Q3 2025 NetApp Inc Earnings Call

February 27, 2025

You need assistance, please figure out a conference specialist by pressing the star key followed by zero.

Today.

Aaron Rakers: Thank you.

Operator: The next question is from Meta Marshall with Morgan Stanley. Please go ahead.

After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded.

Chris Newton: Great. Maybe just kind of following up on that question. So it sounds like it was more.

Meta Marshall: Great. Maybe just kind of following up on that question. So it sounds like it was more.

Speaker Change: Good day and welcome to the NetApp third quarter of fiscal year 2025 earnings call.

I would now like to turn the conference over to Kris Newton Vice President Investor Relations. Please go ahead.

George Kurian: Execution-based versus I just want to.

Execution-based versus I just want to.

Chris Newton: Kind of clarify that customers maybe weren't a little bit more uncertain in that first month of the year.

Kind of clarify that customers maybe weren't a little bit more uncertain in that first month of the year.

Speaker Change: 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 is being recorded.

Kris Newton: Hi, everyone. Thanks for joining us with me today are CEO, George Kurian, and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at <unk> Dot com.

George Kurian: Just, you know, as we had seen.

Just, you know, as we had seen.

Chris Newton: Kind of administration change. Second question, just kind of any commentary around public sector? Thanks.

Kris Newton: Kind of administration change. Second question, just kind of any commentary around public sector? Thanks.

Kris Newton: During today's call, we will make forward looking statements and projections with respect to our financial outlook and future prospects, including without limitation, our guidance for the fourth quarter and fiscal year 2025, our expectations regarding future revenue profitability and shareholder returns and other growth initiatives and strategies.

George Kurian: In Q3 and continuing in Q4, we have seen a degree of caution in the European markets, particularly the ones like France and Germany where there are no governments in place. We have seen a little bit more caution in US public sector as part of our Q4 guide. In Q3, US public sector performed according to plan. You are correct that January always is the first month of the calendar year for many customers and so that sometimes budgets take a little longer to get unfrozen. We have good line of sight into our pipeline and we are progressing the deals according to plan.

Speaker Change: I would now like to turn the conference over to Kris Newton, Vice President, Investor Relations. Please go ahead.

Kris Newton: Hi, everyone. Thanks for joining us. With me today are our CEO, George Kurian, and CFO, Mike Berry. This call is being webcast live and will be available for replay on our website at NetApp.com.

Kris Newton: These statements are subject to various risks and uncertainties, which may cause our actual results to differ materially.

Kris Newton: During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects, including, without limitation, our guidance for the fourth quarter and fiscal year 2025.

Kris Newton: For more information please refer to the documents we file from time to time with the SEC and on our website, including our most recent Form 10-K and Form 10-Q, we disclaim any obligation to update our forward looking statements and projections.

Kris Newton: Our expectations regarding future revenue, profitability, and shareholder returns, and other growth initiatives and strategies.

Kris Newton: During the call all financial measures presented will be non-GAAP, unless otherwise indicated reconciliations of GAAP to non-GAAP estimates are available on our website I'll now turn the call over to George Thanks, Chris Welcome everyone. In Q3, FY 'twenty five we delivered revenue growth of 2%.

Kris Newton: These statements are subject to various risks and uncertainties which may cause our actual results to differ materially.

Kris Newton: For more information, please refer to the documents we filed from time to time with the FCC and on our website, including our most recent Form 10-K and Form 10-Q. We disclaim any obligation to update our forward-looking statements and projections.

Chris Newton: Great, thanks.

Meta Marshall: Great, thanks.

Operator: The next question is from Mehdi Hosseini with SIG. Please go ahead.

Aaron Rakers: Yes, thanks for taking my question. I just want to better understand the competitive landscape. I understand that there was some execution issue, but where are we in terms of increasing the QLC mix that will give you better cost?

Mehdi Hosseini: Yes, thanks for taking my question. I just want to better understand the competitive landscape. I understand that there was some execution issue, but where are we in terms of increasing the QLC mix that will give you better cost?

Kris Newton: Year over year and continued our disciplined management of the business, yielding operating margin of 30% above expectations.

Kris Newton: During the call, all financial measures presented will be non-GAAP unless otherwise indicated. Reconciliations of GAAP to non-GAAP estimates are available on our website. I'll now turn the call over to George.

Speaker Change: Although within our guidance range, we are not satisfied with our top line performance.

George Kurian: How do you see the competitive?

George Kurian: Thanks, Kris. Welcome, everyone. In Q3 FY25, we delivered revenue growth of 2% year over year and continued our disciplined management of the business, yielding operating margin of 30% above expectations.

How do you see the competitive?

Speaker Change: We remain well positioned with customers as their supplier of choice for AI and other data driven workloads.

Aaron Rakers: Environment into spring and later in the year? Thank you.

Environment into spring and later in the year? Thank you.

George Kurian: We did not see any changes to the competitive landscape. It's always been competitive and our portfolio has been strong. As I mentioned in my prepared remarks, we have refreshed the entire product portfolio, both the AFF series, and C, and the ASA all-block storage series. We have seen good traction in the quarter in the C series product family, in the ASA product family, as well as with StorageGRID. So we are winning new footprints with those products and I didn't see any fundamental change to that dynamic during the quarter.

Speaker Change: First party and marketplace cloud storage services, and AI will bright spots in the quarter.

Speaker Change: We had line of sight to achieve our sales targets until the end of Q3 when inconsistent execution resulted in some deals slipping out of the quarter.

George Kurian: Although within our guidance range, we are not satisfied with our top-line performance.

George Kurian: We remained well-positioned with customers as their supplier of choice for AI and other data-driven workloads. First-party and marketplace cloud storage services and AI were bright spots in the quarter. We had line-up sites to achieve our sales targets until the end of Q3, when inconsistent execution

Speaker Change: Recognizing this we have instituted a higher level of scrutiny on yield progression through the pipeline with tighter controls on closing plans. We expect these actions will enhance our execution and improve our momentum already a number of the slipped deals have closed.

resulted in some deals slipping out of the quarter.

Speaker Change: Compared to Q3, a year ago hybrid cloud revenue increased 1% and our all flash array business grew 10% to an annualized revenue run rate of three $8 billion.

George Kurian: Recognizing this, we have instituted a higher level of scrutiny on build progression through the pipeline, with tighter controls on closing plans.

Operator: The next question is from Amit Daryanani with Evercore ISI. Please go ahead.

George Kurian: We expect these actions will enhance our execution and improve our momentum.

Aaron Rakers: Hi, this is Irvin Liu on for Amit, and thank you for the question and congratulations on your retirement. Mike, I wanted to ask about how you are thinking about product gross margins. I think the 56% you guided to for fiscal Q4 reflects some benefit from your strategic SSD purchases. But is there any way to help us think about the direction of product gross margins beyond Q4 once you use up some of these strategic purchases, and then to what degree can you pass through some of these higher commodity costs to your customers?

Irvin Liu: Hi, this is Irvin Liu on for Amit, and thank you for the question and congratulations on your retirement. Mike, I wanted to ask about how you are thinking about product gross margins. I think the 56% you guided to for fiscal Q4 reflects some benefit from your strategic SSD purchases. But is there any way to help us think about the direction of product gross margins beyond Q4 once you use up some of these strategic purchases, and then to what degree can you pass through some of these higher commodity costs to your customers?

Speaker Change: Although impacted by sales execution.

Speaker Change: <unk> capacity flash arrays storage grid object storage systems, and assays scale out all flash block storage system, all delivered solid growth.

George Kurian: Already, a number of the SWIFT deals have flowed. Compared to Q3 a year ago, hybrid cloud revenue increased 1% and our all-slash-array business grew 10% to an annualized revenue run rate of $3.8 billion.

Speaker Change: Keystone our storage as a service offering also had another strong quarter with revenue growing almost 60% year over year.

George Kurian: Although impacted by sales execution, C-Series Capacity Flash Array, Storage Grid Object Storage System, and ASA Scale-Out All-Flash Block Storage System all delivered solid growth.

Speaker Change: We are gaining ground with our industry, leading solutions and earning recognition for our efforts.

Speaker Change: We were recently named our customers choice for primary storage in Gardner's 2025 voice of the customer report.

Mike Berry: Yeah, great question. So let me take a step back and talk about gross margins as a whole. I'll talk about Q4. Even though we're not guiding for fiscal 2026, I do want to give you a view of what we're thinking as we sit here today. So first of all, hey, let's back up for a second folks. We've always said our goal here at NetApp is to drive incremental gross margin dollars and we've done that in 2025. The really good news is the mix of gross margin is a lot better now, diversified between the different product lines.

George Kurian: Keystone, our storage as-a-service offering, also had another strong quarter with revenue growing almost 60% year-over-year. We are gaining ground with our industry-leading solutions and earning recognition for our efforts.

Speaker Change: Testament to our strong market position.

Speaker Change: We continued to deliver innovation at a blistering pace in Q3, we introduced entry and mid range ASF E series High performance and C series capacity Flash arrays, completing the refresh of these product lines.

George Kurian: We were recently named a customer's choice for primary storage in Gartner's 2025 Voice of the Customer Report, a testament to our strong market position.

Mike Berry: Particularly product support and cloud.

Particularly product support and cloud.

Speaker Change: At the start of Q4, we introduced new entry level and mid range Asa's systems to complement the high end ASC products introduced earlier in fiscal year 'twenty five.

Mike Berry: The progression of the gross margins has largely played out as we expected at the beginning of the year, with cloud growth margins increasing materially and product gross margins declining throughout the year as we used up some of those strategic pre-buys. I do want to underline a couple things. Hey folks, we did those pre-buys in 2024 and through the first half of 2025, and you can see it in our product margins as some of that has worked through. Those higher costs is what's reflected in the P&L as we sit here today in Q4. What we're expensing from those pre-buys is really close to where the market is. So I will then talk about in a second what that means for 2026. Your second part of your question though.

The progression of the gross margins has largely played out as we expected at the beginning of the year, with cloud growth margins increasing materially and product gross margins declining throughout the year as we used up some of those strategic pre-buys. I do want to underline a couple things. Hey folks, we did those pre-buys in 2024 and through the first half of 2025, and you can see it in our product margins as some of that has worked through. Those higher costs is what's reflected in the P&L as we sit here today in Q4. What we're expensing from those pre-buys is really close to where the market is. So I will then talk about in a second what that means for 2026. Your second part of your question though.

George Kurian: We continue to deliver innovation at a blistering pace. In 2.3, we introduced entry and mid-range AFF A-series high-performance and B-series capacity flash arrays, completing the refresh of these product lines.

Speaker Change: These new systems make it easier for customers to scale up from a smaller starting point or expand capabilities to remote and branch locations powered.

George Kurian: At the start of Q4, we introduced new entry-level and mid-range ASA systems to complement the high-end ASA products introduced earlier in FY25.

Speaker Change: Powered by on tap they deliver simplicity at scale and enable customers to reduce storage costs through integrated data hearing with consistent streamlined operations and data protection.

George Kurian: These new systems make it easier for customers to scale up from a smaller starting point or expand capabilities to remote and branch locations. Powered by ONTAP, they deliver simplicity at scale.

Speaker Change: The new products are already gaining traction with customers.

Speaker Change: Our ability to unify data across hybrid multi cloud environment and strong ransomware protection puts us ahead of the competition does.

Mike Berry: I want to hit first, which is.

I want to hit first, which is.

Mike Berry: We all know there's two pieces of gross margin. There's revenue and there's cost. On the revenue side, we did implement some price changes going into Q3. Given the long sales cycles in.

We all know there's two pieces of gross margin. There's revenue and there's cost. On the revenue side, we did implement some price changes going into Q3. Given the long sales cycles in.

George Kurian: and enable customers to reduce storage costs through integrated data sharing with consistent streamlined operations and data collection. The new products are already gaining traction with customers. Our ability to unify data across hybrid multi-cloud environments

Speaker Change: To support real time, AI enabled fraud detection, a U S based financial services firm.

Mike Berry: Our business, we really didn't see a.

Our business, we really didn't see a.

Mike Berry: Material impact in our fiscal 2025, but we do expect to see this tailwind pick up as we enter fiscal 2026. Another tailwind is the introduction of our new products that George talked about. Specifically the A-Series where we continue to introduce new products that deliver better performance for our customers and a better cost structure for NetApp. Also, as these new products become a bigger portion of our billings in fiscal 2026, that should also be a tailwind to margins. So that's the revenue side.

Material impact in our fiscal 2025, but we do expect to see this tailwind pick up as we enter fiscal 2026. Another tailwind is the introduction of our new products that George talked about. Specifically the A-Series where we continue to introduce new products that deliver better performance for our customers and a better cost structure for NetApp. Also, as these new products become a bigger portion of our billings in fiscal 2026, that should also be a tailwind to margins. So that's the revenue side.

Selected the ASF 80, 94, its scalable performance native container support and comprehensive security certifications.

and strong ransomware protection puts us ahead of the competition.

Speaker Change: Requiring a storage solution that could provide a consistent unified named space across the different locations with a single management interface and electronics manufacturer chose the <unk> C 64, its proven ability to span multiple locations.

George Kurian: To support real-time AI-enabled fraud detection, a U.S.-based financial services forum

selected the AFF A90.

George Kurian: for its scalable performance, native container support, and comprehensive security certifications.

Speaker Change: Including edge core and cloud at the right price point for each well.

Mike Berry: Now specifically on component cost, we expect.

Now specifically on component cost, we expect.

George Kurian: Requiring a storage solution that could provide a consistent unified mainstay across the different locations.

Mike Berry: To use the majority of the pre buys up in fiscal 2025. As I just mentioned, folks were basically at the same as the industry is today. So as we go into fiscal 2026, we expect there to be continued weakness in the NAND market. We've seen that over the last two quarters, and it's expected to continue into the first half of our year. So based on these current projections, we expect Q4 2025 to be the high point of our component costs. Expect to see costs remain steady entering fiscal 2026 and then start to decline. What that means is assuming mix stays consistent because mix is super important, we would expect 56% to be the low point of product gross margins and start to increase as we enter 2026.

To use the majority of the pre buys up in fiscal 2025. As I just mentioned, folks were basically at the same as the industry is today. So as we go into fiscal 2026, we expect there to be continued weakness in the NAND market. We've seen that over the last two quarters, and it's expected to continue into the first half of our year. So based on these current projections, we expect Q4 2025 to be the high point of our component costs. Expect to see costs remain steady entering fiscal 2026 and then start to decline. What that means is assuming mix stays consistent because mix is super important, we would expect 56% to be the low point of product gross margins and start to increase as we enter 2026.

Speaker Change: We continue to see growth in demand for AI solutions as a large market opportunity for enterprise journey II begins to open and customers seek a unified and structured view of their data assets in Q3, our AI business again performed ahead of our X.

George Kurian: With a single management interface, an electronics manufacturer chose the AFF-C60 for its proven ability to span multiple locations, including edge, core, and cloud, at the right price point for each.

Speaker Change: Spectation with over 100, AI infrastructure and data Lake modernization wins.

George Kurian: We continue to see growth in demand for AI solutions, as the large market opportunity for enterprise AI is open, and customers seek a unified and structured view of their data assets.

Speaker Change: These wins span geographies.

Speaker Change: Buried inside and included a number of service providers deploying net app as the storage foundation for their AI as a service offerings.

George Kurian: In Q3, our AI business again performed ahead of our expectations with over 100 AI infrastructure and data lake modernization wins. These wins span geographies,

Speaker Change: For many organization the journey to widespread use of enterprise AI begins with modernizing data lake environments to object storage in the quarter, we enhanced our storage grid object storage solutions with improved scalability and flexibility and double the density of.

Mike Berry: Hopefully that answers that question, and I just have to give one shout out to, hey, shifting the cloud margins for a second. We are particularly proud of the 1,000 basis point increase that we've seen there, and we expect those margins to continue to increase. In addition, with the divestiture of Spot, we actually get about another 100 basis points of product margin or cloud margin.

Hopefully that answers that question, and I just have to give one shout out to, hey, shifting the cloud margins for a second. We are particularly proud of the 1,000 basis point increase that we've seen there, and we expect those margins to continue to increase. In addition, with the divestiture of Spot, we actually get about another 100 basis points of product margin or cloud margin.

George Kurian: and included a number of service providers deploying NetApp as the storage foundation for their AI as a service offerings.

Speaker Change: Deployment.

Speaker Change: Using rackspace requirements, and lowering power and cooling costs.

Speaker Change: A leading U S retail bank selected storage grid as its foundational platform for its private cloud storage, including AI and data link optimization.

Aaron Rakers: Goodness.

Goodness.

Mike Berry: That's gross margins as a whole. Again, we're not guiding 26, but hopefully that helps with people worrying about what.

That's gross margins as a whole. Again, we're not guiding 26, but hopefully that helps with people worrying about what.

George Kurian: In the quarter, we enhanced our storage-grade object storage solutions with improved scalability and flexibility, and doubled the density of object deployment, reducing rack space requirements and lowering power and cooling costs.

Aaron Rakers: Was going to happen going into next year. Got it. Thank you.

Was going to happen going into next year.

Speaker Change: The initial deployment is five petabytes and expected to triple in size with subsequent phases later this calendar year.

Irvin Liu: Got it. Thank you.

Operator: The next question is from David Vogt with UBS. Please go ahead.

George Kurian: A leading U.S. retail bank selected StorageGrid as its foundational platform for its private cloud storage, including AI and data lake optimization.

Speaker Change: Other enterprises are further along in the area of evolution deploying Gen AI models in production for inferencing in Iraq.

George Kurian: Great.

David Vogt: Great.

Aaron Rakers: Thanks, guys, for taking my question. And Mike, congratulations on the retirement. We'll miss you. Maybe George, can you talk about obviously deals closing late in the quarter or getting pushed out, yet your all-flash array business seemed to perform reasonably well in the quarter, at least on the metrics. Can you talk into more specificity in terms of what was sort of the deciding factors that got pushed to the right? Was it the size of the deals, was it price? What type of technology? Just trying to get a little bit better sense for maybe where customers maybe got a little bit of a pause.

Thanks, guys, for taking my question. And Mike, congratulations on the retirement. We'll miss you. Maybe George, can you talk about obviously deals closing late in the quarter or getting pushed out, yet your all-flash array business seemed to perform reasonably well in the quarter, at least on the metrics. Can you talk into more specificity in terms of what was sort of the deciding factors that got pushed to the right? Was it the size of the deals, was it price? What type of technology? Just trying to get a little bit better sense for maybe where customers maybe got a little bit of a pause.

Speaker Change: One of the world's largest banks struggled with scalability siloed data platforms and disparate tools for its journey II training and inferencing workloads.

George Kurian: The initial deployment is 5 petabytes and expected to triple in size with subsequent phases later this calendar year.

Speaker Change: To address these challenges they selected <unk> as the storage foundation for their journey I factory.

George Kurian: Other enterprises are further along in their AI evolution, deploying Gen-AI models in production for inferencing and RAG.

Speaker Change: Our ability to deliver a solution with secure and economical data movement into and out of the AI factory hearing for model checkpoints and model traceability enabled us to beat the competition and win the deal.

George Kurian: One of the world's largest banks struggled with scalability, siloed data platforms, and disparate tools for its Gen-AI training and interesting workloads.

George Kurian: And why it shifted a little bit?

And why it shifted a little bit?

Aaron Rakers: More to the right. I know you touched on it earlier, but just some more color around that. Given that, you know, all flash ARR looked pretty good in the quarter, I.

More to the right. I know you touched on it earlier, but just some more color around that. Given that, you know, all flash ARR looked pretty good in the quarter, I.

George Kurian: To address these challenges, they selected NEDA as the storage foundation for their Gen-AI faculty.

George Kurian: I think that our all-flash numbers would have been substantially higher if we had been able to close the transactions that moved to the right. Those were primarily flash-based product transactions. There were a few different reasons. Clearly, there were some clients that were not yet ready to make the procurement decision at the window that we wanted them to, and where they had previously communicated that they might be ready to do it. Some of this, as you can imagine, was because it's the first few weeks of a new calendar year and the budgets hadn't yet flowed down to the departments. In other cases, clients wanted to upsize their transactions, so they wanted to consolidate more equipment under the same procurement vehicle. And so it took us longer to close. And I think those were fundamentally a couple of the main reasons.

Speaker Change: Now turning to public cloud.

Speaker Change: We further hone the focus of our public cloud business with the sale of the spot buy naira business.

Speaker Change: Our ability to deliver a solution with secure and economical data movement into and out of the AI factory, tiering for model checkpoints and model traceability enabled us to beat the competition and win the deal.

Speaker Change: As many spot in cloud checker customers are also customers of our other products and services. It was important to us to select the right partner.

Speaker Change: Assumed this portfolio and we are confident that these customers will benefit from a more complete spinoffs portfolio from flex era.

Speaker Change: Now turning to public cloud, we further hold the focus of our public cloud business with the sale of the Spot by NetApp business.

Mike: Mike will share with you the financial impact of the sale.

Speaker Change: As many Spot and CloudChecker customers are also customers of our other products and services, it was important to us to select the right partner to achieve this portfolio.

Mike: Based on our expectation that the deal will close in early March.

Mike: As we've discussed in the past our public cloud strategy is led by our highly differentiated first party and marketplace cloud storage services complemented by intelligent data and operational services, such as data infrastructure insights, formerly known as cloud insights.

Speaker Change: And we are confident that these customers will benefit from a more complete spin-offs portfolio from Flexera.

Speaker Change: Mike will share with you the financial impact of the sale, based on our expectation that the deal will close in early March.

George Kurian: In Europe we saw a couple of deals pushed because of the softness in the overall market. And so it's taken them a little bit more caution in some.

In Europe we saw a couple of deals pushed because of the softness in the overall market. And so it's taken them a little bit more caution in some.

Mike: And workload services like instant cluster.

Speaker Change: As we've discussed in the past, our public cloud strategy is led by our highly differentiated first-party and marketplace cloud storage services.

Mike: <unk> services in concert with our hybrid cloud products enable customers to build a seamless intelligent data infrastructure across hybrid multi cloud.

Aaron Rakers: Of those cases in Europe. Great, thank you, that's helpful.

Of those cases in Europe.

David Vogt: Great, thank you, that's helpful.

Speaker Change: complemented by intelligent data and operational services, such as data infrastructure insights, formerly known as cloud insights, and workload services like Instacluster.

Operator: The next question. Excuse me. The next question is from Jason Ader with William Blair. Please go ahead.

Mike: First party and marketplace cloud storage services again grew well over 40% from last year driving total public cloud segment revenue growth of 15%.

Aaron Rakers: Yeah, thank you. Good afternoon.

Jason Ader: Yeah, thank you. Good afternoon.

Mike Berry: Could you get, I know you said $15 million in the quarter from spot. Can you just give a sense of like if you could annualize the spot impact so we can get a sense of we need to take out of our models for FY26. And then just a quick second question. I know I'm supposed to ask one, but can you give us the US Fed exposure overall sort of for the fiscal year? What's your US Fed exposure? Hey Jason, it's Mike. So on the first question, so the business that we are divesting, for the trailing twelve months, the cloud revenue has been about $94 million. Been relatively consistent. It bounces around a little bit by quarter. From a gross margin perspective, the gross margins are relatively consistent with the cloud gross margins, but slightly lower.

Could you get, I know you said $15 million in the quarter from spot. Can you just give a sense of like if you could annualize the spot impact so we can get a sense of we need to take out of our models for FY26. And then just a quick second question. I know I'm supposed to ask one, but can you give us the US Fed exposure overall sort of for the fiscal year? What's your US Fed exposure?

Speaker Change: These services, in concert with our hybrid cloud products, enable customers to build a seamless, intelligent data infrastructure across hybrid multi-cloud.

Mike: Excluding sparked by net App first party and marketplace storage services made up over 70% of the Q3 public cloud segment revenue.

Mike: In the quarter, we announced innovations to Amazon FSX for Netapp on tap.

Mike: And Microsoft Azure Netapp files.

Mike: And received the Google cloud ready regulated and sovereignty solutions designation for Google Cloud Netapp volumes and cloud volumes on tap.

Mike Berry: Hey Jason, it's Mike. So on the first question, so the business that we are divesting, for the trailing twelve months, the cloud revenue has been about $94 million. Been relatively consistent. It bounces around a little bit by quarter. From a gross margin perspective, the gross margins are relatively consistent with the cloud gross margins, but slightly lower.

Speaker Change: Excluded spot by NetApp, first party and marketplace storage services made up over 70% of the Q3 public cloud segment revenue.

Mike: Advancements highlight the strength of our partnership and collaboration with the leading hyper scaler broadening our addressable opportunity.

Speaker Change: In the quarter, we announced innovations to Amazon FSx for NetApp ONTAP and Microsoft Azure NetApp File.

Mike: As customers move workloads into the cloud they choose netapp storage services to deliver high performance and low T C O.

Speaker Change: and received the Google Cloud Ready Regulated and Sovereignty Solutions Designation for Google Cloud NetApp Volumes and Cloud Volumes on tap.

Mike Berry: Hence my earlier comment about getting a little bump in gross margins. Then when all is said and done, we expect it to be relatively neutral to EPS, as George mentioned, and we both did. You can. The as reported number in Q3 was 15% growth, excluding it from both the previous year and this year, it moved up to 21%. Hopefully that helps size the business.

Hence my earlier comment about getting a little bump in gross margins. Then when all is said and done, we expect it to be relatively neutral to EPS, as George mentioned, and we both did. You can. The as reported number in Q3 was 15% growth, excluding it from both the previous year and this year, it moved up to 21%. Hopefully that helps size the business.

Mike: European Bank is executing a large scale migration to AWS for its Vmware database and container applications. The.

Speaker Change: These advancements highlight the strength of our partnership and collaboration with the leading hyperscalers, broadening our addressable opportunities.

Mike: The customer will migrate tens of thousands of Vms and containers composing almost 15 petabytes of data largely from our competitors' footprint.

Speaker Change: As customers move workloads into the cloud, they choose NetApp-based storage services to deliver high performance and low TCO.

Aaron Rakers: That we divested and fed.

That we divested and fed.

Mike: Two <unk>.

Speaker Change: A European bank is executing a large-scale migration to AWS for its VMware, database and container applications.

Mike: <unk> will deliver significant cost savings compared to other native storage services and its ability to support unified file and block access will reduce the bank's management overhead.

George Kurian: Listen, I think the US public sector business, the incremental, you know, caution is factored into our Q4 outlook. Some of that is related to the near-term, you know, efficiency direction that some parts of the administration have been directed to undertake. We think that these are tied to technology-led productivity improvement initiatives over time. And so once they stabilize, it should be a benefit to us.

Speaker Change: The customer will migrate tens of thousands of VMs and containers composing almost 15 terabytes of data, largely from a competitor's footprint, onto SFXM.

Looking forward our mission is clear and our focus is sharp customers value. Our modern approach to hybrid multi cloud infrastructure and data management, which enables them to build an intelligent data infrastructure and leverage the power of their entire data estate simply securely.

Speaker Change: FSXN will deliver significant cost savings compared to other native storage services and its ability to support unified file and block access will reduce the bank's management overhead.

<unk> and sustainably.

Mike Berry: US public sector is an important business.

US public sector is an important business.

Mike: Portfolio has never been stronger or more tightly aligned to it organizations top priorities, although we didn't perform to our standards in Q3. It remains true that broad based customer preference for our solutions and our visionary approach for a data driven future enables.

Speaker Change: Looking forward, our mission is clear and our focus is sharp.

George Kurian: To NetApp and it's a material part of our Americas business. So I'll just leave it there.

To NetApp and it's a material part of our Americas business. So I'll just leave it there.

Speaker Change: Customers value our modern approach to hybrid multi-cloud infrastructure and data management, which enables them to build an intelligent data infrastructure and leverage the power of their entire data estate simply, securely, and sustainably.

Chris Newton: And Jason, just, this is Chris. Really quickly. Public sector, which includes Fed plus state and local governments, bounces around between 10% to 12%, 13% of total revenue.

Kris Newton: And Jason, just, this is Chris. Really quickly. Public sector, which includes Fed plus state and local governments, bounces around between 10% to 12%, 13% of total revenue.

Mike: Us to outgrow the market and take share.

Mike: We enable customers to treat data as an enterprise wide asset to stay agile and competitive in the age of AI.

Aaron Rakers: That's global public sector.

Jason Ader: That's global public sector.

Chris Newton: That's US public sector US okay.

Kris Newton: That's US public sector

Jason Ader: US okay.

Although we didn't perform to our standards in Q3,

Mike Berry: US total revenue.

US total revenue.

Aaron Rakers: Not of total US revenue, right?

Not of total US revenue, right?

Speaker Change: It remains true that broad-based customer preference for our solutions and our visionary approach for a data-driven future enables us to outgrow the market and take share. We enable customers to treat data as an enterprise-wide asset.

Mike: As we close out fiscal year 'twenty five we believe the actions we've undertaken to improve sales execution will get us back on track in Q4.

George Kurian: Correct.

Kris Newton: Correct.

Chris Newton: Of total company revenue.

Of total company revenue.

Aaron Rakers: Okay.

Jason Ader: Okay.

Mike Berry: All right, thanks, Chris.

All right, thanks, Chris.

Operator: The next question is from Wamsi Mohan with Bank of America. Please go ahead.

Mike: However, as you will hear from Mike our expectations are tempered by the divestiture of spot buy naira.

George Kurian: Hi, thanks for taking the questions.

Ruplu Bhattacharya: Hi, thanks for taking the questions.

Aaron Rakers: It's Ruplu filling in for Wamsi. Mike, great working with you. Congrats. I have a question for you. Are you taking any incremental cost actions, and how should we think about operating expenses as well as your investments going forward? If you can also comment on free cash flow, is it lower sequentially in fiscal Q4, and what would drive further strategic SSD purchases and when would you do that and what would be the criteria for that? Thank you.

It's Ruplu filling in for Wamsi. Mike, great working with you. Congrats. I have a question for you. Are you taking any incremental cost actions, and how should we think about operating expenses as well as your investments going forward? If you can also comment on free cash flow, is it lower sequentially in fiscal Q4, and what would drive further strategic SSD purchases and when would you do that and what would be the criteria for that? Thank you.

Mike: FX and near term headwinds to global public sector, resulting in a slight decrease to our fiscal year 'twenty five guide all.

Speaker Change: to stay agile and competitive in the age of AI. As we close out the year 25, we believe the actions we've undertaken to improve sales execution will get us back on track in Q4.

Mike: All factors considered we remain confident in our ability to achieve the financial goals. We laid out last June at our Investor day.

Speaker Change: However, as you will hear from Mike, our expectations are tempered by that disaster of spot by NetApp.

Speaker Change: Before I close I want to acknowledge that this is the last earnings call. Mike will lead his successor with some job re joins us on March 10.

S.X.

Speaker Change: and near-term headwinds to global public sector, resulting in a slight decrease to our FY 25 guide. All factors considered, we remain confident in our ability to achieve the financial goals we laid out last June at our investor day.

Mike Berry: So thank you for the kind words, and I think there were three questions in there. So first of all, from an operating expense perspective for this year, we're basically flat year over year. The team does a wonderful job continuing to invest in new projects. George talked about all the new products that we have rolled out and the changes also we've made in go to market. So we look at it every quarter, we look at it every day. We want to make sure that we get a return. So we are scrutinizing OPEX the same today as we have in the last couple of years. The second question was.

Mike.

Mike: For your partnership over the past five years.

Mike: You helped drive growth and profitability strengthening our performance to create tremendous shareholder value.

Speaker Change: Before I close, I want to acknowledge that this is the last earnings call Mike will leave. His successor, Wisam Jabri, joins us on March 10th.

Mike: More importantly, you have been a respected colleague and wonderful leader for net app as well as a close partner and friend to me.

Speaker Change: Mike, thank you for your partnership over the past five years. You helped drive growth and profitability, strengthening our performance to create tremendous shareholder value.

Mike: I am confident in our ability to build on this strong foundation you've helped to establish.

Speaker Change: I'll now hand, it over to you for details on the quarter.

Speaker Change: Good afternoon, everyone and thank you for the kind words, George they are greatly appreciated.

George Kurian: Cash flow.

Mike Berry: Let's talk about cash flow and then cost action. So cash flow first. So right now on an operating cash flow perspective, we're down year over year by about $241 million. The driver to this is really two big things that we've talked about all year. One is the payments we've made on our strategic buys. That's going to continue to be a working capital headwind for us in fiscal 2025. The other big piece is incentive payments that we made mostly in Q1. You aggregate those together and the working capital impact is about $300 million year over year. In Q4, we have some headwind from the timing of tax payments. It should increase sequentially, but we do expect to be below last year, and that's what we said in Q3 as well.

Speaker Change: More importantly, you have been a respected colleague and wonderful leader for NAHDAP, as well as a close partner and friend to me.

Speaker Change: Wanted to thank you for our partnership and the confidence and Trust you placed in me.

Speaker Change: I will always value our relationship and I'm very proud of what we have all accomplished at net app.

Speaker Change: I am confident in our ability to build on the strong foundation you've helped to establish. I'll now hand it over to you for details on the quarter.

Speaker Change: As everyone knows I will be handing the baton with sometime after this earnings call, but for now it is business as usual so let's jump into the results.

George Kurian: Good afternoon, everyone, and thank you for the kind words, George. They are greatly appreciated. I want to thank you for our partnership and the confidence and trust you've placed in me.

Speaker Change: Before I get into the financial details of Q3, let me walk you through the key themes for the quarter.

George Kurian: I will always value our relationship and am very proud of what we have all accomplished at NetApp.

Speaker Change: As a reminder, all numbers discussed are non-GAAP unless otherwise noted.

Speaker Change: As everyone knows, I will be handing the baton to Wissam sometime after this earnings call. But for now, it is business as usual, so let's jump into the results.

Speaker Change: First our disciplined operational management yielded operating margin above our guidance and EPS in line with our guidance despite revenues towards the lower end of our expectations in Q3.

Speaker Change: Before I get into the financial details of Q3, let me walk you through the key themes for the quarter.

Chris Newton: Are you planning to take cost actions?

Kris Newton: Are you planning to take cost actions?

Speaker Change: Second we have adjusted our outlook for Q4 and fiscal year 'twenty five due to our recently announced divestiture of spot and cloud checker.

Mike Berry: So just like we talked about, we look all the time at costs as it relates. Oh, I think the third one was pre buys, correct?

Speaker Change: As a reminder, all numbers discussed are non-GAAP unless otherwise noted. First, our Discipline Operational Management yielded operating margin above our guidance and EPS in line with our guidance.

Speaker Change: <unk> called spot by net App.

Aaron Rakers: Yeah.

Ruplu Bhattacharya: Yeah.

Mike Berry: So at this point, as you look at the NAM market, as we've talked about, we did the strategic pre buys when it was really a dislocated market and it was almost a no brainer to do it. And we benefited, and our customers did, because we were able to offer great products for almost the last four quarters, at this point we've used those up. Going forward, we'd have to see a material dislocation again to do those pre buys. The wonderful news is my successor knows this industry really well, so he'll be able to look at it as well.

Speaker Change: The negative revenue and EPS impact from the stronger U S dollar.

Speaker Change: Despite revenues towards the lower end of our expectations in Q3.

Speaker Change: And our Q3 revenue performance our forecast assumes that our Q4 is back on track in terms of our execution.

Speaker Change: Second, we have adjusted our outlook for Q4 in fiscal year 25 due to our recently announced divestiture of Spot and CloudChecker, collectively called Spot by NetApp.

Speaker Change: Somewhat offset by expected global public sector weakness third while our full year revenue guidance is reduced slightly we remain laser focused on driving operating margins and free cash flow generation.

Speaker Change: The negative revenue and UPS impact from the stronger U.S. dollar and our Q3 revenue performance. Our forecast assumes that our Q4 is back on track in terms of our execution, somewhat offset by expected global public sector weakness.

Speaker Change: Towards this end, we have taken Swift action to control our expenses in Q4 as well as remain disciplined on pricing.

Aaron Rakers: But at this point we are not.

But at this point we are not.

Mike Berry: Expecting to do any more pre buys. But you know what, the NAND market continues to change. So we'll wait until Wissam gets here and he can talk about that on the next call.

Speaker Change: We ended the year finally, we returned over $300 million to stockholders through dividends and share repurchases, reducing Q3 diluted share count by 3 million shares year over year.

Speaker Change: Third, while our four-year revenue guidance is reduced slightly, we remain laser-focused on driving operating margins and free cash flow generation.

George Kurian: Thank you for all the details.

Ruplu Bhattacharya: Thank you for all the details.

Aaron Rakers: Yeah, yeah. Mike, thank you so much. Thanks for all the details.

Yeah, yeah. Mike, thank you so much. Thanks for all the details.

Mike Berry: You bet.

Mike Berry: Thank you.

Thank you.

Operator: The next question is from Steven Fox with Fox Advisors. Please go ahead.

Speaker Change: Now to the details of the quarter.

Speaker Change: Towards this end, we have taken swift action to control our expenses in Q4.

Speaker Change: Revenue of $1.64 billion increased 2% year over year, while our revenue was $44 million below the midpoint of our guidance around a third of this was FX driven bill.

Aaron Rakers: Hi, good afternoon. Just following up on that.

Steven Fox: Hi, good afternoon. Just following up on that.

Speaker Change: as well as remain disciplined on pricing as we end the year. Finally, we returned over $300 million to stockholders through dividends and share repurchases, reducing Q3 diluted share count by 3 million shares year over year.

Operator: Just from a competitive dynamic standpoint, having had, Mike, a lot of experience with.

Just from a competitive dynamic standpoint, having had, Mike, a lot of experience with.

Aaron Rakers: Doing these pre buys, now, some of your competitors don't do them, some do them in different ways. Has that at all affected the competitive environment? And given, you know, your comments about.

Doing these pre buys, now, some of your competitors don't do them, some do them in different ways. Has that at all affected the competitive environment? And given, you know, your comments about.

Speaker Change: Billings of $1 seven $1 billion increased 2% year over year.

Speaker Change: This marks our fifth consecutive quarter of year over year revenue and billings growth.

Speaker Change: Now to the details of the quarter. Revenue of $1.64 billion increased 2% year over year. While our revenue was $44 million below the midpoint of our guidance, around a third of this was FX-driven.

Operator: NAND pricing going down, I mean, I.

NAND pricing going down, I mean, I.

Aaron Rakers: Guess it's all relative, but some of.

Guess it's all relative, but some of.

Operator: The NAND suppliers are talking about the.

The NAND suppliers are talking about the.

Speaker Change: <unk> revenue of $758 million was up 1% year over year.

Aaron Rakers: Bottom of an inventory cycle. So I'm curious if you see any risk that maybe you're being too optimistic on NAND pricing. Thanks.

Bottom of an inventory cycle. So I'm curious if you see any risk that maybe you're being too optimistic on NAND pricing. Thanks.

Speaker Change: Support revenue of $621 million declined 2% year over year, but was roughly flat year over year in constant currency.

Speaker Change: Billings of 1.71 billion dollars increased 2% year-over-year. This marks our fifth consecutive quarter of year-over-year revenue and billings growth.

George Kurian: Let me address those two questions. I think first of all, in terms of the competitive landscape, the real competitive differentiator that NetApp has is really our software and hybrid cloud. The percentage of our cost to a customer that comes from NAND is a small part of the total cost. And so we have a full lineup of products with different forms of NAND. And I think that the competitive dynamic with our software strength, our hybrid cloud, and our AI technologies gives us a real strong position in the market and a durable competitive mode with regard to the, you know, the NAND market itself. Listen, we are very, very closely aligned with all of the large suppliers of solid state technology and in deep discussions with, we will make strategic decisions about procurement in the way that Mike talked about.

Speaker Change: Professional services revenue of $88 million grew 14% year over year, mainly driven by Keystone, our storage as a service offering which grew nearly 60% year over year.

Speaker Change: Product revenue of 758 million dollars was up 1% year-over-year. Support revenue of 621 million dollars declined 2% year-over-year but was roughly flat year-over-year in constant currency.

Speaker Change: Public cloud revenue over $174 million increased 15% year over year, driven by Hyperscale or first party and marketplace storage services.

Professional services revenue of $88 million dollars being 14% year-over-year.

Speaker Change: Q3 cloud revenues, excluding spot by net App grew 21% year over year, and we expect this to accelerate on a year over year basis in Q4, driven by our cloud storage business signaling a continued healthy cloud demand environment.

Speaker Change: mainly driven by Keystone, our storage as a service offering, which grew nearly 60% year-over-year. Public cloud revenue of $174 million increased 15% year-over-year, driven by hyperscale first party and marketplace storage services.

Speaker Change: Q3 deferred revenue was $4 $1 billion flat year over year, but up 1% year over year in constant currency.

Speaker Change: Q3 cloud revenues excluding spot by net app the 21% year-over-year

Speaker Change: And we expect this to accelerate on a year-over-year basis into Q4, driven by our cloud storage business, signaling a continued healthy cloud demand environment.

Speaker Change: Remaining performance obligations were $4 5 billion.

George Kurian: We feel very, very good about our ability to understand the market.

We feel very, very good about our ability to understand the market.

Speaker Change: Unbilled RP O was approximately $350 million up 6% quarter over quarter.

George Kurian: It is a dynamic market like you said.

It is a dynamic market like you said.

George Kurian: But we are in very close dialogue with these suppliers as we have been for many, many years.

But we are in very close dialogue with these suppliers as we have been for many, many years.

Speaker Change: Q3 deferred revenue was $4.1 billion flat year-over-year but up 1% year-over-year in constant currency.

Speaker Change: Growth in Unbilled RP O is a key indicator of future Keystone growth.

Aaron Rakers: Thank you, that's helpful.

Steven Fox: Thank you, that's helpful.

Speaker Change: Q3 consolidated gross margin came in at 71%.

Operator: The next question is from Krish Sankar with TD Cowen. Please go ahead.

Speaker Change: Remaining performance obligations were $4.5 billion. Unbilled RPO was approximately $350 million, up 6% quarter over quarter.

Speaker Change: Product gross margin was 57% and we expect product gross margin to be around 56% in Q4.

George Kurian: Yeah, hi, thanks for the question, Josh. Just wanted to find out kind of.

Krish Sankar: Yeah, hi, thanks for the question, Josh. Just wanted to find out kind of.

Aaron Rakers: Like where are we in the AI in the enterprise cycle? And along the same path, the focus on enhancements to StorageGRID, which is object storage. Is this also related to capitalizing on AI in the enterprise? And then Mike, thanks for all your help. Just a clarification. Is Spot completely out of the model in April quarter? Thank you.

Like where are we in the AI in the enterprise cycle? And along the same path, the focus on enhancements to StorageGRID, which is object storage. Is this also related to capitalizing on AI in the enterprise? And then Mike, thanks for all your help. Just a clarification. Is Spot completely out of the model in April quarter? Thank you.

We plan to utilize the majority of our remaining strategic SSD purchases in Q4.

Speaker Change: Growth in unbilled RPL is a key indicator of future Keystone growth.

Speaker Change: Our recurring support business continues to be highly profitable with gross margins of 92%.

Speaker Change: Q3 consolidated gross margin came in at 71%. Product gross margin was 57% and we expect product gross margin to be around 56% in Q4.

Speaker Change: Q3 public cloud gross margins improved to 76% from 66% in the prior year.

George Kurian: So let me get the first one, and then Michael get you the answer on Spot. We are starting to see the opening up of AI in the enterprise where we are seeing clients stand up AI centers of excellence with AI infrastructures that combine GPU-based compute with high-performance storage infrastructures. We had several large wins in that category. We are also seeing people build out data lakes which are applications that allow.

Speaker Change: We are particularly proud of the 1000 basis point improvement in public cloud gross margins.

Speaker Change: We expect to make further progress on our public cloud gross margins and exit fiscal year 'twenty five towards the high end of our long term target of 75% to 80%.

Speaker Change: Q3 public cloud growth margins improved to 76% from 66% in the prior year.

Speaker Change: Operating expenses of $669 million was down 2% year over year and down 7% from Q2 25.

Speaker Change: We are particularly proud of the 1,000 basis point improvement in public cloud gross margins.

George Kurian: You to combine data from multiple types.

You to combine data from multiple types.

Speaker Change: Q3, again highlighted the strength of our business model and disciplined operational execution with operating margin of 30%.

George Kurian: So that you can then normalize it and feed it into a large language model. Our AI business has performed according to our high expectations multiple quarters in a row. We are also seeing a growing number of wins in AI service providers who are building as a service infrastructure for enterprise AI, and all of our differentiation around kind of multi-tenancy, security, AI model versioning, data mobility, all of those things come into play in all of those use cases. So I'm pleased it's in the early innings like we said, but our technology and our approach with customers is resonating.

So that you can then normalize it and feed it into a large language model. Our AI business has performed according to our high expectations multiple quarters in a row. We are also seeing a growing number of wins in AI service providers who are building as a service infrastructure for enterprise AI, and all of our differentiation around kind of multi-tenancy, security, AI model versioning, data mobility, all of those things come into play in all of those use cases. So I'm pleased it's in the early innings like we said, but our technology and our approach with customers is resonating.

Speaker Change: Ahead of expectations.

EPS of $1 91 was in line with our guidance with revenues and gross margins below our guidance points, but offset by operating expense control.

Speaker Change: Operating expenses of $669 million is down 2% year-over-year and down 7% from Q2-25.

Speaker Change: Q3 again highlighted the strength of our business model and discipline operational execution with operating margin of 30% ahead of expectations.

Speaker Change: Operating cash flow was $385 million in Q3 compared to $484 million a year ago.

Speaker Change: Free cash flow was $338 million compared to $448 million a year ago.

EPS of $1.91 was in line with our guidance.

Speaker Change: with revenues and gross margins below our guidance points but offset by operating expense control. Operating cash flow was $385 million in Q3 compared to $484 million a year ago.

Speaker Change: Our lower year over year cash flow results for Q3 were primarily driven by lower collections and higher cash outflows for previously secured strategic SSD purchases.

George Kurian: Mike.

Mike.

Mike Berry: Thanks, Jordan.

Mike Berry: Chris, there is about $9 million of cloud revenue in the Q4 guide. That's with the expected close date of early March. That's the difference. The 15 that we talked about is we expected there to be the full quarter of about 24 and there's about a month in.

Chris, there is about $9 million of cloud revenue in the Q4 guide. That's with the expected close date of early March. That's the difference. The 15 that we talked about is we expected there to be the full quarter of about 24 and there's about a month in.

Speaker Change: These strategic purchases resulted in much higher than usual inventory levels and inventory turns of 7% in Q3.

Speaker Change: and free cash flow was $338 million compared to $448 million a year ago.

Speaker Change: Our lower year-over-year cash flow results for Q3 were primarily driven by lower collections and higher cash outflows for previously secured strategic SSD purchases.

Speaker Change: As previously noted we expect to utilize the majority of these purchases by the end of our fiscal year and see a commensurate reduction in inventory and then fiscal year 'twenty five.

Aaron Rakers: Thanks George.

Krish Sankar: Thanks George.

Mike Berry: Thanks Mike. Thank you.

Thanks Mike.

George Kurian: Thank you.

Operator: The next question is from Simon Leopold with Raymond James. Please go ahead.

Speaker Change: These strategic purchases resulted in much higher-than-usual inventory levels and inventory turns of seven in Q3.

George Kurian: Thank you very much.

Simon Leopold: Thank you very much.

Speaker Change: As mentioned on our last call, we expect free cash flow in fiscal year 'twenty five to be lower year over year due to working capital related factors that we don't expect to repeat in the fiscal year 'twenty six.

Aaron Rakers: I wanted to see if you could talk about your expectations for tariffs and risks. I know Mike, you had mentioned some commentary on the gross margin that was.

I wanted to see if you could talk about your expectations for tariffs and risks. I know Mike, you had mentioned some commentary on the gross margin that was.

Speaker Change: As previously noted, we expect to utilize the majority of these purchases by the end of our fiscal year and see a commensurate reduction in inventory ending fiscal year 25.

Mike Berry: Really in the context of NAND pricing.

Really in the context of NAND pricing.

Speaker Change: In the quarter DSO increased to 50 in line with seasonal averages.

Aaron Rakers: I'd like to get a better understanding of what you're thinking for the risk of tariffs and if you baked anything in.

I'd like to get a better understanding of what you're thinking for the risk of tariffs and if you baked anything in.

George Kurian: And Mike, congratulations on your retirement as well. I think you were speaking about tariffs. Listen, we have a global supply chain that has given us the ability to fulfill products to customers from multiple locations, and that is a very highly flexible supply chain. We have, as you know, through the course of the past several years, removed our dependency on China to a very immaterial amount. So any tariffs applied to products coming from China don't really affect us. We have a location in Mexico out of which we do build product, but we have the flexibility to move those capabilities to other locations that are not tariffed in a fairly short period of time. And so it's dynamic. We are watching the situation. We have, as you can imagine, several contingency plans.

And Mike, congratulations on your retirement as well.

Speaker Change: During the quarter, we returned $306 million to stockholders through share repurchases and cash dividends.

Speaker Change: As mentioned on our last call, we expect free cash flow in fiscal year 25 to be lower year-over-year due to working capital related factors that we don't expect to repeat in the fiscal year 26.

George Kurian: I think you were speaking about tariffs. Listen, we have a global supply chain that has given us the ability to fulfill products to customers from multiple locations, and that is a very highly flexible supply chain. We have, as you know, through the course of the past several years, removed our dependency on China to a very immaterial amount. So any tariffs applied to products coming from China don't really affect us. We have a location in Mexico out of which we do build product, but we have the flexibility to move those capabilities to other locations that are not tariffed in a fairly short period of time. And so it's dynamic. We are watching the situation. We have, as you can imagine, several contingency plans.

Speaker Change: We have approximately $600 million remaining on our existing repurchase authorization.

Speaker Change: Our balance sheet remains healthy we ended the quarter with approximately $2 $3 billion in cash and short term investments against $2 billion in debt.

Speaker Change: In the quarter, DSOs increased to 50 in line with seasonal averages.

Speaker Change: During the quarter we returned three hundred and six million dollars to stockholders through share repurchases and cash dividends.

Speaker Change: Before I go through our updated guidance I want to quickly level set on two of the changes that happen from our last guidance in November.

Speaker Change: We have approximately $600 million remaining on our existing repurchase authorization.

Speaker Change: First as.

Speaker Change: As we have all seen the strength of the U S. Dollar is having a negative impact on reported results.

Speaker Change: Our balance sheet remains healthy. We ended the quarter with approximately $2.3 billion in cash and short-term investments against $2 billion in debt.

Speaker Change: For net App, the expected impact to the second half of fiscal year 'twenty five as compared to our previous guidance is approximately $30 million less in reported revenue and an eight cent impact to EPS.

Speaker Change: Before I go through our updated guidance I want to quickly level set on two of the changes that happened from our last guidance in November.

Speaker Change: First, as we have all seen, the strength of the U.S. dollar is having a negative impact on reported results.

Speaker Change: Second we plan to close the spot divestiture in early March and this will result in around $15 million less in cloud revenue in Q4.

George Kurian: I'll just close by saying that we have not factored tariffs into our Q4 guide. If tariffs apply to a wide swath of technologies that everybody in the industry uses, which is our typical approach to using industry standard commodity components, then of course it will affect the entire industry.

I'll just close by saying that we have not factored tariffs into our Q4 guide. If tariffs apply to a wide swath of technologies that everybody in the industry uses, which is our typical approach to using industry standard commodity components, then of course it will affect the entire industry.

Speaker Change: For NetApp, the expected impact to the second half of FY25, as compared to our previous guidance, is approximately $30 million less in reported revenue and an $0.08 impact to EPS.

Speaker Change: The transaction is expected to be largely neutral to EPS.

Speaker Change: Now turning to guidance starting with the full year.

Speaker Change: Our new revenue guidance for the full year is between 6.49 and $6 six $4 billion, representing approximately 5% year over year growth at the midpoint.

Speaker Change: Second, we plan to close the spot divestiture in early March and this will result in around $15 million less in cloud revenue in Q4.

Aaron Rakers: Thank you.

Simon Leopold: Thank you.

Operator: The next question is from Lou Miscioscia with Daiwa Capital Markets. Please go ahead.

The transaction is expected to be largely neutral to EPS.

Speaker Change: The slight reduction in our full year guidance is primarily driven by FX and the planned divestiture of spa.

Aaron Rakers: Yes, thanks, Lou with Daiwa.

Lou Miscioscia: Yes, thanks, Lou with Daiwa.

Mike Berry: Mike, greatly appreciate all your support and.

Mike, greatly appreciate all your support and.

Speaker Change: Now turning the guidance starting with the full year. Our new revenue guidance for the full year is between 6.49 and 6.64 billion dollars representing approximately 5% year-over-year growth at the midpoint.

Aaron Rakers: Help throughout the years and best to you. So George, you've mentioned a couple times that it's going to take a while for AI really to contribute to give you material revenue growth. Just if you just give us an update on that. You did just mention a minute ago that some AI inference applications are starting to ramp, but obviously didn't seem like it really helped the product revenue too much in this quarter. So are we still six months out, 12 months out, or anything that you could shed light on without guidance would be helpful.

Help throughout the years and best to you. So George, you've mentioned a couple times that it's going to take a while for AI really to contribute to give you material revenue growth. Just if you just give us an update on that. You did just mention a minute ago that some AI inference applications are starting to ramp, but obviously didn't seem like it really helped the product revenue too much in this quarter. So are we still six months out, 12 months out, or anything that you could shed light on without guidance would be helpful.

Speaker Change: We now expect fiscal year 'twenty five consolidated gross margin to be approximately 71%.

Speaker Change: We continue to expect fiscal year 'twenty five operating margin to be 28 to 28, 5%.

Speaker Change: The slight reduction in our four-year guidance is primarily driven by FX and the planned divestiture of SPOT.

Speaker Change: We expect net interest income to be approximately $55 million.

Speaker Change: We expect our tax rate to be 20% to 21%.

Speaker Change: We now expect FY 25 consolidated gross margin to be approximately 71%.

Speaker Change: As a result, we expect EPS to be in the range of $7 17.

Speaker Change: We continue to expect fiscal year 25 operating margin to be 28 to 28.5 percent.

George Kurian: We said, you know, in our prior commentary that what we are seeing clients do is put AI projects into proof of concepts and start to learn from that and that the, you know, movement of those projects into production in the enterprise would be in the second half of calendar year 2025 or 2026. We see the same thing to be the case. It is certainly the case that we are seeing the larger clients being more facile at building AI centers of excellence and being able to deploy those kind of technologies into their business environment. And so it'll take time, as we've said, to broaden. We'll keep you updated as we go through the quarters, but we feel good about our position. There are sort of really good templatized wins that we are seeing across industries and across geographies. And I feel good about our progress.

Speaker Change: The $7 27.

Speaker Change: Which at the $7.22 midpoint implies 12% growth year over year.

We expect net interest income to be approximately $55 million.

Speaker Change: Turning now to our fourth quarter guidance, we expect Q4 revenue to range between 165, and one $8 billion, which at the midpoint implies 3% growth year over year.

Speaker Change: We expect our tax rate to be 20 to 21 percent.

Speaker Change: As a result, we expect EPS to be in the range of $7.17 to $7.27, which at the $7.22 midpoint implies 12% growth year over year.

We expect Q4 consolidated gross margin to be between 69, and 70% and operating margin to be approximately 28%. We expect net interest income to be approximately $10 million in the quarter and our tax rate to be 20% to 21% <unk>.

Turning now to our fourth quarter guidance.

Speaker Change: We expect Q4 revenue to range between 1.65 and 1.8 billion dollars, which at the midpoint implies 3% growth year-over-year.

Speaker Change: <unk> is expected to be in the range of $1 84.

Speaker Change: We expect Q4 consolidated gross margin to be between 69 and 70% and operating margin to be approximately 28%. We expect net interest income to be approximately $10 million in the quarter and our tax rate to be 20 to 21%.

Speaker Change: Two a dollar and 94 in closing I want to thank the net app ecosystem for their commitment and investment in our company I am confident in our ability to help our customers successfully achieve their digital and cloud transformation goals.

Aaron Rakers: Okay, thank you.

Lou Miscioscia: Okay, thank you.

Operator: The next question is from Tim Long with Barclays. Please go ahead.

Chris Newton: Hi, this is Alyssa Shreves on for Tim Long. I was just wanting to check in on Keystone, you know, yet another strong quarter of gross. Can you talk about customers' kind of willingness to move to as a service versus traditional sale? Any kind of change in customer behavior, increased interest you can mention.

Alyssa Shreves: Hi, this is Alyssa Shreves on for Tim Long. I was just wanting to check in on Keystone, you know, yet another strong quarter of gross. Can you talk about customers' kind of willingness to move to as a service versus traditional sale? Any kind of change in customer behavior, increased interest you can mention.

Speaker Change: EPS is expected to be in the range of $1.84 to $1.94. In closing, I want to thank the NetApp ecosystem for their commitment and investment in our company.

Speaker Change: We are well aligned to priority investments and are committed to deliver sustainable long term value for our stockholders.

Speaker Change: Before handing the call to Chris for Q&A I want to thank our employees customers and shareholders for their commitment to net app. During my five years in this role.

Speaker Change: I am confident in our ability to help our customers successfully achieve their digital and cloud transformation goals.

Operator: Thank you.

Thank you.

George Kurian: We offer as-a-service models in a broad range of ways. Clearly cloud, you know, and our super strong performance in cloud is reflective of a broad-based enthusiasm in customers for as-a-service and the flexibility that cloud transformation gives them. We are seeing clients who are either looking to transform their IT landscape to have the same model as public cloud taking on Keystone. They really like our hybrid offerings so that they can build an architecture that spans public and on-prem with Keystone. The second is clients that are deploying applications that are going through an early validation.

It has been an honor and a privilege to be the CFO of Netapp and I am confident that George with some and the whole net app team will continue to deliver shareholder value going forward.

Speaker Change: We are well aligned to priority IT investments and are committed to deliver sustainable long-term value for our stockholders.

Speaker Change: Before handing the call to Kris for Q&A, I want to thank our employees, customers, and shareholders for their commitment to NetApp during my five years in this role.

Speaker Change: With that said I'll now turn the call over to Chris to open the Q&A, Chris Thanks, Mike Operator, let's begin the Q&A.

Speaker Change: It has been an honor and a privilege to be the CFO at NetApp and I am confident that George, Nassam, and the whole NetApp team will continue to deliver shareholder value going forward.

Speaker Change: We will now begin the question and answer session to.

Speaker Change: To ask a question you May press Star then one on your telephone keypad.

Speaker Change: If you were using a speakerphone please pick up your handset before pressing the keys.

Speaker Change: With that said, I'll now turn the call over to Kris to open the Q&A. Kris? Thanks, Mike. Operator, let's begin the Q&A.

Speaker Change: To withdraw your question. Please press Star then two.

Speaker Change: Please limit yourselves to one question. If you have additional questions you may rejoin the queue.

Chris Newton: Right.

Right.

George Kurian: So it could be like an AI.

So it could be like an AI.

Aaron Rakers: Application that is not yet at scale.

Application that is not yet at scale.

We will now begin the question and answer session.

Speaker Change: Our first question today is from Aaron Rakers with Wells Fargo. Please go ahead.

George Kurian: So they don't want to buy a full-scale infrastructure for that use case. They want to just buy kind of a flexible infrastructure model, and when they are ready they can deploy it into a more capital expenditure kind of architecture. So we feel good. We are focused on executing that part of our business.

So they don't want to buy a full-scale infrastructure for that use case. They want to just buy kind of a flexible infrastructure model, and when they are ready they can deploy it into a more capital expenditure kind of architecture. So we feel good. We are focused on executing that part of our business.

Speaker Change: To ask a question, you may press star, then 1 on your telephone keypad.

Speaker Change: Yes, Thanks for letting me ask a question and Mike It's been great working with you and wish you the best.

Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then 2.

Speaker Change:

Speaker Change: Real quickly George you had mentioned some comments in your prepared remarks around just sales execution I'm curious if you could kind of double click on that a little bit what efforts you've put in place to kind of rectify those issues then.

Speaker Change: Please limit yourselves to one question. If you have additional questions, you may rejoin the queue.

Chris Newton: Thank you.

Alyssa Shreves: Thank you.

Operator: Our next question is from Ananda Baruah with Loop Capital. Please go ahead.

Speaker Change: Our first question today is from Aaron Rakers with Wells Fargo. Please go ahead.

Speaker Change: Any thoughts on the duration of which those could show up maybe on the other side of those efforts. Thank you.

Aaron Rakers: Yeah, thanks guys. Good afternoon. Thanks for taking the question. And Mike. Yeah, I really enjoy working with you. We'll miss working with you. Have a great time. I guess the question is for. Could be for both of you at the analyst day. Guys, you talked about through 2027 an average of mid to high single digit digit growth. Does what is going on this quarter, next quarter, does that impact that target at all yet? And any early way to think about the flow through to fiscal 2026 since we're almost there as well would be helpful. Thanks a lot.

Ananda Baruah: Yeah, thanks guys. Good afternoon. Thanks for taking the question. And Mike. Yeah, I really enjoy working with you. We'll miss working with you. Have a great time. I guess the question is for. Could be for both of you at the analyst day. Guys, you talked about through 2027 an average of mid to high single digit digit growth. Does what is going on this quarter, next quarter, does that impact that target at all yet? And any early way to think about the flow through to fiscal 2026 since we're almost there as well would be helpful. Thanks a lot.

Speaker Change: Yeah, thanks for letting me ask a question, and Mike, it's been great working with you and wish you the best. Real quickly, George, you had mentioned some comments in your prepared remarks around the sales execution. I'm curious if you could kind of double-click on that a little bit.

Speaker Change: Yes, we have a strong pipeline.

Speaker Change: By both secular growth drivers and company specific growth drivers and a fully refreshed product portfolio that is highly differentiated as.

Speaker Change: What efforts you've put in place to kind of rectify those issues and any thoughts on the duration of which you know those could show up Maybe on the other side of those efforts. Thank you

Speaker Change: As we progressed through the quarter.

Speaker Change: Good momentum across our business.

Yeah, we have a strong pipeline.

Speaker Change: Last couple of weeks of the quarter.

Speaker Change: Several of the large seven or eight figure deals that we had expected to close in the quarter began to take longer to get through procurement into order.

Speaker Change: fueled by both secular growth drivers and company-specific growth drivers and a fully refreshed product portfolio that is highly differentiated.

Mike Berry: Hey Ananda, it's Mike. Thank you for the kind words. I will miss working with you as well. So as we talked about last quarter, we still feel very good about the long term targets we gave at investor day. And nothing that happened in Q3 has changed that in terms of the mid to upper single digit growth, the margins as well as the cash flow conversion. So we feel really good about the product lineup. George talked about that entering into 2026, all of the all of the product momentum that we have, the go to market changes. So nothing that we sit here today say that that would change. And we will hold fiscal 2026 guidance until the next call.

Speaker Change: Fulfillment and so what this required us to do is to inspect at a much higher level of detail in terms of our closing plan for every transaction.

Speaker Change: As we progress through the quarter, we saw good momentum across our business, but at the last couple of weeks of the quarter,

several of the large

Speaker Change: 7 or 8 figure deal that we had expected to close in the quarter began to take longer to get through fulfillment into order fulfillment. And so what this required us to do is to inspect at a much higher level of detail.

Speaker Change: What we have seen is many of the deals that pushed from Q3 have closed in Q4, particularly many of the largest ones in the quarter and so we expect to bring this ongoing discipline through Q4, and then it becomes part of the norm.

Speaker Change: And of course, our business as we head into the implementation of fiscal year 2006 sales plans.

Aaron Rakers: Thank you. Thanks guys.

Ananda Baruah: Thank you. Thanks guys.

Speaker Change: Okay.

Speaker Change: from Q3 have closed in Q4, particularly many of the largest ones in the quarter. And so we expect to bring this ongoing discipline through Q4.

Speaker Change: Thank you.

Operator: The next question is from Asiya Merchant with Citi. Please go ahead. Great.

Mehdi Hosseini: The next question is from Asiya Merchant with Citi. Please go ahead.

Speaker Change: The next question is from meta Marshall with Morgan Stanley. Please go ahead.

Asiya Merchant: Great.

Chris Newton: Thanks for taking my call. Mike, again, congratulations on your retirement and enjoyed working with you. If I can just ask about the flash installed base, I mean, how far along are we in terms of converting the installed base and net new customers? If you can tell us about the overall installed base that still has line of sight to perhaps move to the flash base. Thank you.

Thanks for taking my call. Mike, again, congratulations on your retirement and enjoyed working with you. If I can just ask about the flash installed base, I mean, how far along are we in terms of converting the installed base and net new customers? If you can tell us about the overall installed base that still has line of sight to perhaps move to the flash base. Thank you.

Speaker Change: Great.

Speaker Change: Maybe just kind of following up on that question. So it sounds like it was more execution day, it's worth if I just wanted to kind of clarify that customers may be werent kind of a little bit more uncertain kind of in that first month of the year just as we have the same kind of administrations change.

Speaker Change: And then it becomes part of the normal course of business as we head into the implementation of fiscal year 26 sales plans.

Thank you.

Meta Marshall: The next question is from Meta Marshall with Morgan Stanley. Please go ahead

Speaker Change: And then second question, just kind of any commentary around public sector. Thanks.

Speaker Change: In Q3.

George Kurian: Yeah, thank you, Asiya. The penetration of our all-flash footprint into our installed base is now 43%. So it's up again modestly every quarter, which is a reflection of both the scale of our installed base and the fact that we are growing new footprints in that installed base. So that's 43% with regard to the kind of nature of our wins in all-flash. Listen, all-flash and public cloud are the two vehicles that allow us to win new customers. And the pace of new customers continues to be good.

Speaker Change: And continuing in Q4, we have seen a degree of caution in the European markets.

Speaker Change: Particularly the ones like France, and Germany, where there are no government in place.

Speaker Change: And then second question, just kind of any commentary around public sector. Thanks.

Speaker Change: We have seen.

Speaker Change: A little bit more.

Speaker Change: Caution in U S public sector as part of our Q4 guide in Q3 U S public sector performed according to plan.

Speaker Change: In Q3 and continuing in Q4, we have seen a degree of caution in the European markets, particularly the ones like France and Germany where there are no governments in place.

Speaker Change: You are correct that January always is the first month of the calendar year for many customers and so that sometimes budgets take a little longer to get on frozen. We have good line of sight into our pipeline and we are progressing the deals according to plan.

Speaker Change: We have seen a little bit more caution in U.S. public sector as part of our Q4 guide. In Q3, U.S. public sector performed according to plan.

Chris Newton: Thank you.

Asiya Merchant: Thank you.

Operator: The next question is from Samik Chatterjee with JPMorgan. Please go ahead.

Speaker Change: Alright, thank you.

Speaker Change: The next question is from Mehdi Hosseini with S. I G. Please go ahead.

Speaker Change: You are correct that January always is the first month of the calendar year for many customers And so that sometimes budgets take a little longer to get unfrozen We have good line of sight into our pipeline, and we are progressing the deals according to plan

Aaron Rakers: Hi, thanks for taking my question. And Mike will miss working with you. It was good experience working with you. Maybe George, just on the product side, you talked about a disaggregated solution and sort of launching that somewhere before Insights this year. Maybe if you can help me with a sort of update on the progress on doing a disaggregated solution and how do you think about on the storage side and how you think about the incremental addressable market that that product would allow you to address. And maybe just on the same lines, one of your peer companies has talked about a hyperscaler deal where there has been a hyperscaler scale with a software solution.

Samik Chatterjee: Hi, thanks for taking my question. And Mike will miss working with you. It was good experience working with you. Maybe George, just on the product side, you talked about a disaggregated solution and sort of launching that somewhere before Insights this year. Maybe if you can help me with a sort of update on the progress on doing a disaggregated solution and how do you think about on the storage side and how you think about the incremental addressable market that that product would allow you to address. And maybe just on the same lines, one of your peer companies has talked about a hyperscaler deal where there has been a hyperscaler scale with a software solution.

Mehdi Hosseini: Yes, thanks for taking my question.

Speaker Change: <unk>.

Speaker Change: I just want to better understand the competitive landscape I understand that there were some execution issues.

But where are we in terms of increasing the QC mix that would give you better.

Thank you.

Great, thank you.

Moderator: The next question is from Mehdi Hosseini with SIG. Please go ahead.

Speaker Change: And how do you see the competitive environment.

Speaker Change: And into the spring and later in the year. Thank you.

Yes, thanks for taking my question.

Moderator: I sort of better understand the complete landscape, I understand that there was some education issues, but where are we?

Speaker Change: We did not see any changes to the competitive landscape, it's always been competitive and our portfolio has been strong as I mentioned in my prepared remarks, we have refreshed the entire product portfolio of both the FX theory.

Moderator: in terms of increasing the Q and C mix that will give you better cost and how do you see the competitive environment into the spring and later in the year. Thank you.

Aaron Rakers: Particularly, how do you think about sort of those being in your strategic roadmap, or are those sort of deals in something that you would consider, given sort of the puts that takes about how you think your product portfolio sort of positioned right now?

Particularly, how do you think about sort of those being in your strategic roadmap, or are those sort of deals in something that you would consider, given sort of the puts that takes about how you think your product portfolio sort of positioned right now?

Speaker Change: And the C and the ASC or block storage theories.

Speaker Change: We have.

Moderator: We did not see any changes to the competitive landscape, it's always been competitive, and our portfolio has been strong. As I mentioned in my prepared remarks, we have refreshed the entire product portfolio, both the AFF series, ANC, and the ASA, All Block Storage series.

Speaker Change: Thanks, good traction in the quarter in the C series product family in the assay product family as well as with storage. Greg. So we are winning new footprints with those products and I didn't see any fundamental change to that dynamic during the quarter.

Mike Berry: Thank you.

Thank you.

George Kurian: We make good progress on disaggregated storage. It is for high performance unstructured data use cases, and you'll hear more as we get towards insight. As you know, our disaggregated storage is third generation disaggregated storage, which is the most scalable, the most high performant, and of course the richest set of features in the industry. Many clients are using us for high performance NAS already for AI and other use cases. But this opens up our ability to attack the other players in the NAS market, particularly the large other NAS incumbent, Dell, and so we feel good about our opportunity there. With regard to cloud, listen, our cloud business offers compelling value to all three large hyperscaler providers. I'll point out that we've been in that market since 2019, which was the GA of the first cloud hyperscaler solution.

Speaker Change: Okay.

We have...

Speaker Change: The next question is from Amit <unk> with Evercore ISI. Please go ahead.

Moderator: see good traction in the quarter in the C-series product family, in the ASA product family, as well as with storage grids. So we are winning new footprints with those products, and I didn't see any fundamental change to that dynamic during the quarter.

Speaker Change: Hi, This is irvin Liu on for Amit and thank you for the question and congrats congratulations on your retirement, Mike I wanted to ask about how you're thinking about product gross margins I think the 56% you guided to for fiscal Q4. It reflects some benefit from your strategic SSD purchases.

Speaker Change: The next question is from Amit Daryanani with Evercore ISI. Please go ahead.

Speaker Change: But is there any way to help us think about the direction of product gross margins beyond Q4. Once you use up some of these strategic purchases and then to what degree can you pass through some of these higher commodity costs to your customers.

Speaker Change: Hi, this is Irvin Liu for OMIT. Thank you for the question and congratulations on your retirement advice. I wanted to ask about how you are thinking about product close margins. I think the 56% you guided to for fiscal Q4, it reflects some benefit from your strategic SSD purchases.

Speaker Change: Yes, Greg Great question. So let me, let me take a step back and talk about gross margins as a whole I will talk about Q4, even though we're not guiding for fiscal 'twenty I do want to give you a view of what we're thinking as we sit here today.

Speaker Change: But is there any way to help us think about the direction of product growth margins beyond Q4 once you use up some of these strategic purchases? And then to what degree can you pass through some of these higher commodity costs to your customers?

George Kurian: It's a highly valuable technology to them because it allows them to bring clients to their platforms and it's a very high margin business for both us and them. And so we're going to continue to drive the full stack value we have into more and more and more use cases and we feel really good about the momentum in the hyperscaler business that we have.

It's a highly valuable technology to them because it allows them to bring clients to their platforms and it's a very high margin business for both us and them. And so we're going to continue to drive the full stack value we have into more and more and more use cases and we feel really good about the momentum in the hyperscaler business that we have.

Speaker Change: First of all let's back up for a second folks we've always said our goal here and that happens to drive incremental gross margin dollars and we've done that in 'twenty five the really good news.

Speaker Change: Yeah, great question. So let me take a step back and talk about gross margins as a whole. I'll talk about Q4. Even though we're not guiding for fiscal 26, I do want to give you a view of what we're thinking as we sit here today.

Speaker Change: The mix of gross margin is a lot better now diversified between the different product lines.

Speaker Change: <unk> product support and cloud.

Speaker Change: The progression of the gross margin has largely played out as we expected at the beginning of the year with cloud gross margins increasing materially our product gross margins declining throughout the year as we used up some of those strategic pre buys I do want to underline a couple of things April we did the pre buy.

George Kurian: Thank you.

Samik Chatterjee: Thank you.

Operator: The final question today comes from Ari Terjanian with Cleveland Research. Please go ahead.

Speaker Change: So first of all, hey, let's back up for a second, folks. We've always said our goal here at NetApp is to drive incremental gross margin dollars, and we've done that in 25. The really good news is the mix of gross margin is a lot better now, diversified between the different product lines.

Aaron Rakers: Hi all, thanks for taking the question, and Mike, best of luck here. Just want to wrap on any more updates on dynamics we're seeing with VMware and Broadcom, and customers contemplating new architectures, converged hyper converged cloud, et cetera, and potential opportunities and challenges that that might be presenting the business. Thank you.

Ari Terjanian: Hi all, thanks for taking the question, and Mike, best of luck here. Just want to wrap on any more updates on dynamics we're seeing with VMware and Broadcom, and customers contemplating new architectures, converged hyper converged cloud, et cetera, and potential opportunities and challenges that that might be presenting the business. Thank you.

particularly product support and cloud.

Speaker Change: In 2004 and through the first half of 'twenty five and you can see it in our product margins as some of that has worked through those higher cost is what's reflected in the P&L.

Speaker Change: The progression of the gross margins has largely played out as we expected at the beginning of the year, with cloud gross margins increasing materially and product gross margins declining throughout the year as we used up some of those strategic pre-buys.

Speaker Change: As we sit here today in Q4, what were expecting from those pre buys is really close to where the market is so I will then talk about in a second what that means for 'twenty six your second part of your question, though I want to hit first which as we all know there is two pieces of gross margin. There is revenue and there is cost.

George Kurian: I think we are well positioned with the VMware discussions in our clients if they want to stay on VMware and optimize their overall VMware landscape. We have good solutions with VMware to allow customers to do that, and we've seen some of our clients start to take that up. We talked about in my prepared remarks some clients re-platforming from on-prem VMware to cloud using a combination of VMware Cloud offerings as well as modern container-based architectures. We have very good progress with some of our clients on cloud. Then I think with regard to using on-prem alternatives, again, as you said, we have joint solutions with Microsoft.

Speaker Change: I do want to underline a couple of things. We did those pre-buys in 24 and through the first half of 25, and you can see it in our product margins. As some of that has worked through, those higher costs is what's reflected in the P&L.

Speaker Change: On the revenue side, we did implement some price changes going into Q3, given the longer sales cycles in our business, we really don't see a material impact in our fiscal 'twenty five, but we do expect to see this tailwind pickup as we enter fiscal 'twenty six.

Speaker Change: As we sit here today in Q4, what we're expecting from those pre-buys is really close to where the market is.

Speaker Change: So I will then talk about in a second what that means for 26. Your second part of your question, though, I want to hit first, which is we all know there are two pieces of gold margin. There's revenue and there's cost.

Speaker Change: Another tailwind is the introduction of our new products that George talked about specifically the a series, where we continue to introduce new products that deliver better performance.

Speaker Change: On the revenue side, we did implement some price changes going into Q3. Given the larger sales cycles in our business, we really didn't see a material impact in our fiscal 25, but we do expect to see this tailwind pick up as we enter fiscal 26.

Speaker Change: Customers at a better cost structure for net out.

Speaker Change: Also as these new products become a bigger portion of our billings in fiscal 'twenty six that should also be a tailwind to margins. So that's the revenue side now specifically our component costs.

Aaron Rakers: Red Hat and others.

Red Hat and others.

George Kurian: And so I think it's a topic that will take time to clarify where customers are headed, but we have good choices for them regardless of where they're going.

And so I think it's a topic that will take time to clarify where customers are headed, but we have good choices for them regardless of where they're going.

George Kurian: Another tailwind is the introduction of our new products that George talked about, specifically the A-Series, where we continue to introduce new products that deliver better performance for our customers, add a better cost structure for NetApp.

Speaker Change: We expect to use the majority of the pre buys up in fiscal 'twenty five as I just mentioned folks we're basically at the same as the industry is today. So as we go into fiscal 'twenty six we expect there to be continued weakness in the NAND market, we've seen that over the last two quarters and it's expected to continue into.

Operator: Thank you. We're actually able to squeeze in one more question from Param Singh with Oppenheimer. Please go ahead.

Ari Terjanian: Thank you.

Operator: We're actually able to squeeze in one more question from Param Singh with Oppenheimer. Please go ahead.

George Kurian: Also, as these new products become a bigger portion of our billing in fiscal 26, that should also be a tailwind of margins. So that's the revenue side. Now specifically on component costs.

George Kurian: Yeah, yeah.

Param Singh: Yeah, yeah.

Aaron Rakers: Thank you for squeezing me in. I really appreciate it, and thanks for taking my question. Now, sorry to beat a dead horse, but wanted to understand going back to the deal crush outs, what percentage of those were displacement of competitive opportunities versus replacing your existing HD or hybrid footprint?

Thank you for squeezing me in. I really appreciate it, and thanks for taking my question. Now, sorry to beat a dead horse, but wanted to understand going back to the deal crush outs, what percentage of those were displacement of competitive opportunities versus replacing your existing HD or hybrid footprint?

Speaker Change: The first half of our year.

George Kurian: We expect to use the majority of free buys up in fiscal 25. As I just mentioned, folks are basically at the same as the industry is today.

Speaker Change: Based on these current projections, we expect Q4 dollars 25 to be the high point of our component costs and expect to see cost remains steady entering fiscal 'twenty six and then start to decline.

So, as we go into Fiscal 26...

George Kurian: As you look towards your sales.

George Kurian: We expect there to be continued weakness in the NAM market, we've seen that over the last two quarters, and it's expected to continue into the first half of our year. So based on these current projections, we expect Q4-25 to be the high point of our component cost.

As you look towards your sales.

Speaker Change: What that means is assuming that stays consistent because mix is super important.

Aaron Rakers: In the quarter and as it progressed through the year, what has been the?

In the quarter and as it progressed through the year, what has been the?

Speaker Change: Expect 56 to be the low point of product gross margins and start to increase as we enter 2006.

George Kurian: Opportunity to replace competitors versus, again, your existing footprint?

Opportunity to replace competitors versus, again, your existing footprint?

Speaker Change: So hopefully that answers that.

Aaron Rakers: If you could talk about that a little bit, I'd really appreciate that.

If you could talk about that a little bit, I'd really appreciate that.

Speaker Change: Question and I, just have to get one shot up to a shifting to cloud margins for a second.

George Kurian: Expect to see costs remain steady entering fiscal 26 and then start to decline.

George Kurian: There was no specific dynamic related to the deals that pushed out that followed any pattern of competitive versus NetApp. Refresh was really tied to customers buying and procurement kind of life cycle and our lack of visibility into some of those that we are correcting with more detailed inspection of exactly who in the customer has approved and the various steps that a transaction typically takes to get to closure. So I wouldn't comment that there was anything specific with regard to whether it was our footprint or competitors. Listen, in every quarter there are a huge number of transactions that we undertake. Some of them are refreshes of our installed footprint, some of them are competitor footprint takeout.

Speaker Change: We are particularly proud of the 1000 basis point increase that we've seen there and we expect those margins to continue to increase in addition, with the divestiture of spot we actually got about another 100 basis points of product margin, our cloud margin goodness. So thats gross margins as a whole again, we're not guiding 2006.

George Kurian: What that means is, assuming MIPS stays consistent, because MIPS is super important, we would expect 56 to be the low point of product gross margin and start to increase as we enter 26.

Speaker Change: So hopefully that answers that question, and I just have to give one shout-out to A, shifting the clock margin for a second.

Speaker Change: That helps with people worrying about what was going to happen going into next year.

Speaker Change: We are particularly proud of the thousand basis point increase that we've seen there, and we expect those margins to continue to increase.

Speaker Change: Got it thank you.

David vote: The next question is from David vote with UBS. Please go ahead.

Speaker Change: In addition, with the divestiture spot, we actually get about another 100 basis points of product margin, or cloud margin goodness. So that's growth margins as a whole. Again, we're not guiding 26, but hopefully that helps with people worrying about what was going to happen going into next year.

David vote: Great. Thanks, guys for taking my question and my congratulations on the retirement, we will Miss you.

Speaker Change: Maybe George can you talk about obviously deals closing late in the quarter are getting pushed out.

Speaker Change: Yet your all flash array business seem to perform reasonably well in the quarter at least on the metrics can you talk into more specificity in terms of.

George Kurian: I can just tell you, having sold Flash for so many, many years and the fact that we are 43% of our installed base penetrated with Flash should give you an indication that a preponderant part of our Flash business is net new footprint or net new logos. Right. Because if we're just displacing our installed base, we would be at a much, much higher percentage of penetration today.

I can just tell you, having sold Flash for so many, many years and the fact that we are 43% of our installed base penetrated with Flash should give you an indication that a preponderant part of our Flash business is net new footprint or net new logos. Right. Because if we're just displacing our installed base, we would be at a much, much higher percentage of penetration today.

Thank you for watching!

Got it. Thank you.

Speaker Change: The next question is from David Vogt with UBS. Please go ahead.

Speaker Change: What were sort of the deciding factors that got pushed to the right was it the size of the deals was it price was it what type of technology, just trying to get a little bit better sense for maybe where customers maybe got a little bit of a pause and why it shifted a little bit more to the right. I know you touched on it earlier, but just some more color around that given that all flashing are look pretty good.

David Vogt: Chris, thanks guys for taking my question and my congratulations on the retirement.

I will miss you.

Speaker Change: Maybe, George, can you talk about, obviously, deals closing late in the quarter or getting pushed out?

Chris Newton: All right, thanks Param. I appreciate your question. Thank you. I'm going to pass it back to George for some final comments.

Kris Newton: All right, thanks Param. I appreciate your question. Thank you. I'm going to pass it back to George for some final comments.

Speaker Change: During the quarter.

Speaker Change: I think that our Oh.

Speaker Change: All flash numbers would have been substantially higher if we had been able to close the transactions that moved to the right.

George Kurian: Thank you Chris. While we did not perform to our standards in Q3, we remain very well.

to comment. Thanks very much.

George Kurian: Positioned with customers as their supplier of.

Positioned with customers as their supplier of.

Speaker Change: Those are primarily flash based product transactions. They were a few different reasons clearly there are some clients that are not yet ready to make the procurement decision at the window that we wanted them to and where they had previously communicated that they might be ready to do it.

Aaron Rakers: Choice for AI and other data-driven workloads.

Choice for AI and other data-driven workloads.

George Kurian: We are taking action to get back on track and have already seen several deals that slipped out of Q3, closed in early Q4. Our portfolio has never been stronger or more tightly aligned to IT organizations' top priorities. We enable customers to treat data as an enterprise-wide asset to stay agile and competitive in the age of AI. I am very confident in our continued ability to outgrow the market and to take share.

We are taking action to get back on track and have already seen several deals that slipped out of Q3, closed in early Q4. Our portfolio has never been stronger or more tightly aligned to IT organizations' top priorities. We enable customers to treat data as an enterprise-wide asset to stay agile and competitive in the age of AI. I am very confident in our continued ability to outgrow the market and to take share.

Speaker Change: I think that our offlash numbers would have been substantially higher if we had been able to close the transactions that moved to the right.

Speaker Change: Some of this as you can imagine was because it's the first few weeks of a new calendar year and the budgets haven't get flowed down to the departments in other cases clients wanted to upsize their transactions. So they wanted to consolidate more equipment under the same procurement.

Those were primarily flash-based product transactions.

There were a few different reasons.

Speaker Change: Clearly, there were some clients that were not yet ready to make the procurement decision at the window that we wanted them to, and where they had previously communicated that they might be ready to do it.

Speaker Change: Vehicle and so it took us longer to close and I think those are fundamentally a couple of the main reasons in Europe. We saw a couple of deals push because of the softness in the overall.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Some of this as...

Speaker Change: You can imagine because it's the first few weeks of a new calendar year and the budget hasn't yet flown down to the department.

Speaker Change: In other cases, clients wanted to upsize their transactions, so they wanted to consolidate more equipment under the same procurement vehicle, and so it took us longer to close. And I think those were...

Speaker Change: Market and so it took it's taken them a little bit more caution in some of those cases in Europe.

Speaker Change: Great. Thank you that's helpful.

Speaker Change: The next question.

Speaker Change: Excuse me. The next question is from Jason Ader with William Blair. Please go ahead.

Speaker Change: Fundamentally a couple of the main reasons. In Europe we saw a couple of deals pushed because of the softness in the overall market and so it took, it's taken them a little bit more caution in some of those cases in Europe.

Jason Ader: Yeah. Thank you good afternoon.

Jason Ader: Could you I know you said $15 million in the quarter from spot can.

Jason Ader: Can you just give a sense of like the.

Jason Ader: If you could annualize that.

Great, thank you, that's helpful.

Jason Ader: The spot impact so we can get a sense of what we need to take out of our models for FY 'twenty six.

Speaker Change: The next question is from Jason Ader with William Blair. Please go ahead.

Jason Ader: And then just a quick second question I know I'm supposed to ask one but can you give us the U S fed exposure.

Jason Ader: Overall sort of for the fiscal year as well, what's your U S fed exposure.

Spot, can you just give a sense of like the...

Jason Ader: Okay.

Jason Ader: Hey, Jason it's Mike So on the first question. So the business that was that we are divesting for the trailing 12 months. The cloud revenue has been about $94 million, it's been relatively consistent it bounces around a little bit by quarter from a gross margin perspective, the gross margins are relatively consistent.

Thank you.

Speaker Change: If you could annualize the spot impact so we can get a sense of what we need to take out of our models for FY25. And then just a quick second question, I know I'm supposed to ask one, but can you give us the U.S. Fed exposure overall, sort of for the fiscal year, what's your U.S. Fed exposure?

Jason Ader: The cloud gross margins, but slightly lower hence my earlier comment about getting a little bump in gross margins and then when all is said and done we expect it to be relatively neutral to EPS as George mentioned and we bought the U K.

Speaker Change: Hey, Jason, it's Mike. So on the first question, so the business that was, that thing, for the trailing 12 months, the cloud revenue has been about $94 million.

Speaker Change: been relatively consistent, it bounces around a little bit, I'd say it is.

The as reported number in Q3 was 15% growth excluding it from both the previous year and this year it moved up to 'twenty, one so hopefully that helps size businesses.

Speaker Change: From a gross margin perspective, the gross margins are relatively consistent with the cloud gross margins, but slightly lower. Hence my earlier comment about getting a little buff in gross margins. And then when all is said and done, we expect it to be relatively neutral for CPS. As George mentioned, and we both did,

Jason Ader: Divested.

Jason Ader: And third.

Listen I think the U S public sector business.

Speaker Change: You can see the as-reported number in Q3 was 15% growth, excluding it from both the previous year and this year, it moved up to 21. So hopefully that helps size the businesses we digested.

Incremental.

Jason Ader: Caution is factored into our Q4 outlook.

Jason Ader: Some of that is related to the near term.

Jason Ader: Efficiency.

Jason Ader: Direction that some parts of the administration have been.

and Ted.

Jason Ader: Directed to undertake we think that these are tied to technology led productivity improvement initiatives over time, and so once they stabilize it should be a benefit to us.

Speaker Change: Listen, I think the U.S. public sector business, the incremental portion is factored into our Q4 outlook.

BOOM

Speaker Change: Some of that is related to the near-term, you know, efficiency.

Jason Ader: Public sector.

Jason Ader: <unk> partner Fisher to net out at it.

Speaker Change: direction that some parts of the administration have been directed to undertake. We think that these are tied to technology-led productivity improvement initiatives over time and so once they stabilize it should be a benefit to us.

Jason Ader: A material part of our.

Jason Ader: Americas business.

Jason Ader: And so I'll just leave it there and Jason just this is Chris really quickly public sector, which includes federal state and local governments.

Jason Ader: Ounces around between 10 to 12, 13% of total revenue.

Speaker Change: U.S. private sector is an important business to NetApp, and it's a material part of America's business.

Speaker Change: That's global public sector.

Jason Ader: At U S public sector U S. Okay.

Jason Ader: Total revenue not of total U S revenue right.

Speaker Change: And Jason, this is Kris, really quickly, public sector, which includes feds plus state and local governments, bounces around between 10 to 12, 13 percent of total revenue. That's global public sector.

Chris: Total company revenue, Okay, all right. Thanks, Chris.

Jason Ader: Okay.

Mohan: The next question is from Wamus, Hey, Mohan with Bank of America. Please go ahead alright. Thanks for taking the question that <unk> filling in for Onesie, Mike Great working with you congrats.

Speaker Change: That's U.S. public sector. Oh, U.S., okay. U.S. of total revenue, not of total U.S. revenue, right?

Speaker Change: I have a question for you are you taking any incremental cost actions and how should we think about operating expenses as well as your investments going forward and if you can also comment on free cash flow is it lower sequentially in fiscal <unk> and what would what would drive further our strategic SSD purchases.

of Total Company Revenue.

Speaker Change: The next question is from Wamsi Mohan with Bank of America. Please go ahead.

Speaker Change: Thanks for taking the questions. It's Rupil filling in for WAMSI. Mike, great working with you. Congrats. I have a question for you. Are you taking any incremental cost actions and how should we think about operating expenses as well as your investments going forward? And if you can also comment on free cash flow, is it lower sequentially in fiscal 4Q and what would what would drive further strategic SSD purchases and when would you do that and what

Speaker Change: And when would you do that and what would be the criteria for that thank you.

Speaker Change: So thank you for the kind words and I think there are three questions in there.

Speaker Change: So first of all from a operating expense perspective for this year, we're basically flat year over year. The team does a wonderful job continuing to invest in new projects.

Speaker Change: Projects George talked about all the new products that we've rolled out and the changes also we've made a go to market.

Thank you.

Speaker Change: So thank you for the kind words, and I think there were three questions in there. So first of all, hey, from an operating expense perspective, for this year, we're basically flat year over year. The team does a wonderful job continuing to invest in you.

Look at it every quarter, we look at it every day, we want to make sure that we get a return. So we are scrutinizing opex. The same today as we have in the last couple of years.

Speaker Change: The second question was on cash on cash flow, let's talk about cash flow.

Speaker Change: projects. George talked about all the new products that we have rolled out and the changes also we've made to go to market.

Speaker Change: And then.

Speaker Change: Cost actions so.

Speaker Change: Castle first so right now on an operating cash flow perspective were down year over year by about $241 million. The driver to this is really two big things that we've talked about all year. What is the prepay the payments we've made on our strategic buys thats going to continue to be a working capital headwind for us in fiscal <unk>.

Speaker Change: So we look at it every quarter, we look at it every day, we want to make sure that we get a return, so we are scrutinizing OPEX the same today as we have in the last couple of years.

The second question was...

Speaker Change: Cash flow, let's talk about cash flow, and then cost action.

Speaker Change: <unk> 25.

Speaker Change: Other tech piece is incentive payments that we made and mostly in Q1, you aggregate those together and the working capital impact is about $300 million year over year.

Speaker Change: Cash flow first. So right now, and I'm bringing cash flow in perspective, we're down year over year by about $241 million.

Speaker Change: The driver to this is really two big things that we've talked about all year. One is the payments we've made on our strategic buys. That's going to continue to be a working capital headwind for us in fiscal 25.

Speaker Change: In Q4, we have some headwind from the timing of tax payments.

Speaker Change: Should increase sequentially, but we do expect to be below last year and Thats, what we said in Q3 as well.

The other big piece of art is incentives.

Speaker Change: I need to take cost actions.

Speaker Change: Payments that we made mostly in Q1, you aggregate those together and the working capital impact is about $300 million year-over-year.

Speaker Change: So just like we talked about we look all the time and cost as it relates to I think the third one was pre buys right.

Speaker Change: In Q4, we have some headwind from the timing of tax payments. It should increase sequentially, but we do expect to be below last year, and that's what we said in Q3 as well. Are you planning to take cost actions?

Speaker Change: So at this point.

Speaker Change: As you look at the NAND market as we've talked about we did a strategic pre buys when it was really a dislocated market and it was almost a no brainer to do it and we benefited and our customers did because we were able to offer great products.

Speaker Change: So, just like we talked about, we look all the time at costs as it relates to... Oh, I think the third one was prebuys. Correct. Yeah. So, at this point...

Speaker Change: For almost the last four quarters at this point, we view ourselves up going forward, we have to see a material. This location of Gan to do those pre buys.

Speaker Change: As you look at the demand market, as we've talked about, we did the strategic pre-buy when it was really a dislocated market, and it was almost a no-brainer to do it. And we benefited, and our customers did, because we were able to offer great products.

Speaker Change: Wonderful news as my successor knows us industry really well, so you'll be able to look at it as well, but at this point, we are not expecting to do any more pre buys but what the NAND market continues to change. So we'll all wait until <unk> gets here and he can talk about that on the next call. Thank you for that.

Speaker Change: For almost the last four quarters. At this point, we've used those up. Going forward, we'd have to see a material dislocation again to do those pre-buys.

Speaker Change: Yeah, Yeah, Mike. Thank you so much thanks for all the details.

Speaker Change: You bet. Thank you.

Speaker Change: The wonderful news is my successor knows this industry really well, so he'll be able to look at it as well. But at this point, we are not expecting to do any more pre-buys, but you know what? The NAM market continues to change, so we'll wait until Wassam gets here, and we can talk about that on the next call.

Steven Fox: The next question is from Steven Fox with Fox Advisors. Please go ahead.

Steven Fox: Hi, good afternoon.

Steven Fox: Just following up on that just from a competitive dynamic standpoint, having had Mike a lot of experience with doing these pre buys now some some of your competitors don't do them. Some do them in different ways has that at all affected the competitive environment and given your comments about NAND pricing.

Speaker Change: Yeah, Mike, thank you so much. Thanks for all the details.

Yeah, thank you.

Speaker Change: The next question is from Stephen Fox with Fox Advisors. Please go ahead.

Steven Fox: Going down I mean, I guess, it's all relative but some of the NAND suppliers are talking about the bottom of the inventory cycle. So I'm curious if you see any risk that maybe you are being too optimistic on NAND pricing. Thanks.

Stephen FOX: Hi, good afternoon. Just following up on that, just from a competitive dynamic standpoint, having had, Mike, a lot of experience with doing these pre-buys now, some of your competitors don't do them, some do them in different ways. Has that at all affected the competitive environment?

Steven Fox: So let me address those two questions right I think first of all in terms of the competitive landscape there.

Stephen FOX: given your comments about NAN pricing going down. I mean, I guess it's all relative, but some of the NAN suppliers are talking about the bottom of an inventory cycle. So I'm curious if you see any risk that maybe you're being too optimistic on NAN pricing. Thanks.

Speaker Change: Real competitive differentiator that Ipass is really our software and hybrid cloud.

Steven Fox: The <unk>.

Steven Fox: Percentage of our cost to a customer that comes from NAND is a small part of the total cost and so we have a full lineup of products with different forms of NAND and I think that the competitive dynamic with our software strength, our hybrid cloud and AI technologies gives us a real strong.

Thank you.

George Kurian: Let me address those two questions. I think first of all in terms of the competitive landscape, the real competitive differentiator that NetApp has is really our software and hybrid cloud.

Speaker Change: <unk> in the market and a durable competitive mode with regard to the <unk>.

George Kurian: Percentage of our cost to a customer that comes from NAND is a small part of the total cost.

Steven Fox: The NAND market itself.

Steven Fox: We are very very closely aligned with all of the large suppliers of solid state technology in deep discussions with them, we will make strategic decisions about procurement.

And so we have a full lineup of products.

George Kurian: with different forms of NAND, and I think that the competitive dynamic with our software strength, our hybrid cloud, and our AI technologies gives us a real strong position in the market and a durable competitive mode.

Steven Fox: And the way that Mike talked about and so we feel very very good about our.

George Kurian: With regard to the NAND market itself, listen, we are very, very closely aligned with all of the large suppliers of solid-state technology and in deep discussions with them.

Steven Fox: Our ability to understand the market and does the dynamic market like you said, but we are in very close dialogue with these suppliers as we have been for many many years.

Steven Fox: Thank you that's helpful.

We will, you know, make strategic decisions about procurement.

Speaker Change: The next question is from Krish Shankar with TD Cowen. Please go ahead.

George Kurian: in the way that Mike talked about. And so we feel very, very good about our, you know, ability to understand the market. It is a dynamic market, like you said, but we are in very close dialogue with these suppliers as we have been for many, many years.

Yeah, Hi, Thanks for taking my question George just wanted to find out kind of like where are we in the AI and the enterprise cycle and along the same path or focus on enhancements to the storage grid with this object storage is this also related to capitalizing on.

Thank you, that's helpful.

Speaker Change: In the enterprise and then Mike. Thanks for all your help just a clarification as spot completely out of the model in the April quarter. Thank you.

Speaker Change: The next question is from Krish Sankar with TD Cowan. Please go ahead.

Krish Sankar: George, just wanted to find out, kind of like, where are we in the AI, in the enterprise cycle?

Speaker Change: Yeah.

So let me get the first one and then Michael give you the answer on spot we are starting to see the opening up of AI in the enterprise.

Krish Sankar: And along the same path, the focus on enhancements to storage grid, which is object storage, is this also related to capitalizing on AI in the enterprise? And then, Mike, thanks for all your help. Just a clarification, is SPOT completely out of the model in April quarter? Thank you.

Speaker Change: Where we are seeing clients standup AI centers of excellence with AI infrastructures that combined GPU based compute with HIFU.

Krish Sankar: So, let me get the first one and then Michael will get you the answer on Spock. We are starting to see the opening up of AI.

Speaker Change: High performance storage infrastructures, we had several large wins in that category.

Speaker Change: We're also seeing people build out Ada lakes, which are applications that allows you to combine data from multiple types. So that you can then normalize it and feed it into a larger language model our AI businesses performed according to our high.

Indiana Prize.

Krish Sankar: you know, high-performance storage infrastructures. We had several large wins in that category.

Speaker Change: Patients multiple quarters in a row, we are also seeing a growing number of wins.

We are also seeing people build out data lakes.

Krish Sankar: which are applications that allow you to combine data from multiple types.

Speaker Change: AI service providers, who are building as a service infrastructure for enterprise AI and all of our differentiation around.

Krish Sankar: So that you can then normalize it and feed it into a large language model. Our AI business has performed according to our high expectations, multiple quarters in a row.

Speaker Change: End of multi tenancy security AI model <unk> data mobility, all of those things come into play and all of those use cases.

We are also seeing a growing number of wins.

Speaker Change: Please it's in the early innings, like we said, but our technology and our approach with customers is resonating.

in AI service providers.

who are building as-a-service infrastructures for enterprise AI.

Speaker Change: Mike Thanks, George Crush there is about $9 million of cloud revenue in the Q4 guide that's with the expected close date of early March So thats. The difference the 15 that we talked about as we expected there to be that full quarter of about 24, and there was about a month ago.

Krish Sankar: and all of our differentiation around, you know, kind of multi-tenancy, security, AI model, versioning, data mobility, all of those things come into play in all of those use cases.

Krish Sankar: Please, it's in the early innings, like we said, but our technology and our approach with customers is resonating.

Speaker Change: Thanks, Scott Thanks, Mike.

Speaker Change: Joe.

Speaker Change: Mike? Thanks George. So Kris, there's about nine million dollars of cloud revenue in the Q4 guide that's with the expected closed date of early March. So that's the difference, the 15 that we talked about, is we expected there to be the full quarter of about 24. There's about a month in.

Simon Leopold: The next question is from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold: Thank you very much I wanted to see if you could talk about your expectations for tariffs and the risks I know Mike you had mentioned some some commentary on gross margin.

Simon Leopold: That was really in the context of NAND pricing.

Thanks, George. Thanks, Mike.

Thank you.

Simon Leopold: Like to get a better understanding of what you're thinking for the rest of apparel and if you've baked anything in and my congratulations on your retirement as well.

Speaker Change: The next question is from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold: Thank you very much. I wanted to see if you could talk about your expectations for the risks. I know Mike, you had mentioned some commentary on the gross margin.

Simon Leopold: Yeah.

Simon Leopold: I think you were.

Speaker Change: Speaking about tariffs listen we have a global supply chain that has given us the ability to fulfill products.

Speaker Change: That was in the context of NAMD pricing. I'd like to get a better understanding of what you're thinking for the risk of tariffs and if you've based anything in. And Mike, congratulations on your retirement as well.

Speaker Change: Two customers from multiple locations and that is a very highly flexible supply chain.

Thank you.

Speaker Change: We have as you know through the course of the past several years removed our dependency on China to a very immaterial amount.

Thank you.

Speaker Change: So any tariff supply to products coming from China don't really affect us.

to customers from multiple locations.

Speaker Change: <unk>.

Speaker Change: Location in Mexico out of which we do build product, but we have the flexibility to move those capabilities to other locations that are not in a fairly short period of time.

Speaker Change: and that is a very highly flexible supply chain. We have, as you know, through the course of the past several years, removed our dependency on China to a very immaterial amount. So any tariffs applied to products coming from China don't really affect us.

Speaker Change: So it's dynamic we are watching the situation we have as you can imagine several contingency plans and I'll just close by saying that.

Speaker Change: We have a location in Mexico out of which we do build products, but we have the flexibility to move those capabilities to other locations that are not carried in a fairly short period of time.

Speaker Change: We have not factored tariffs into our Q4 guide.

Speaker Change: And if tariffs applied to a wide swath of technologies that everybody in the industry users.

Which is our typical approach to using industry standard commodity components, then of course, it will affect the entire industry.

Speaker Change: And so it's dynamic. We are watching the situation. We have, as you can imagine, several contingency plans. And I'll just close by saying that we have not factored CARES into our Q4 guide.

Speaker Change: Thank you.

Speaker Change: The next question is from Lou <unk> with DIY capital markets. Please go ahead.

Speaker Change: and if tariffs apply to a wide swath of technologies that everybody in the industry uses, which is our typical approach to using industry standard commodity components, then of course it will affect the entire industry.

Yes, thanks, Lew with Guidewire.

Speaker Change: Micra greatly appreciate all your support and help throughout the years and best to you. So George you mentioned a couple of times that it's going to take a while for AI really to contribute to give your material revenue growth. Just if you just give us an update on that you did just mentioned a minute ago that some AI inference applications.

Thank you.

Speaker Change: The next question is from Lou Michiochia with Diawa Capital Markets. Please go ahead.

Speaker Change: Yes, thanks, Lillia Daiwa. You know, Mike, I greatly appreciate all your support and help throughout the years.

Speaker Change: We're starting to ramp, but obviously didn't seem like it really helped to the product revenue too much in this quarter. So are we still six months out 12 months out or anything that you could shed.

Speaker Change: and Bess Teo. So George, you've mentioned a couple times that it's going to take a while for AI really to contribute to give you material revenue growth. Just to give us an update on that, you did just mention a minute ago that some AI interest applications are starting to ramp. But obviously, it didn't seem like it really helped the product revenue too much in this quarter. So are we still six months out, 12 months out? Or anything that you could shed light on without guidance would be helpful.

Speaker Change: Shed light on without guidance would be helpful.

Speaker Change: We said no.

Speaker Change: In our prior commentary that what we are seeing clients do.

Speaker Change: Is put AI projects into proof of concept and start to learn from that and that.

Speaker Change: Movement of those projects into production in the enterprise would be in the second half of calendar year, 'twenty five or 'twenty six.

We said, you know, in our prior commentary,

See the same thing can be the case. It is certainly the case that we are seeing the larger clients being more facts ILEC building AI centers of excellence.

Speaker Change: And being able to deploy those kind of technologies into their business environment.

Speaker Change: So it will take time as we have said to brought and will keep you updated as we go through the quarter through the quarters, but we feel good about our position there are sort of really good <unk> wins that we are seeing across industries and across geographies and I feel good about our progress.

Speaker Change: We see the same thing to be the case. It is certainly the case that we are seeing the larger clients.

Speaker Change: being more fracile at, you know, building AI centers of excellence.

Speaker Change: and being able to deploy those, you know, kind of technologies into their business environment. So it will take time, as we've said, to broaden. We'll keep you updated as we go through the quarter, through the quarters, but we feel good about our position. There are sort of really good...

Speaker Change: Okay. Thank you.

Tim Long: The next question is from Tim long with Barclays. Please go ahead.

Speaker Change: Hi, This is <unk> on for Tim Long I was just wanting to check in on Keystone.

Speaker Change: Another strong quarter of growth and can you talk about customers kind of willingness to move to as a service versus traditional sale any kind of change in customer behavior increased interest you can mentioned thank you.

Speaker Change: templatized wind that we are seeing across industries and across geographies and I feel good about our progress.

Okay, thank you.

Tim Long: The next question is from Tim Long with Barclays. Please go ahead.

Speaker Change: We offer as a service models in a broad range of ways clearly cloud.

Tim Long: Hi, this is Alyssa Shreves on for Tim Long. I was just wanting to check in on Keystone. You know, you had another strong quarter of growth.

Speaker Change: Our Super strong performance in cloud is reflective of a broad based enthusiasm and customers for as a service and the flexibility that cloud transformation gives them. We are seeing clients, who are either looking to transform their IP landscape, you'll have the same model as.

Tim Long: Can you talk about customers' willingness to move to as-a-service versus traditional sale? Any kind of change in customer behavior, increased interest you can mention? Thank you.

Speaker Change: Public cloud taking on Keystone.

Speaker Change: Really like our hybrid offerings, so that they can build an architecture that spans public and on premise with Keystone. The second is clients that are deploying.

Speaker Change: and the flexibility that cloud transformation gives them. We are seeing clients...

Speaker Change: Applications that are going through an early validation right. So it could be like an AI application that is not yet at scale. So they don't want to buy a full scale infrastructure for that use case they wanted to buy.

Speaker Change: who are either looking to transform their IT landscape to have the same model as public cloud

taking on Keystone.

Speaker Change: They really like our hybrid offerings so that they can build an architecture that stands public and on-prem.

Speaker Change: We have a flexible infrastructure model and when they are ready they can deploy it into a more capital like.

with Keystone.

Speaker Change: Pending Chuck kind of architecture. So we feel good we are focused on executing that part of our business.

Speaker Change: Thank you.

Ananda Baruah: Our next question is from Ananda Baruah with loop capital. Please go ahead.

Speaker Change: Yeah. Thanks, guys. Good afternoon. Thanks for taking the question and Mike Yeah really enjoy working with you, we'll we'll miss working with you all have a great time.

editor-in-chief, at Google.

Speaker Change: The question I guess the question is for it could be for both of you at the Analyst day, guys you talked about.

Thank you.

Speaker Change: Our next question is from Ananda Barua with Loop Capital. Please go ahead.

Speaker Change: Through 2027, and the average mid to high single digit digit.

Speaker Change: Is it Gregg.

Ananda Barua: Yeah, thanks guys. Good afternoon. Thanks for taking the question. And Mike, yeah, I really enjoy working with you. We'll miss working with you. Have a great time.

Speaker Change: What yes it was.

Speaker Change: Going on this quarter next quarter is that impact that.

Speaker Change: At target at all yet and any early way to think about the productivity.

Ananda Barua: The question, I guess the question is for, could be for both of you, at the annuals say, guys, you talked about through 2027, an average of mid to high single digit.

Speaker Change: During fiscal 'twenty six.

Speaker Change: Was there as well would be helpful. Thanks, a lot.

Speaker Change: And Thats why I. Thank you for the kind words I will miss working with you as well so as we talked about last quarter, we still feel very good about the long term targets. We gave at Investor day, and nothing that happened in Q3 is change that in terms of the mid to upper single digit growth.

Ananda Barua: Does it grow? Does what is going on this quarter and next quarter, does that impact that target at all yet? And any early way to think about the flow through to fiscal 26 since we're almost there as well would be helpful. Thanks a lot.

Speaker Change: Margins as well as the cash flow conversion. So we felt really good about the product lineup George talked about that entering into 26 all of the all of the product momentum that we have the go to market changes. So nothing that we sit here today to say that that would change and we will we will hold fiscal 'twenty six guidance in total.

Ananda Barua: Hey Anand, it's Mike. Thank you for the kind words. I will miss working with you as well.

Ananda Barua: As we talked about last quarter, we still feel very good about those long-term targets we gave at Investor Day, and nothing that happened in Q3 has changed that.

in terms of the mid-to-upper single-digit growth.

Speaker Change: Our next call.

Ananda Barua: We feel really good about the product line-up, George talked about that, entering into 26, all of the product momentum that we have, the go-to-market changes, so nothing that we sit here today to say that that will change, and we will hold Fiscal 26 guidance until the next call.

Speaker Change: Thank you thanks guys.

Speaker Change: The next question is for from <unk> merchant with Citi. Please go ahead.

Speaker Change: Great. Thanks for taking my call and Mike again, congratulations on your retirement and.

Speaker Change: And working with you if I can just ask about the flash installed base I mean, how far along are we in terms of converting that installed base and net new customers that you can tell us about the overall installed base that still has line of sight to perhaps move to the Flash me. Thank you.

Thank you. Thank you, guys.

Speaker Change: The next question is from Oskia Merchant with Citi. Please go ahead.

Oskia Merchant: Great, thanks for taking my call and Mike again, congratulations on your retirement.

Speaker Change: Yes, Thanks George at.

Speaker Change: The penetration of our all flash.

Speaker Change: enjoyed working with you. If I can just ask about the Flash install space, I mean how far along are we in terms of converting the install space and you know, NetBean customers, if you can tell us about the overall install space that still has line of sight to perhaps move to the Flash space. Thank you.

Speaker Change: Our footprint into our installed base is now 43%. So it's up again modestly every quarter, which is a reflection of both the scale of our installed base and the fact that we are growing new footprints in that installed base. So that's it's 43% with Rick.

Speaker Change: Yeah, thank you, Ajay. The penetration of our all-flash footprint into our installed base is now 43%.

Speaker Change: Got to be.

Speaker Change: No kind of nature of our wins in all flash listen all flash and public cloud are the two vehicles that allow us to win new customers and the pace of new customers continues to be good.

Speaker Change: So it's up, again, modestly every quarter, which is a reflection of both the scale of our installed base...

Speaker Change: and the fact that we are growing new footprints in that install base. So that's 43%. With regard to the, you know, kind of nature of our wins in All Flash, listen, All Flash and Public Cloud are the two vehicles that allow us to win new customers.

Speaker Change: Thank you.

Speaker Change: The next question is from stomach chatterji with J P. Morgan. Please go ahead.

Speaker Change: Hi, Thanks for taking my question and Mike.

Speaker Change: We'll miss working with you know because good experience working with you.

<unk> charged off just on the product side you talked about.

and the faith of new customers continues to be good.

Speaker Change: Disaggregated solution.

Thank you.

Speaker Change: And sort of launching that's on Libya.

Speaker Change: The next question is from Samik Chatterjee with J.P. Morgan. Please go ahead.

Speaker Change: Insights to feel maybe if you can help me with those sort of update on the progress on doing a disaggregated solution and how do you think about on the service side and how you think about the incremental addressable market.

Speaker Change: Hi, thanks for taking my question, and Mike, very much working with you. It was a good experience working with you. Maybe George, just on the product side, you talked about a disaggregated solution and sort of launching that somewhere before the Insights this year. Maybe if you can help me with a sort of update on the progress on doing a disaggregated solution and how do you think about on the service side and how you think about the incrementally aggressive market with that.

Speaker Change: Product.

It would allow you to address and maybe just on the same lines. One of your peer companies has talked about the hyperscale deal whether it has been like mosquito scheme with a software solution.

Speaker Change: Particularly how do you think about sort of those being in your strategic roadmap or are those sort of beans in something that you would consider giving some of the puts or takes about.

Speaker Change: How you think of pork product.

Speaker Change: Our product portfolio yourself positioned right now thank you.

Speaker Change: peer companies has talked about a hyperscalability where there has been a hyperscaler scale.

Speaker Change: We made good progress on <unk> disaggregated.

Speaker Change: with a software solution, particularly, how do you think about sort of those being in your strategic roadmap, or are those sort of deals in something that you would consider given sort of the perspective about how you think your product portfolio is sort of positioned right now? Thank you.

Speaker Change: Disaggregated storage it is for high performance unstructured data use cases, and you'll hear more as we get towards in sight.

Speaker Change: As you know our disaggregated storage is third generation disaggregated storage, which is the most scalable the most high performance and of course, the richest set of features in the industry. Many clients are using us for high performance NASS.

Speaker Change: We make good progress on disaggregated storage. It is for high-performance, unstructured data use cases.

And you'll hear more as we get towards Insight.

Speaker Change: Ready for AI and other use cases, but this opens up our ability to attack. The other players in the Nash market, particularly the large other nascent incumbent Dale and so we feel good about our opportunity there with regard to cloud listen our cloud business offers compelling value.

Many clients are using us for high-performance NAS.

Speaker Change: <unk> to all three large hyper scale providers.

Speaker Change: All ready for AI and other use cases, but this opens up our ability to attack.

Speaker Change: Out that we've been in that market since 2019, which was the GE of the first.

Speaker Change: and the other players in the NAS market, particularly the large other NAS incumbent Dell.

Speaker Change: Cloud hyper scaler solution, it's a highly valuable technology to them because it allows them to bring clients to their platforms and it's a very high margin business for both us and them and so we're going to continue to drive the full stack value, we have into more and more and more use cases.

Speaker Change: And so we feel good about our opportunity there. With regard to Cloud, listen.

Speaker Change: Our cloud business offers compelling value to all three large isoscale providers. I'll point out that we've been in that market since 2019, which was the GA of the first.

Speaker Change: And we feel really good about the momentum in the Hyperscale business.

Speaker Change: You know, Cloud Hyperscaler Solution is a highly valuable technology to them because it allows them to bring clients to their platforms.

Speaker Change: Thank you.

Speaker Change: And the final question today comes from <unk> with Cleveland Research. Please go ahead.

Speaker Change: And it's a very high margin business for both us and them, and so we're going to continue to drive the full stack value we have into more and more and more use cases, and we feel really good about the momentum in the hyperscaler business that we have.

Speaker Change: Thanks for taking the question and Mike Best of luck here.

Speaker Change: Just want to wrap on any more updates on dynamics, we're seeing with <unk>.

Speaker Change: Vmware and Broadcom and customers.

Thank you.

Speaker Change: Customers contemplating new architectures converged hyper converged cloud et cetera.

Ari Serjanian: And the final question today comes from Ari Serjanian with Cleveland Research. Please go ahead.

Speaker Change: Potential.

Speaker Change: Opportunities and challenges that that might be presenting the business. Thank you.

Speaker Change: Thanks for taking the question and Mike, best of luck here. Just wanted to wrap on, you know, any more updates on dynamics we're seeing with, you know,

Speaker Change: I think we are well positioned with the Vmware.

Speaker Change: Discussions and our clients if they want to stay on Vmware and optimize their overall Vmware landscape. We have good solutions with Vmware to allow customers to do that and we've seen some of our clients start to shake that up we talked about in my prepared remarks some clients.

Speaker Change: VMware and Vodcom and customers contemplating new architectures, converged, hyper-converged, cloud, etc. and you know potential you know opportunities and challenges that might be presenting the business. Thank you.

Speaker Change: I think we are well positioned with VMware discussions in our clients.

Speaker Change: Platforming from on premise Vmware cloud using a combination of Vmware cloud offerings as well as you know.

if they want to stay on VMware and optimize.

Speaker Change: Their overall VMware landscape, we have good solutions with VMware to allow customers to do that, and we've seen some of our clients, you know, start to take that up.

Speaker Change: Modern container based architectures you have.

Speaker Change: Very good progress with some of our clients on cloud and then I think with regard to using on Prem alternatives.

We talked about it in my prepared remarks, some clients...

Speaker Change: Again as he said, we have joint solutions, with Microsoft and Red hat and others.

re-platforming from on-prem VMware to cloud.

Speaker Change: using a combination of VMware cloud offerings as well as, you know, modern container-based architectures.

Speaker Change: So I think it's a topic that will take time to clarify where customers are headed but we have good choices for them, regardless of where they're going.

Speaker Change: you know, very good progress with some of our clients on cloud. And then, I think, with regard to, you know, using on-prem alternatives...

Speaker Change: Yeah.

Thank you.

Speaker Change: We're actually able to squeeze in one more question from <unk> Singh with Oppenheimer. Please go ahead.

Speaker Change: You know, again, as we said, we have joint solutions with Microsoft and Red Hat and others. And so I think it's a topic that will take time to clarify where customers are headed, but we have good choices for them regardless of where they're going.

Singh: Yes, yes. Thank you for squeezing me in I really appreciate it and.

Speaker Change: Thanks for taking my question now.

Speaker Change: To beat a dead horse, but wanted to understand going back to the deal cash outs.

Speaker Change: What percentage of those were displacement of competitive opportunities worth is.

Speaker Change: Thank you. We're actually able to squeeze in one more question from Param Singh with Oppenheimer. Please go ahead.

Speaker Change: Our replacing your existing ACD to hybrid footprint and as you look towards your.

Speaker Change: Yeah, yeah, thank you for excluding me in that, I really appreciate it. And thanks for taking my question. Now, sorry to be a dead horse, but I wanted to understand, going back to the deal crush-outs.

Speaker Change: In the quarter had a is progressing a year.

Speaker Change: What has been the opportunity to replace cost.

What percentage of those were displacement of competitive opportunities versus

Speaker Change: Our competitors versus again your existing footprint, if you could talk about that a little bit I'd really appreciate that.

Speaker Change: There was no specific dynamic in related to the deals that pushed out that followed any pattern of competitive versus <unk>.

Speaker Change: As you look towards your sales in the quarter and as we progress through the year, what has been the opportunity to replace competitors versus, again, your existing footprint? If you could talk about that a little bit, I'd really appreciate that.

Speaker Change: Net app refresh it was really tied to customers buying in procurement.

Speaker Change: Kind of lifecycle and our lack of visibility into some of those right that we are correcting with more detailed inspection of exactly who and the customer has approved.

Thank you for watching!

Speaker Change: There was no specific dynamic in related to the deals that pushed out that followed any pattern of competitive versus

Speaker Change: And the various steps that a transaction typically it takes to get to closure. So I wouldn't comment that there was anything specific with regard to whether it was our footprint our competitors listen in every quarter. There are a huge number of transactions that we undertake some of them are refreshes of our installed footprint some of.

Speaker Change: you know, NetApp refresh was really tied to customers' buying and procurement, you know, kind of life cycle.

Speaker Change: and our lack of visibility into some of those, right, that we are correcting with more detailed inspection of exactly who in the customer has approved.

Speaker Change: Denmark competitor footprint take out I can just tell you having sold flash for so many many years and the fact that we are 43% of our installed base penetrated with flash.

Speaker Change: So I wouldn't comment that there was anything specific with regard to whether it was our footprint of competitors. Listen, in every quarter, there are a huge number of transactions that we undertake.

Speaker Change: Give you an indication that a preponderant.

Speaker Change: Part of our flash business is net new footprint or net new logos right because of it.

Speaker Change: Some of them are refreshers of our install footprint, some of them are competitor footprint takeout. I can just tell you, having sold Flash for so many, many years, and the fact that we are 43% of our install base penetrated with Flash,

Speaker Change: Displacing our installed base, we will be at a much much higher percentage of penetration today.

Speaker Change: Alright. Thanks, Thanks for that I appreciate your question.

Speaker Change: Thank you I'm going to pass it back to George for some final comments. Thank.

Speaker Change: should give you an indication that a preponderant part of our flash business is net new footprint or net new logos. Because if it was just displacing our install base, we would be at a much, much higher percentage of penetration today.

Speaker Change: Thank you Chris.

Speaker Change: While we did not perform to our standards in Q3, we remain very well positioned with customers as their supplier of choice for AI and other data driven workloads. We are taking actions to get back on track and have already seen several deals that slipped out of Q3 flows in early Q4.

All right. Thanks, Tom. I appreciate your questions.

George Kurian: Thank you. I'm going to pass it back to George for some final comments.

Speaker Change: Our portfolio has never been stronger or more tightly aligned to it organizations top priorities.

Thank you, Kris.

George Kurian: While we did not perform to our standards in Q3, we remain very well positioned with customers as their supplier of choice for AI and other data-driven workloads.

Speaker Change: We enable customers to trade data as an enterprise wide effort to stay agile and competitive in the age of AI.

George Kurian: We are taking action to get back on track, and I've already seen several deals that slipped out of Q3 close in early Q4.

Speaker Change: I am very confident in our continued ability to outgrow the market and to take share.

George Kurian: Our portfolio has never been stronger or more tightly aligned to IT organizations' top priorities.

Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

George Kurian: We enable customers to treat data as an enterprise-wide asset to stay agile and competitive in the age of AI. I am very confident in our continued ability to outgrow the market and to take share.

Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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