrated S3 capabilities gives us a lot of, you know, strength in the market. We've got wins in training. We've got wins in data lakes. We've got wins in, you know, fine tuning and inferencing, right.
George Kurian: So pretty much across the board. We are also unique in the market with the hybrid cloud pipelines, right. We do, there is no one else in the market that can do what we do. Literally no one else because of the native integration that we have. And I would just close by saying come to NetApp Insight. We have an awesome set of innovations that will showcase how real customers are using our technology to solve real AI problems today.
George Kurian: And over the next 12 months, we got an awesome set of capabilities that build on all the hard work we've done so far. That's super helpful. I'm going to just do a quick follow-up. Does this mean, like just giving all the capability to spoke about George? Does that suggest that you believe the company could have an amplified chair position in Gen. A.I, storage going like when that kicks in? With Gen. A.I, the two market players that have the installed base, Dell and us, are super well-positioned. We feel extraordinarily good about our capabilities that come to insight. You'll hear more. Thanks a lot. We hear it.
George Kurian: Our next question comes from Wamsi Mohan with Bank of America. Please go ahead. Yes, thank you so much for taking the question. George, you just said that you had in all-flash, Newton NetApp and Newton all-flash. Can you elaborate a little bit? What parts of the all-flash market are you seeing the most traction between hybrid capacity and performance flash? And who do you think you're taking the most share from it? I'll follow up.
George Kurian: I think if you look at the overall market, the capacity flash market is the fastest growing. It is because the technology is new. You are seeing the displacement of 10K drives. And it all, you're on here compares the capacity flash market as tailwinds. And I think that's where we see the strongest growth. The performance flash market continues to be a growing part of the business. We have done well there. And I feel good about the prospects for our performance flash loss products, which are a cam expanding opportunity for us.
George Kurian: We compete in that part of the market against frame arrays. It could be the Dell PowerMax or a large frame array from Hitachi or HPE. And essentially the capability that we have is exceptional price performance, consistent latency, which makes it easy to run databases and other workloads and other infrastructure. And here, plus a great set of features that allow you to unify your data landscape and take these environments and plug them into the AI workflows that you want.
George Kurian: And so I feel good about that on the high end. We have also seen good progress in the mid-range with QLC against a broad range. You know, upgrading our install base of 10K drive, upgrading other install bases of 10K drive. And so same suspects we compete with our results are strong. And so I feel good about the fact that we've taken share market. Okay, thanks. Sure.
Wamsi Mohan: I want from Mike Mike Congrats as well. Can you can you talk about the drivers for the lower tax rate. And if you look at the higher interest income and lower tax rate, it does not show much increase of the operational level for for operating dollars, despite the higher slightly higher revenue. So just wondering what some of the puts and takes there are if there are anything that you'd like to call out and are you still expecting gross margins to step down a little in the second half versus first half or does that change now because you have these pre buys that that you've made during during the quarter.
Wamsi Mohan: Thank you. So thank you, Wamsi. Thanks for the question. So I'm going to answer the last one first and then I just give me the chance to walk through the puts and takes of guidance. The answer is no, no change to what we said last time in terms of the trajectory of gross margin. So hey, let's back up for a second. So we beat the first corner by 11 million in revenue and 11 million EPS because of the strength and the business and our confidence in it.
Wamsi Mohan: We then raised it by 30 million in revenue and then 20 cents in EPS. Let's go left to right first and then we're going to go down because I think this is important. So based on those results and the demand that we see in the visibility in the Q2, we did raise Q2 by about another 10 million. We also raised the second half in revenue as well. EPS largely follows that as you go through the year.
Wamsi Mohan: However, we did under spend in the first quarter. Therefore, we pushed some of that spend to the second half. That answers your question about why you don't see the operational the throughput as much. And then let's hit your other questions on the tax rate. It is simply a forecast of projection of income by geo. Our tax rate in the last two years has been 20.9%. 20.3%. We thought it would go up based on the mix of profitability.
Wamsi Mohan: We now expect it to be consistent with last year. And then on the interest income, the team has done a lot of great work, making sure that we can invest all of our cash balances and handily they didn't lower rates of stress as we thought they might hence we've bumped that number up as well. So that's those are the big movers in guidance and then for the year we've left importantly the full year gross margin percentage and operating income percentage is consistent.
Wamsi Mohan: We're only one quarter in. We feel really good about the year, but let us get through the next quarter and then we'll take a look at that as we go through the year. So hopefully that helps. That's the outline for guidance for the year.
Michael Berry: Yeah, thank you so much.
Michael Berry: Our final question today comes from David Vaughn with UBS please go ahead. Hi, thanks for seeing the question. This is Brian on for David. I'm just wondering on Gen AI is flash at a TCO today to drive a doctrine of storage or do we need the cost curve to come down further over the next year or so. And then what percentage of shipments and install base are flash today. Thank you. You know with regard to shipments flashes if you look at it roughly 60% of the hybrid cloud revenue and so it's a little bit higher than that on product revenue.
Michael Berry: So I would just leave it there. I think with regard to the install base it's still a small part of the total install base. The majority is it's about 40%. The majority is still hard drives right and we've been selling flash for you know how many years so it shows the size and the fact that our overall install base is growing. Let me get to your question about AI with regard to AI you know depends on what part of the life cycle you're operating in.
Michael Berry: If you are building a large repository of data like a data lake where you're unifying all the different data types that you want to be able to process in a large language model. The portion of that data that is actively being used with the model is going to be on flash. The you know sort of a practical customer that doesn't want to go play their environment will keep the archive data sets for models that they have run for either regulatory reasons or for business trajectory reasons.
Michael Berry: They will keep that on disk based solutions what we've seen so far large scale object repositories that are typically on you know kind of disk based solutions. If you then move into active model training and fine tuning that happens in an all flash configuration where the active data set is being crunched with an LLM. And then when you move to an infrancing model infrancing happens wherever you have your business process right.
Michael Berry: So you could have it in a data center environment where you could run it on flash you could have it in a small you know manufacturing facility where you could probably use disk or flash. And then you could also have it in the cloud we are seeing many instances of cloud based infrancing there are tools of being used so it's a broad mix. I hope that gave you and you know there's no one answer. I hope that gave you a good sense of where the business is. Got it, that's helpful, thank you.
David Vaughn: All right, thank you, Brian.
George Kurian: I'm going to pass it back to George for some closing remarks. Thank you, Chris, and thanks everyone. We have got F-25 off to a strong start because of the strong alignment of our solutions with customers most important data challenges, couples with our focused execution. We are delivering innovation at a fast pace and are well positioned to capture the growth potential in the key markets of flash, block, cloud storage, and AI. Our relentless focus on these significant opportunities combined with disciplined operational management continues to yield positive outcomes. I hope to see you at NetApp Insight and look forward to updating you on our continued progress on next quarter score. Thank you.
Unknown Executive: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.