Q1 2026 NetApp Inc Earnings Call

August 27, 2025

Speaker #2: After today's presentation, there will be an opportunity to ask questions.

Speaker #3: Healthy customer engagement and strong interest in our unified and block-optimized all-flash storage portfolio have enabled us to displace competitive all-flash and hybrid flash footprints.

Speaker #3: This strength propelled us to the number one position in the all-flash array market for calendar Q1 2025, as reported by IDC. Let me share a couple of examples that highlight why customers are moving to NetApp.

Speaker #3: In Q1, an aerospace company selected us to replace a competitor's footprint. With Ontap-based all-flash arrays, the customer gained cutting-edge security and performance for its defense initiatives, with consistent data management across multiple data types and domains, streamlining operations and boosting productivity, while enhancing security, data protection, and resilience against cyber threats.

Operator: This event is being recorded. I would now like to turn the conference over to Kris Newton, Vice President, Investor Relations. Please go ahead.

Kris Newton: Hi, everyone. Thanks for joining us. With me today are our CEO, George Kurian, and CFO, Wissam Jabre. This call is being recorded live and will be available for replay on our website at netapp.com. During today's call, we will make forward-looking statements and projections with respect to our financial outlook and future prospects, including without limitation, our guidance for the second quarter and fiscal year 2026, our expectations regarding future revenue, profitability, and shareholder return, and other growth initiatives and strategies. These statements are subject to various risks and uncertainties, which may cause our actual results to differ materially. For more information, please refer to the documents we file from time to time with the SEC and on our website, including our most recent Form 10-K and Form 10-Q. We disclaim any obligation to update our forward-looking statements and projections.

Speaker #3: Another example from Q1 is a UK-based financial services firm that replaced a competitor's storage infrastructure with our block-optimized all-flash array. The customer selected NetApp for our enterprise data management capabilities, which helped them to secure, protect, and efficiently store sensitive client data.

Speaker #3: Our modern data infrastructure also helped the customer achieve its sustainability requirements, with a better total cost of ownership through Rackspace consolidation and more efficient power and cooling.

Speaker #3: In Q1, we delivered enhancements to each of our first-party cloud storage services, increasing their value to customers and expanding our technology leadership. Our natively integrated services enable customers to discover, deploy, and manage storage seamlessly alongside other native services.

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 #3: This integration puts us in front of customers at the point of workload design, ties to hyperscaler committed spend, benefits from hyperscaler seller incentives, and reduces procurement and operational friction.

George Kurian: Thanks, Kris. Good afternoon, everyone. Thank you for joining us. We delivered a solid start to fiscal year 2026, achieving revenue of $1.56 billion, above the midpoint of our guidance range. As anticipated, robust performance in the Americas enterprise offset year-over-year declines in the US public sector and EMEA. This success was fueled by strong demand for our all-flash offerings, first-party and marketplace cloud storage services, and AI solutions. By maintaining an unwavering focus on helping customers with their top priorities, we are driving success in a dynamic market. While we continue to observe some macro-related spending caution, the emerging enterprise AI market is driving urgency among customers to modernize data infrastructure, advance cloud transformation, and bolster cyber resiliency.

Speaker #3: In addition to a seamless customer experience, our cloud storage services deliver the performance, cost efficiency, data protection, cybersecurity, multi-protocol support, and hybrid multi-cloud capabilities of Ontaz.

Speaker #3: Our native integration and advantages over other cloud storage services are driving strong win rates in enterprise-critical workloads. Our highly differentiated first-party and marketplace cloud storage services continue to deliver rapid growth, increasing 33% from Q1 a year ago.

Speaker #3: In the first quarter, public cloud services again served as a strong engine for new customer acquisition. A leading energy company migrated from its on-premises VMware environment to VMware Cloud on AWS and FSx for NetApp Ontap.

George Kurian: The data infrastructure demands of AI applications are complex and relentless, involving the need to unify, search, and organize massive volumes of data scattered across multiple silos, on-premises, and in the cloud. Legacy architectures are increasingly becoming bottlenecks, limiting the ability to scale and adapt to new requirements. Organizations are turning to NetApp for data solutions that deliver competitive advantage and operational efficiencies. Our unified data architecture, capable of handling any data type anywhere, empowers customers to break down silos, eliminate complexity, and accelerate their AI journey. Customers seeking to build future-proof, AI-ready infrastructure choose NetApp. In Q1, we've secured a number of wins, highlighting the unique benefits of our intelligent data infrastructure platform powered by ONTAP as customers modernize their data infrastructure. For example, a leading global bank turned to NetApp to manage massive amounts of highly sensitive, structured, and unstructured data.

Speaker #3: After experiencing Ontap's rich feature set, this first-time NetApp customer decided to expand its use of FSx for AI and other workloads. A global technology provider migrated from a competitor's on-premises environment to NetApp Block Storage in the cloud for its database environment.

Speaker #3: The customer chose NetApp for our ability to seamlessly move data across multiple clouds, as well as our robust data protection capabilities. NetApp helped enhance the customer's data security, disaster recovery posture, and operational efficiency.

Speaker #3: We are already in discussions to expand their usage of our cloud services into new areas. Just as we've empowered enterprises to harness public and hybrid cloud environments, we are now helping them achieve faster time to value in their AI journeys.

Speaker #3: Enterprises are beginning to explore and deploy inferencing workloads, shifting demand from proofs of concept to transformational initiatives, which require comprehensive analysis of datasets across the enterprise.

George Kurian: The customer needed a centralized hybrid cloud data lake to be the foundational source for its AI initiatives, with stringent requirements for cyber resiliency and data protection. Our ability to deliver a secure, high-performance, scalable platform with unified management, supporting all data types and spanning both cloud and on-premises environments, made NetApp the clear choice. In Q1, our all-flash array revenue grew 6% year-over-year to $893 million and annualized run rate of $3.6 billion. Exiting Q1, 45% of systems in our installed base under active support contracts are all-flash. Healthy customer engagement and strong interest in our unified and block-optimized all-flash storage portfolio have enabled us to display competitive all-flash and hybrid flash footprint. This strength propelled us to the number one position in the all-flash array market for calendar Q1 2025, as reported by IDC.

Speaker #3: Achieving business outcomes from AI investments is our customer's and our priority. Unlike training environments, successful enterprise AI deployments require more than just performance and scale.

George Kurian: Let me share a couple of examples that highlight why customers are moving to NetApp. In Q1, an aerospace company selected us to replace a competitor's footprint. With ONTAP-based all-flash arrays, the customer gained cutting-edge security and performance for its defense initiatives, with consistent data management across multiple data types and domains, streamlining operations, boosting productivity, and enhancing security data protection and resilience against cyber threats. Another example from Q1 is a UK-based financial services firm that replaced a competitor's storage infrastructure with our block-optimized all-flash array. The customer selected NetApp for our enterprise data management capabilities, which helped them to secure, protect, and efficiently store sensitive client data. Our modern data infrastructure also helped the customer achieve its sustainability requirements, with better total cost of ownership through rack space consolidation and more efficient power and cooling.

George Kurian: In Q1, we delivered enhancements to each of our first-party cloud storage services, increasing their value to customers and expanding our technology leadership. Our natively integrated services enable customers to discover, deploy, and manage storage seamlessly alongside other native services. This integration puts us in front of customers at the point of workload design, ties to hyperscaler-committed spend, benefits from hyperscaler seller incentives, and reduces procurement and operational friction. In addition to a seamless customer experience, our cloud storage services deliver the performance, cost efficiency, data protection, cybersecurity, multi-protocol support, and hybrid multi-cloud capabilities of ONTAP. Our native integration and advantages over other cloud storage services are driving strong win rates in enterprise-critical workloads. Our highly differentiated first-party and marketplace cloud storage services continue to deliver rapid growth, increasing 33% from Q1 a year ago.

George Kurian: In the first quarter, public cloud services again served as a strong engine for new customer acquisitions. A leading energy company migrated from its on-premises VMware environment to VMware Cloud on AWS and FSx for NetApp ONTAP. After experiencing ONTAP's rich feature set, this first-time NetApp customer decided to expand its use of FSxN for AI and other workloads. A global technology provider migrated from a competitor's on-premises environment to NetApp block storage in the cloud for its database environment. The customer chose NetApp for our ability to seamlessly move data across multiple clouds, as well as our robust data protection capabilities. NetApp helped enhance the customer's data security, disaster recovery posture, and operational efficiency. We are already in discussions to expand their usage of our cloud services into new areas.

George Kurian: Just as we've empowered enterprises to harness public and hybrid cloud environments, we are now helping them achieve faster time to value in their AI journey. Enterprises are beginning to explore and deploy inferencing workloads, shifting demand from proofs of concept to transformational initiatives, which require comprehensive analysis of data sets across the enterprise. Achieving business outcomes from AI investments is our customers' and our priority. Unlike training environments, successful enterprise AI deployments require more than just performance and scale. They demand unified data management, enterprise-grade data protection, production scale reliability, hybrid multi-cloud integration, and the ability to consolidate data without compromising privacy or security. Our AI solutions are designed to truly unify enterprise data, delivering outstanding performance and scale while also seamlessly meeting all these critical requirements. This positions us exceptionally well to address the evolving needs of our customers.

Speaker #3: They demand unified data management, enterprise-grade data protection, production-scale reliability, hybrid multi-cloud integration, and the ability to consolidate data without compromising privacy or security. Our AI solutions are designed to truly unify enterprise data, delivering outstanding performance and scale while also seamlessly meeting all these critical requirements.

Speaker #3: This positions us exceptionally well to address the evolving needs of our customers. In Q1, we closed approximately $125 million in AI infrastructure and data lake modernization deals across various geographies, industries, and use cases.

George Kurian: In Q1, we closed approximately 125 AI infrastructure and data lake modernization deals across various geographies, industries, and use cases. We further expanded our AI ecosystem in Q1. We introduced the AI Pod Mini with Intel to address the cost and complexity of deploying AI at the department and team level. Additionally, we completed the NetApp reference architecture for NVIDIA Cloud Partners, providing ultra-high performance with the richness of NetApp's hyperscaler-proven data management. This collaboration allows AI service providers to deliver scalable, high-performance, enterprise-grade data services by combining ONTAP's advanced data management with NVIDIA's compute and networking platform, delivering consistent governance, multi-tenancy, and security across hybrid and multi-cloud environments. Our conversations with customers about AI infrastructure have intensified, with organizations recognizing the critical role that data plays.

Speaker #3: We further expanded our AI ecosystem in Q1. We introduced the AI Pod Mini with Intel to address the cost and complexity of deploying AI at the department and team level. Additionally, we completed the NetApp Reference Architecture for NVIDIA Cloud Partners, providing ultra-high performance with the richness of NetApp's hyperscaler-proven data management.

Speaker #3: This collaboration allows AI service providers to deliver scalable, high-performance, enterprise-grade data services by combining Ontaz's advanced data management with NVIDIA's compute and networking platforms, delivering consistent governance, multi-tenancy, and security across hybrid and multi-cloud environments.

Speaker #3: Our conversations with customers about AI infrastructure have intensified, with organizations recognizing the critical role that data plays. Notable AI wins in Q1 included a leading automaker that chose NetApp to efficiently manage the massive data volumes essential for training advanced AI models and for building an autonomous vehicle software stack.

George Kurian: Notable AI wins in Q1 included a leading automaker that chose NetApp to efficiently manage the massive data volumes essential for training advanced AI models and for building an autonomous vehicle software stack. NetApp's data governance, security, and auto-curing capabilities were key factors in this customer selecting us as the data infrastructure for their NVIDIA Superpod deployment. Another example showcases our capabilities for service providers. A large sovereign cloud provider selected NetApp for their AI-as-a-Service platform to support large LLM providers and AI development companies. Critical factors in this win included our certification with NVIDIA Cloud Partners, confirming compatibility and performance for AI workloads, and our secure multi-tenancy, delivering storage and data isolation with assured high-performance SLAs for each tenant in a shared environment. Looking ahead, we remain committed to executing our innovation roadmap and are building on a position of strength.

Speaker #3: NetApp's data governance, security, and auto-curing capabilities were key factors in this customer selecting us as the data infrastructure for their NVIDIA SuperPod deployment.

Speaker #3: Another example showcases our capabilities for service providers. A large sovereign cloud provider selected NetApp for their AI-as-a-Service platform to support large LLM providers and AI development companies.

Speaker #3: Critical factors in this win included our certification with NVIDIA Cloud Partners, confirming compatibility and performance for AI workloads, and our secure multi-tenancy, delivering storage and data isolation with assured high-performance SLAs for each tenant in a shared environment.

Speaker #3: Looking ahead, we remain committed to executing our innovation roadmap and are building on a position of strength. We've taken the number one position in the all-flash market by helping customers modernize with cutting-edge data infrastructure and industry-leading cyber resilience for storage.

George Kurian: We've taken the number one position in the all-flash market by helping customers modernize with cutting-edge data infrastructure and industry-leading cyber resilience for storage. Our highly differentiated cloud services enable hybrid and multi-cloud transformations, and we are well-positioned and growing in the emerging area of enterprise AI. I'm excited about the advantages we bring to customers in these critical areas. Our commitment to delivering customer value with the industry's best products and cloud services is unwavering. Our focused strategy is delivering share gains, and our teams are energized and executing with discipline. I hope to see you all this October at our NetApp Insight Customer Conference, where we will unveil more pioneering innovations for the era of data and intelligence. I'll now turn it over to Wissam.

Speaker #3: Our highly differentiated cloud services enable hybrid and multi-cloud transformations, and we are well positioned and growing in the emerging area of enterprise AI. I'm excited about the advantages we bring to customers in these critical areas.

Speaker #3: Our commitment to delivering customer value with the industry's best products and cloud services is unwavering. Our focus strategies are delivering share gains, and our teams are energized in executing with discipline.

Speaker #3: I hope to see you all this October at our NetApp Insight Customer Conference, where we will unveil more pioneering innovations for the era of data and intelligence.

Speaker #3: I'll now turn it over to Wissam.

Speaker #4: Thanks, George. And good afternoon, everyone. As a reminder, all numbers discussed are non-GAAP unless otherwise noted. We delivered a strong quarter, exceeding the midpoint of our revenue and EPS guidance ranges.

Wissam Jabre: Thanks, George, and good afternoon, everyone. As a reminder, all numbers discussed are non-GAAP unless otherwise noted. We delivered a strong quarter, exceeding the midpoint of our revenue and EPS guidance ranges. As expected, first-quarter revenue was driven by strength in the Americas enterprise, offsetting softness in the US public sector and EMEA. Total revenue for Q1 came in above the midpoint of our guidance at $1.56 billion, up 1% year-over-year. Excluding the divested spot business, which generated $23 million of revenue in Q1 2025, total revenue was up 3% year-on-year. The effect of foreign currency exchange rates was favorable to revenue growth by approximately one percentage point year-on-year, though it was immaterial relative to guidance. Q1 hybrid cloud revenue of $1.4 billion was up 1% year-over-year, driven by support revenue of $647 million, growing 3%, and professional services revenue of $97 million, growing 18%.

Speaker #4: As expected, first-quarter revenue was driven by strength in the Americas enterprise, offsetting softness in the U.S. public sector and EMEA. Total revenue for Q1 came in above the midpoint of our guidance at $1.56 billion, up 1% year-over-year.

Speaker #4: Excluding the divested spot business, which generated $23 million in revenue in Q1 2025, total revenue was up 3% year-on-year. The effect of foreign currency exchange rates was favorable to revenue growth by approximately 1% year-on-year.

Speaker #4: Though it was immaterial relative to guidance, Q1 hybrid cloud revenue of $1.4 billion was up 1% year-over-year, driven by support revenue of $647 million, growing 3%, and professional services revenue of $97 million, growing 18%.

Speaker #4: Keystone, our differentiated storage-as-a-service offering, which was up approximately 80% compared to the same period last year, drove the growth in professional services revenue. Product revenue of $654 million was down 2% year-over-year.

Wissam Jabre: Keystone, our differentiated storage-as-a-Service offering, which was up approximately 80% compared to the same period last year, drove the growth in professional services revenue. Product revenue of $654 million was down 2% year-over-year. Public cloud revenue of $161 million increased 1% year-over-year. Excluding spot, public cloud revenue was up 18% year-over-year. We ended Q1 with $4.53 billion in deferred revenue, up 9% year-over-year and 6% year-over-year in constant currency. Q1 remaining performance obligations were $4.94 billion, up 11%. Unbilled RPO, a key indicator of future Keystone revenue, was $415 million, up 40% year-over-year. Q1 consolidated gross margin improved by 1.6 percentage points sequentially to 71.1%. Hybrid cloud gross margin was 70%, up 1.6 percentage points sequentially, due to a favorable mix of highly profitable support revenue. Product gross margin was 54%.

Speaker #4: Public cloud revenue of $161 million increased 1% year-over-year. Excluding spot, public cloud revenue was up 18% year-over-year. We ended Q1 with $4.53 billion in deferred revenue, up 9% year-over-year and 6% year-over-year in constant currency.

Speaker #4: Q1 remaining performance obligations were $4.94 billion, up 11%. Unbilled RPO, a key indicator of future Keystone revenue, was $415 million, up 40% year-over-year. Q1 consolidated gross margin improved by 1.6% sequentially, to $71.1%.

Speaker #4: Hybrid cloud gross margin was 70%, up 1.6% sequentially, due to a favorable mix of highly profitable support revenue. Product gross margin was 54%. Our recurring support business continues to be highly profitable, with a gross margin of 92.3%, and professional services gross margin was 29.9% driven by Keystone.

Wissam Jabre: Our recurring support business continues to be highly profitable, with a gross margin of 92.3%, and professional services gross margin was 29.9%, driven by Keystone. Public cloud gross margin was 80.1%, up 80 basis points sequentially and 9 percentage points year-over-year. Our public cloud business was at the high end of the 75 to 80% long-term target range in Q1. We are confident that public cloud gross margin will continue to improve and are increasing the long-term gross margin target range for this business to 80 to 85%. Operating expenses of $707 million were down 1% year-over-year, despite the unfavorable impact of foreign currency exchange rates, and flat from Q4 2025. Q1 operating profit was $401 million, operating margin was 25.7%, and diluted EPS was $1.55, all aligned with our expectations.

Speaker #4: Public cloud gross margin was 80.1%, up 80 basis points sequentially and 9% year-over-year. Our public cloud business was at the high end of the 75% to 80% long-term target range in Q1.

Speaker #4: We are confident that public cloud gross margin will continue to improve, and our increasing long-term gross margin target range for this business is $80 to $85%.

Speaker #4: Operating expenses of $770 million were down 1% year-over-year, despite the unfavorable impact of foreign currency exchange rates, and flat from Q4 2025. Q1 operating profit was $401 million, operating margin was 25.7%, and diluted EPS was $1.55, all aligned with our expectations.

Speaker #4: We had a strong cash quarter with Q1 records for both cash flow from operations of $673 million and free cash flow of $620 million.

Wissam Jabre: We had a strong cash quarter with Q1 records for both cash flow from operations of $673 million and free cash flow of $620 million. This was mainly driven by working capital improvement. During the first quarter, we redeemed the senior notes due in June 2025 for $757 million, which comprised principal and interest. We also returned $404 million of capital to our shareholders, with $300 million in share repurchases and $104 million paid in dividends of $0.52 per share. Q1 diluted share count of 203 million was down 9 million shares, or 4% year-over-year. Our balance sheet remains strong. We ended the quarter with $3.3 billion in cash and short-term investments and $2.5 billion in total debt, resulting in a net cash position of approximately $840 million. Now turning to guidance, starting with Q2. We expect revenue to be $1.69 billion, plus or minus $75 million.

Speaker #4: This was mainly driven by working capital improvement. During the first quarter, we redeemed the senior notes due in June 2025 for $757 million, which comprised principal and interest.

Speaker #4: We also returned $440 million of capital to our shareholders, with $300 million in share repurchases and $104 million paid in dividends of $0.52 per share.

Speaker #4: Q1 diluted share count of 203 million was down 9 million shares, or 4%, year-over-year. Our balance sheet remains strong. We ended the quarter with $3.3 billion in cash and short-term investments.

Speaker #4: And $2.5 billion in total debt, resulting in a net cash position of approximately $840 million. Now turning to guidance, starting with Q2. We expect revenue to be $1.69 billion, plus or minus $75 million.

Speaker #4: This implies 2% growth year-over-year at the midpoint. Excluding the divested spot business from the year-ago comparison, our revenue guidance implies 3% growth. We expect Q2 consolidated gross margin to be 71% plus or minus 0.5%, and operating margin to be in the range of $28 million to $29 million.

Wissam Jabre: This implies 2% growth year-over-year at the midpoint. Excluding the divested spot business from the year-ago comparison, our revenue guidance implies 3% growth. We expect Q2 consolidated gross margin to be 71%, plus or minus 0.5%, and operating margin to be in the range of 28% to 29%. Diluted EPS is expected to be between $1.84 and $1.94, with a midpoint of $1.89. Turning now to full year 2026. We are pleased with a solid start to the year and remain confident in our strong portfolio, as well as our ability to execute in a dynamic environment. We are reiterating our full-year guidance and expect fiscal year 2026 total revenue to be between $6.625 billion and $6.875 billion, which at the $6.75 billion midpoint reflects 3% growth year-over-year. Excluding spot, revenue guidance implies 4% growth year-over-year.

Speaker #4: Diluted EPS is expected to be between $1.84 and $1.94, with a midpoint of $1.89. Turning now to full-year 2026, we are pleased with a solid start to the year and remain confident in our strong portfolio as well as our ability to execute in a dynamic environment.

Speaker #4: We are reiterating our full-year guidance and expect fiscal year 2026 total revenue to be between $6.625 billion and $6.875 billion, which, at the $6.75 billion midpoint, reflects 3% growth year-over-year.

Speaker #4: Excluding spot, revenue guidance implies 4% growth year-over-year. We expect diluted EPS in the range of $7.60 to $7.90, for a midpoint of $7.75. In closing, as we look to the remainder of fiscal year 2026, we are focused on executing our strategy, capitalizing on our growing opportunities, enhancing profitability and free cash flow, and consistently delivering value to our customers and shareholders.

Wissam Jabre: We expect diluted EPS in the range of $7.60 to $7.90 for a midpoint of $7.75. In closing, as we look to the remainder of fiscal year 2026, we are focused on executing our strategy, capitalizing on our growing opportunities, enhancing profitability and free cash flow, and consistently delivering value to our customers and shareholders. I'll now turn the call over to Kris for Q&A.

Speaker #4: I'll now turn the call over to Chris for Q&A.

Speaker #1: Thanks, Wissam. Operator, let's begin the Q&A.

Kris Newton: Thanks, Wissam. Operator, let's begin the Q&A.

Speaker #5: Our first question comes from the line of Chris Sankar with TD Cohen. Please go ahead.

Operator: Our first question comes from the line of Kris Sankar with TD Cohen. Please go ahead.

Speaker #3: Yeah, hi. Thanks for taking my question. Wissam, the first question is for you. Your all-flash revenue growth has decelerated from double digits to just 5% now.

Krish Sankar: Yeah, hi. Thanks for taking my question. Wissam, the first question is for you. Your all-flash revenue growth has decelerated from double digits to just 5% now. Is it pricing or demand or something else? And along the same path, the product growth margins are also down, even when compared to similar all-flash revenue levels around $900 million. Is this due to non-pricing or what is driving it and how we think about product growth models going forward? And then add a long-term follow-up for George.

Speaker #3: Is it pricing, or demand, or something else? And along the same path, the product gross margins are also down, even when compared to similar all-flash revenue levels around $900 million.

Speaker #3: Is this due to NAND pricing, or what is driving it? And how do you think about product gross margins going forward? And then I had a long-term follow-up for George.

Speaker #4: Yeah, thanks, Chris. Look, the dynamics that drove the all-flash revenue were very much what we had said earlier in the quarter when we guided. They are very much similar to what we also said in our prepared remarks.

Wissam Jabre: Yeah, thanks, Kris. Look, the dynamics that drove the all-flash revenue were very much what we had said earlier in the quarter when we guided. They're very much similar to what we also said in our prepared remarks. You know, we did experience some softness in the US public sector and to a much lesser extent EMEA. While it was offset by the Americas, that sort of drove the dynamics on seeing all-flash growing slightly lower than previous quarters. But this was already sort of anticipated by us. What I would point out is, you know, when you look at fiscal '25, all-flash grew by mid-teens, and we just saw some dynamics in Q1. We anticipate this to basically not continue for the rest of the year.

Speaker #4: You know, we did experience some softness in the U.S. public sector and, to a much lesser extent, EMEA. While it was offset by the Americas, that sort of drove the dynamics on seeing all-flash growing slightly lower than previous quarters.

Speaker #4: But this was already sort of anticipated by us. What I would point out is, you know, when you look at fiscal '25, all-flash grew by mid-teens, and we just saw some dynamics in Q1. We anticipate this to basically not continue for the rest of the year.

Speaker #4: When I look at the second part of your question in relation to the product gross margin, we had a few dynamics also on the product gross margin.

Wissam Jabre: When I look at the second part of your question in relation to the product growth margin, we had a few dynamics also on the product growth margin. If you look at it sequentially, we did see costs improve marginally, but we saw mix being unfavorable. We had anticipated a slightly richer mix of high-performance flash versus capacity flash. So that sort of drove that. But when you look at the product margin on a year-over-year basis, it's mostly the vast majority of it is cost-related. You know, we did see a much bigger uptick in flash cost in Q1 '26 versus Q1 '25. So I would say more than 5 percentage points of the 5.9% were driven by the cost dynamic. The rest is very much product and customer mix. And if I look at the rest of the year, we expect product margin to improve from here.

Speaker #4: If you look at it sequentially, we did see costs improve marginally, but we saw mixed results that were unfavorable. We had anticipated a slightly richer mix of high-performance flash versus capacity flash.

Speaker #4: So that sort of drove that. But when you look at the product margin on a year-over-year basis, the vast majority of it is cost-related.

Speaker #4: You know, we did see a much bigger uptick in flash costs in Q1 2026 versus Q1 2025. So, I would say more than 5% of the $5.9% was driven by the cost dynamic.

Speaker #4: The rest is very much product and customer mix. If I look at the rest of the year, we expect product margin to improve from here.

Speaker #4: I expect the product margin to continue to improve gradually for the rest of the year. We should be operating in our long-term range, which is mid to high 50% for the rest of the year.

Wissam Jabre: I expect the product margin to continue to improve gradually for the rest of the year. We should be operating in our long-term range, which is mid to high 50% for the rest of the year. And so that's where I think Q1 was very much the low point in terms of the product margin.

Speaker #4: And so that's where I think Q1 was very much the low point in terms of the product margin.

Speaker #3: Gotcha. Thanks for that; it's very helpful to hear that. And, George, I had a long-term question for you. It's kind of very encouraging to see enterprises adopting AI and deploying inference workloads.

Krish Sankar: Got it. Thanks, Wissam. It's very helpful to hear that. And George, I had like a long-term question for you. It's kind of very encouraging to see enterprises adopting AI and deploying inference workloads. It seems like they're gone from proof of concept to production. But can you give a sense of some of the architecture these customers are formulating? Are they buying more storage or more capacity or more software attached? Any color there on enterprise adoption would be helpful. Thanks a lot, John.

Speaker #3: It seems like they're gone from proof of concept to production. But can you give a sense of some of the architecture these customers are following?

Speaker #3: Are they buying more storage or more capacity? Or more software attached? Any color there on enterprise adoption would be helpful. Thanks a lot, George.

Speaker #4: We saw three types of wins in the quarter. As you know, we noted in our prepared remarks that we had over $125 million in wins for AI in the quarter.

George Kurian: We saw three types of wins in the quarter. As you know, we noted in our prepared remarks, we had north of 125 wins for AI in the quarter as compared to 50 a year ago, so strong momentum. The three types of use cases were data lakes, which was about 20% of the total number. There was training, which is either fine-tuning a large model or, you know, taking a smaller model and customizing it for your enterprise or building a sovereign cloud model for model training. We saw that was about 45% of the total number, and the remainder were RAG and agentic AI use cases. For data lakes, it's typically a combination of flash-based storage for the hot tables and hot data and a large archive with object storage. For the other two, they're typically all-flash storage.

Speaker #4: As compared to 50 a year ago, there is strong momentum. The three types of use cases were data lakes, which accounted for about 20% of the total number.

I think we were still waiting for budgets to be deployed to agencies. We saw changes in the budgets allocated to different types of agencies, and we have moved resources to where the budgets are. Q2 is typically a strong budget spending quarter for us in the public sector, and it's a smaller part of our overall business in the second half of the fiscal year. In Europe, we executed well; you know, in most countries, we saw softness in the UK and some parts of the large enterprise in Germany. But overall, you know, a lot of our European teams executed well. In Asia-Pacific, again, outside of Australia and New Zealand, our teams have performed well. So the thoughts of weakness were localized but pronounced in those areas.

Meaning budgets to be deployed to agencies. We saw a change in the budgets allocated to different types of agencies that we have moved resources to, where the budgets in Q2 are typically a strong budget spending quarter for us in the public sector. It's a smaller part of our overall business in the second half of the fiscal year. In Europe, we executed well, you know, in most countries. We saw softness in the UK and a small dip in some parts of the large enterprise in Germany. But overall, you know, a lot of our European teams executed well. In Asia Pacific, again outside of Australia and New Zealand, our teams have performed well. So the thoughts of weakness were localized but pronounced in those areas.

Speaker #4: There was training which is either fine-tuning a large model or, you know, taking a smaller model and customizing it for your enterprise, or building a sovereign cloud model.

Speaker #4: For model training, we saw that it was about 45% of the total number. The remainder consisted of RAG and agentic AI use cases. For data lakes, it's typically a combination of flash-based storage for the hot tables and hot data, and a large archive with object storage.

I'm super helpful. Thank you. Thank you for that George. And then, you know, maybe with some, um, great great to great to work together again. Um, you know, I would just love to to better understand is as you think about, um, the god, the gross margin guide for your public Cloud business. It's now 80 to 85 versus the 75 to 80 before. Can can what has changed that that influences, um, that view and and clearly you, you see that as sustainable. But if you could, if you could just unpackage that a little bit to help us understand why why that continues to improve and what what what influence that change that would be helpful. Thanks so much.

Okay. Um, super helpful. Thank you. Thank you for that George. And then, you know, maybe with some um, great great to great to work together again. Um, you know, I would just love to to better understand as as you think about um the guy, the gross margin guide for your public Cloud business. It's now 80 to 85 versus the 75 to 80 before that kind of what has changed that that influences um that view and and clearly you you see that it is sustainable. But if you could, if you could just unpack that a little bit to help us understand why that continues to improve and what what what influence that change that would be helpful. Thanks so much.

Speaker #4: For the other two, they are typically all-flash storage.

Yeah, thanks, Eric, and good to hear your voice.

Speaker #3: Got it. Thank you very much, George. Very helpful.

Krish Sankar: Got it. Thank you very much, George. Very helpful.

Speaker #4: Thank you.

George Kurian: Thank you.

Speaker #5: And our next question comes from the line of Mahdi Hasini with Yohana International Group. Please.

Operator: And our next question comes from the line of Mari Hassini with Festuhana International Group. Please.

Speaker #3: Yes, thanks for taking my question. Two follow-ups for me. First, George, does the availability of $128 terabyte QLC-based NAND impact your ability to provide search solutions, especially for the AI application?

Mari Hassini: Yes. Thanks for taking my question. Two follow-ups from me. First, George, does the availability of 128 terabyte QMC-based NAND impact your ability to provide a storage solution, especially for the AI application? And then number two, how should we think about the seasonality into the January quarter? I'm not asking for a guide, but given that it perhaps compares a bit easy. So should seasonality still be a factor looking into the January quarter? Thank you.

Speaker #3: And then, number two, how should we think about the seasonality into the January quarter? I'm not asking for a guide, but given the perhaps comparison with an easy, should seasonality still be a factor looking into the January quarter?

With it. Uh, we look the the business itself has been improving and gross margins very steadily and actually at a very fast pace, uh, and this last quarter, we just hit the high end of the prior uh, long term target range. And looking at where the business is headed that we feel comfortable that 80 to 85% is a good target range, for it going forward. And that's why we we erased it, um, uh, the, uh, the few of the, the, the few things I would say, uh, that, uh, contribute to that are 1. We're seeing a, a depreciation roll off for some of the initial, uh, installed the hardware. So that sort of helps with the margin. In addition, there's more

Yeah, thanks Eric and good to hear your voice look forward to working together. Um, yeah, on the public Cloud front with it. Uh, we look the the business itself has been improving and gross margin, very steadily and actually at a very fast pace, uh, and this past quarter, we just hit the high end of the prior, uh, long-term target range. And looking at where the business is headed, we feel comfortable that 80 to 85% is a good target range, for it going forward and that's why we we erased it, um, uh, the, uh, the few, the, the, the few things I would say, uh, that, uh, contribute to that are 1. We're seeing a, a depreciation roll off for some of the initial, uh, installed the hardware. So that sort of helps with the margin. In addition, there's more software content in the, in the revenue. And so, both of these Dynamics, uh, will help sort of continue to improve.

Speaker #3: Thank you.

Speaker #4: On the first question, listen, we have a broad range of NAND technologies available to customers, all the way from 15 terabyte, super high-performance drives to 60 terabyte, you know, QLC drives.

George Kurian: On the first question, listen, we have a broad range of NAND technologies available to customers, all the way from 15-terabyte super high-performance drives to 60-terabyte QLC drives. And we are working on, you know, bigger drive form factors. So we don't feel like we are gated on any of those. I think, as I said in my previous remark, we use the right configuration for whether it's a really high-performance use case or more of a capacity-based use case or an archival use case. With regard to the second question, the seasonality, listen, we are very confident of the outlook for the year. We are one quarter in. We performed better than we expected at the start of the quarter. And we saw strength, particularly in the Americas commercial business and in several other parts of the world.

More software content in the, in the revenue. And so, both of these Dynamics, uh, will help sort of continue to improve the uh the gross margin going forward. Um, as we think uh to the rest of the year and I think I said that also on our poll last quarter. We anticipate uh public Cloud gross margin to continue to gradually improve from here.

The uh the gross margin going forward. Um as we think uh to the rest of the year and I think I said that also on our poll last quarter. We anticipate uh public Cloud gross margin to continue to gradually improve from here.

And so, I hope this helps unpack for you.

And so, hope this helps unpack it for you.

Yes. Thank you, guys, and best of luck.

Yes, thank you, guys, and our best of luck.

Speaker #4: And we are working on, you know, a bigger drive form factor. So we don't feel like we are gated on any of those. I think, as I said in my previous remark, we use the right configuration for whether it's a really high-performance use case or more of a capacity-based use case.

Thank you. Thanks Eric.

Our next question comes from the line of semic chattery with JP Morgan.

This question comes from the line of semic chattery with JP Morgan.

Speaker #4: Or an archival use case. With regard to the second question, the seasonality, listen, we are very confident of the outlook for the year. We are one quarter in.

Speaker #4: We performed better than we expected at the start of the quarter, and we saw strength, particularly in the Americas commercial business, as well as in several other parts of the world.

Speaker #4: I think as we look through the rest of the year, we're focused on executing one quarter at a time. There's still a decent amount of uncertainty in the external landscape.

George Kurian: I think as we look through the rest of the year, we're focused on executing at a quarter at a time. There's still a decent amount of uncertainty outside in the external landscape. And we'll guide the year as we see visibility to the full year. So we feel good at the end of one quarter. And we'll tell you more at the end of the second quarter.

Hi. Um, thank you for taking my question. Um, I guess George is following up on your earlier comments about the activity or engagement you're seeing on the AI side. With your sort of first couple of quarters of the year, you've settled into this nice run rate of AI wins. Um, if you can give any color in terms of the magnitude or size of those deals with your customers. And should we expect that consistent level of new wins as you go through the year, or is the pipeline telling you that maybe AI wins do taper off as you go through the rest of this fiscal year? Any color on that on both of those fronts, please? And I have a follow-up.

Hi. Um, thanks for taking my question. Um, I guess George is following up on your earlier comments about the activity or engagement you're seeing on the AI side. With your sort of first couple of quarters of the year, you've settled into this sort of nice run rate of AI where, um, if you can give any color in terms of the magnitude or size of those, um, deals with your customers. And should we expect that consistent level of new wins as you go through the year, or is the pipeline telling you that maybe AI wins will access it as you go through the rest of this fiscal year? Any color on that on both of those front pieces, and I have a follow-up?

Speaker #4: And we'll guide the year as we see visibility to the full year. So we feel good at the end of one quarter, and we'll tell you more at the end of the second quarter.

Speaker #3: Thank you.

Krish Sankar: Thank you.

The winds are quite wide. You could see smaller environments being stood up, like an AI Center of Excellence, proof of concept for inferencing or RAG, and then it could be much larger scale. For example, we have very large-scale RAG environments in some of the large financial services firms.

Speaker #5: Our next question comes from Eric Woodring with Morgan Stanley.

Operator: Our next question comes from Eric Woodring with Morgan Stanley.

Speaker #6: Hey, guys. Thank you very much for taking my questions, and I'm looking forward to working together with you. Maybe just to start, George, I’d love to get your viewpoint as you kind of have conversations with your customers or look at your pipeline.

Speaker 8: Hey, guys. Thank you very much for taking my questions and looking forward to working together with you guys. Maybe just to start, George, I'd love to get your viewpoints as you kind of have conversations with your customers or look at your pipeline. When you think about strength in America's commercial versus weakness in public and EMEA, is that expected to persist? Do you see any of your kind of end-market customers maybe inflecting in the second half? For example, could SMB get better in the second half here in America? We'd just love to know kind of underlying that guide by end-market, how you're thinking about these strengths or weaknesses or accelerations and decelerations of these different end-markets. And then a quick follow-up. Thanks.

Speaker #6: When you think about strengths in America's commercial versus weaknesses in public and EMEA, is that expected to persist? Do you see any of your end market customers maybe inflecting in the second half? For example, could SMB get better in the second half here in America?

Speaker #6: I would just love to know what kind of underlying trends you're seeing by end market. How are you thinking about the strengths or weaknesses, or the accelerations and decelerations of these different end markets?

So, you know, it's a wide range. I think we are excited about the fact that we have more than double the number of AI wins year on year. We are continuing to engage more clients around the world. We are bringing more technologies to that part of the market as we head into our November Insight conference. We'll tell you more. We should expect that to grow, you know, through the course of the year at a steady clip.

Speaker #6: And then a quick follow-up. Thanks.

As well as we have won some big model training environments, which are very large so that you can put a lot of capacity against a large number of GPUs. Um, we are also beginning to have some significant wins in the AI as a Service provider. So this, you know, it's a wide range. I think we are excited about the fact that we have more than double the number of AI wins year on year. We are continuing to engage more clients around the world, and we are bringing more technologies to that part of the market as we head into our, you know, November Insight conference. And we'll tell you more. We should expect that to grow, you know, through the course of the year at a steady clip.

Speaker #4: We had a really strong quarter in the Americas, broadly defined as not public sector. This included the largest enterprises; it included the mid-market customer segment as well.

George Kurian: We had a really strong quarter in the Americas, broadly defined as not public sector. This included the largest enterprises. It included, you know, the mid-market customer segment as well. Excellent execution, strong demand patterns, and a large number of competitive wins. The US public sector was very weak in the quarter. I think we were still awaiting budgets to be deployed to agencies. We saw a change in the budgets allocated to different types of agencies, and we have moved resources to where the budgets are. Q2 is typically a strong budget spending quarter for the US public sector, and it's a smaller part of our overall business in the second half of the fiscal year. In Europe, we executed well. You know, in most countries, we saw softness in UKI and some parts of the large enterprise in Germany.

Speaker #4: Excellent execution, strong demand patterns, and a large number of competitive wins. The U.S. public sector was very weak in the quarter. I think we were still awaiting budgets to be deployed to agencies.

Got it, got it. And then um just on the guide for the full year here. Um I mean it does imply. If you grow 3%, export, and uh fiscal 2 q u, you do have a backup that needs to be around mid single digit growth. Um, and I think last quarter, you did reference your working with some customers on large data, center modernization deals as well. So, maybe what's the visibility in terms of that expiration from the first half into the second half at this point and Does it include any, uh, large deals that are in the pipeline to sort of come through, to enable you to activate that more to that modest number. Thank you.

Just on the guide for the full year here. Um, I mean, it does imply if you grow 3%, export, and, uh, fiscal Q2, um, you do have a backup that needs to be around mid-single-digit growth. Um, and I think last quarter you did reference you're working with some customers on large data center modernization deals as well. So, maybe what's the visibility in terms of that expiration from the first half into the second half at this point? And does it include any, uh, large deals in the pipeline to sort of come through, to enable you to activate that more to that model number? Thank you.

We feel good about the performance we made in the, you know, prior call. We are working on a number of different opportunities. I think, uh, Swami, we are one quarter in, in a pretty dynamic environment.

We feel good about the performance we made in the prior call. We are working a number of different opportunities. I think, uh, Swami, we have 1 quarter in a pretty dynamic environment.

George Kurian: But overall, you know, a lot of our European teams executed well. And in Asia-Pacific, again, outside of Australia and New Zealand, our teams have performed well. So the spots of weakness were localized but pronounced in those areas.

We want to take it a quarter at a time. And, you know, should we have another strong quarter? We'll tell you more about the full year at the end of Q2. So I feel good about the year; all of the things that we're working on, we're executing well. You know, we had the softness in the U.S. public sector at the start of the year. We're going to see a stronger second quarter through to the rest of the year. The headwind from USPS continues to be much less.

We want to take it a quarter at a time and, you know, should we have another strong quarter? We'll tell you more about the full year at the end of Q2. So I feel good about the year; all of the things that we're working on, we're executing well. You know, we had the softness in the U.S. public sector to start the year. We're going to see a second quarter through, and then the rest of the year, the headwind from USPS continues to be much less.

Speaker 8: Okay. Super helpful. Thank you. Thank you for that, George. And then, you know, maybe Wissam, great to work together again. You know, I would just love to better understand, as you think about the gross margin guide for your public cloud business, it's now 80 to 85 versus the 75 to 80 before. Kind of what has changed that influences that view? And clearly, you see that as sustainable. But if you could just unpackage that a little bit to help us understand why that continues to improve and what influenced that change, that would be helpful. Thanks so much.

You know, in terms of large deals, listen, we've had several large deals this quarter. We continue to work on several more deals through the course of the year, and we feel confident about those.

You know, in terms of large deals, listen, we've had several large deals this quarter. We continue to work several more deals through the course of the year, and we feel confident about those.

Okay, great. Thank you. Thanks for taking the questions.

Okay, great. Thank you. Thanks for making the questions.

Thank you. Next question, is from Whimsy Moen with Bank of America.

Thank you. Next question is from Whimsy Moen with Bank of America.

Wissam Jabre: Yeah, thanks, Eric. And good to hear your voice. Look forward to working together. Yeah, on the public cloud front, we did look, the business itself has been improving in gross margin very steadily and actually at a very fast pace. And this past quarter, we just hit the high end of the prior long-term target range. And looking at where the business is headed, we feel comfortable that 80 to 85 percent is a good target range for it going forward. And that's why we raised it. The few things I would say that contribute to that are, one, we're seeing a depreciation rollout for some of the initial installed hardware. So that sort of helps with the margin. In addition, there's more software content in the revenue. And so both of these dynamics will help sort of continue to improve the gross margin going forward.

Ah, yes, thank you. Um, C. Can you just talk a little bit about some of the variables? In that course, margin guide for Q2 that might push you lower on a quarter and quarter basis. I mean, you got it 70.5 to 71.5, which at the lower end would be 60, bits lower. But if you expect product growth, margins up quarter on quarter and you've just taken up your range for public Cloud, gross, margins and supports pretty stable. What, how, how do you even get to sequentially down? Uh, gross margins in that range or, or, is there anything else that I'm not not taking into account?

Ah, yes, thank you. Um can you just talk a little bit about some of the variables in that gross margin guide for Q2 that might push you lower on a quarter and quarter basis? I mean, you got it 70.5 to 71.5 which at the low end would be 60, bibs lower, but if you expect product growth, margins up quarter on quarter and you've just taken up your range for public Cloud, gross, margins and supports, pretty stable. What, how, how, how do you even get to sequentially down? Uh, gross margins in that range or, or, is there anything else that I'm not not taking into account?

Hey, thanks, Wamsi. Just to clarify the uh, uh,

Hey, thanks, Wi. Just to clarify the, uh, uh,

We ended Q1 with a gross margin of 71.1%, and we're guiding, basically, a flattish. I think it's like 10.

Think of the various Dynamics.

Think of the various dynamics.

uh,

Wissam Jabre: As we think to the rest of the year, and I think I said that also on our call last quarter, we anticipate the public cloud gross margin to continue to gradually improve from here. And so I hope this helps unpackage for you.

Speaker 8: Yeah. Thank you, guys, and best of luck.

Wissam Jabre: Thank you. Thanks, Eric.

Operator: Our next question comes from the line of Samek Chatterjee with JPMorgan.

Speaker 8: Hi, Tom. Thanks for taking my question. I guess, George, just following up on your comments about the activity or engagement you're seeing on the AI side. With your sort of first couple of quarters of the year, you've settled into this sort of nice run rate of AI wins. If you can give any color in terms of the magnitude or size of those deals with your customers, and should we expect that consistent level of new wins as you go through the year, or is the pipeline telling you that maybe AI wins do escalate as you go through the rest of this fiscal year? Any color on that on both of those fronts? Please and I will follow.

We expect, uh, the the, um, I would say, uh, directionally, we expect the margins for the various components to improve, uh, in this play, Stay in line or to improve from here here. But then when you look at the mix of Revenue, uh, product, typically, product revenue is is a bigger, uh, component when it gets to Q2 and sort of, uh, with the mix of Revenue itself. You you'd expect some headwinds as well. And so, there isn't anything fundamentally uh, problematic. Actually we're optimistic. And we're confident that the that the uh, that margins, as I said for the various components of the revenue should be uh, flat to up from here. It's really the mix of the uh, of the revenue itself.

we expect, uh, the the, um, I would say, uh, they're actually, we expect the margins for the various components to improve, uh, in this play, Stay in line or to improve from here here. But then when you look at the mix of Revenue, uh, product, typically, product revenue is is a bigger, uh, component when it gets to Q2. And so of, uh, with the mix of Revenue itself, you you'd expect some headwinds as well. And so, there isn't anything fundamentally uh, problematic. Actually we're optimistic. And we're confident that the that the uh, that margins, as I said for the various components of the revenue should be, uh, flat to up from here. It's really the mix of the uh, of the revenue itself.

If that helps.

Yeah, they want the... I wouldn't read too much into the sequential. I think the big moving parts within Q1 and Q2 is really the percentage of the total revenue that's product.

If that happens, yeah, I think I wouldn't read too much into the sequential. I think the big moving parts within Q1 and Q2 is really the percentage of the total revenue that's product.

George Kurian: The wins are quite wide. You could see smaller environments being stood up like an AI center of excellent proof of concept for inferencing or RAG. And then it could be much larger scale. For example, we have very large-scale RAG environments in some of the large financial services firms, as well as we have won some big model training environments, which are very large so that you can put a lot of capacity against a large number of GPUs. We are also beginning to have some significant wins in the AI as a service provider. So this, you know, it's a wide range. I think we are excited about the fact that we have more than double the number of AI wins year on year. We are continuing to engage more clients around the world.

In Q1, it was lower, so Q2 will probably be higher. So that's where I can get, right?

In Q1, it was lower. And so, Q2 it will probably be higher, so that's why I can get it right.

Okay, that's helpful and then um just from operating leverage, right? If I if I just think about this roughly flattish, um, gross margins but but quote unquote are your operating margin is up. Maybe similar to how it was last year, so your operating Leverage is improving. With last year, you had gross margin improvement too, so should we expect that operating leverage benefit to continue in the back half of the year as well? Thank you.

Okay, that's helpful and then um just from operating leverage, right? If I if I just think about this roughly flattish, um, gross margins but but quote unquote, your operating margin is up. Maybe similar to how it was last year, so your operating Leverage is improving. With last year, you had gross margin improvement too, so should we expect that operating leverage benefit to continue in the back half of the year as well? Thank you.

it was the, um,

yeah, it was the um,

operating leverage to continue in the back half of

The year and the reason we're, the, the probably the only dynamic you're seeing with respect to Q2 and operating leverage is that the gross margin differential. If you recall, last year, product margin was in the 60% range, much higher than what we've experienced the of Link.

Last year, product margin was in the 60% range and much higher than what we've experienced of late.

Okay. Thanks Visa.

You're welcome.

George Kurian: We are bringing more technologies to that part of the market as we head into our, you know, November insider conference. And we'll tell you more. We should expect that to grow, you know, through the course of the year at a steady clip.

Your next question comes from the line of Tim Long with Barclays.

Your next question comes from the line of Kim Long with Barclays.

Speaker 8: Got it. Got it. And then just on the guide for the full year here, I mean, it does imply if you grow 3% export in fiscal 2Q, you do have a backup that needs to be around mid-single-digit growth. And I think last quarter you did reference you're working with some customers on large data center modernization deals as well. So maybe what's the visibility in terms of that acceleration from the first half into the second half at this point? And does it include any large deals that are in the pipeline to sort of come through to enable you to accelerate that to that modest number? Thank you.

Thank you. Um, to, to, as well, if I can. Uh first. Um, maybe just talk about the comment about the install date. 45% of the systems on all flash. Um, could you talk a little bit about, um, you know, what NetApp's doing to try to convert, uh, those the rest of that install base and what...

George Kurian: We feel good about the comments we made in the, you know, prior call. We are working on a number of different opportunities. I think, Samek, we are one quarter in in a pretty dynamic environment. We want to take it a quarter at a time. And, you know, should we have another strong quarter, we'll tell you more about the full year at the end of Q2. So I feel good about the year. All of the things that we're working on, we're executing well. You know, we've, you know, had the softness in the US public sector to start the year. We're going to see a second quarter through, and then the rest of the year, the headwind from USPS continues to be much less. You know, in terms of large deals, listen, we've had several large deals this quarter.

That would mean you know the financials, and you know, uh, margins, revenue opportunity, as well as the competition you would see there. And then secondly, if you could just touch on Keystone and another very impressive quarter, I get a small, um, but could you just talk a little bit about what you're expecting mid- to long-term from Keystone, given how successful, um, you know, the public cloud business has been around Carl areas? And what Keystone could be, uh, could be on-trend business. Thank you.

Thank you. Um, to to, as well, if I can. Uh first. Um, maybe just talk about the the comment about the install base, 45% of the systems on all flash. Um, could you talk a little bit about um you know what, net app's doing to uh try to convert uh those the the rest of that install base and what that would mean for you know financials and you know uh margins Revenue opportunity as well as the competition you would see there and then secondly if you could just touch on Keystone and other very impressive quarter, I get a small um but could you just talk a little bit about what you're expecting, the mid long term from Keystone, given how successful um, you know, the public Cloud. Um, business has been around Carl areas and what what Keystone could be, uh, to be on trending business. Thank you.

Yeah, thank you for your questions.

George Kurian: We continue to work several more deals through the course of the year. And we'll, you know, we feel confident about those.

Speaker 8: Okay. Great. Thank you. Thanks for taking the questions.

Wissam Jabre: Thank you.

Operator: Next question is from Wenzie Mohan with Bank of America.

The Keystone question first Keystone has done. Well, it's an as a service model, there are more and more clients who are, uh, you know, who are comfortable with and as a service model and so, uh, they are, you know, probably looking to harmonize their it operating model for infrastructure to more of an answer service. We also see clients who are either doing transitional work. Going from 1 data center to another or going from a data center to the cloud where they want to have a bridge between our on-prem technology and our Cloud technology that will buy a keystone service for the transitional period. So I'm excited about that. We are also using Keystone to help in competitive situations.

Yeah, thank you for your questions on, you know, with regard to, I'll take, uh, the Keystone question first Keystone has done. Well, it's an as a service model, there are more and more clients who are, uh, you know, who are comfortable with an as a service model and so, uh, they are, you know, probably looking to harmonize their it operating model for infrastructure to more of an as a service. We also see clients who are either doing transitional work. Going from 1 data center to another or going from a data center to the cloud where they want to have a bridge between our on-prem technology and our Cloud technology that will buy a keystone service for the transitional period. So I'm excited about that. We are also using Keystone to help in competitive situations, where the customer may have.

Speaker 8: Hi, yes. Thank you. Can you just talk a little bit about some of the variables in that gross margin guide for Q2 that might push you lower on a quarter-on-quarter basis? I mean, you guide at 70.5 to 71.5, which at the low end would be 60 bips lower. But if you expect product gross margins up quarter on quarter, and you've just taken up your range for public cloud gross margins and support's pretty stable, how do we even get to sequentially down gross margins in that range? Or is there anything else that I'm not taking into account?

Where the customer may have a capital commitment in another you know, vendors technology and wants to you know kind of not have to pay 2 Capital Investments at the same time. Ultimately our view is we give customers choice and we're not going to try to force them into 1 model but we are going to continue to make Keystone as ever better offering just like we make our products.

A capital commitment in another vendor's technology means that they want to not have to pay two capital investments at the same time. Ultimately, our view is that we give customers choice, and we're not going to try to force them into one model. But we are going to continue to make Keystone an ever better offering, just like we make our products. With regard to your other question about the install date, listen, we have a...

Wissam Jabre: Hey, thanks, Wenzie. Just to clarify, we ended Q1 with a gross margin of 71.1%. And we're guiding basically a flattish, I think, it's like 10. Think of the various dynamics. We expect the, I would say, directionally, we expect the margins for the various components to improve, either stay in line or to improve from here. But then when you look at the mix of revenue, typically, product revenue is a bigger component when it gets to Q2. And sort of with the mix of revenue itself, you'd expect some headwinds as well. And so there isn't anything fundamentally problematic. Actually, we're optimistic, and we're confident that the margins, as I said, for the various components of the revenue should be flat to up from here. It's really the mix of the revenue itself, if that helps.

We continue to sell our, you know, flash technologies to customers who are not existing customers of NetApp.

We have a very, very large installed base of systems, and we continue to sell our flash technologies to customers who are not existing customers of NetApp.

Or, and customers who are existing customers of NetApp.

Or and customers who are existing customers of NetApp.

They refresh their Technologies when it is time for them to refresh. And we have an extremely high win rate in those, you know, refreshes because the software layer is essentially entirely consistent, the operational layer is entirely consistent at the same time. If you look at, you know, the number of flash systems that we sell a quarter, you can input the fact that you know we are growing 1% in our installed base. Means we are winning a large number of customers outside our install day. So we have both selling motions. We are providing clients, the right choice for their right, use case.

Hard drive-based solutions are still the cheaper options for things like backup or cold storage, and so they have a place in our portfolio.

So, thank you.

Thank you.

Your next question comes from the line of Simon Leupold with Raymond James.

George Kurian: Yeah, hey, Wenzie, I think I wouldn't read too much into the sequential. I think the big moving parts between Q1 and Q2 is really the percentage of the total revenue that's product. In Q1, it was lower. And so Q2, it'll be probably higher. So that's where I think it's right.

Thank you for taking the question. I, I wanted to, um, try to get a better sense of the longer term. Uh, AI product strategy. In other words, I, I, I know you don't want a front, run your Insight event for October, but what I'm trying to get a better sense of is the Readiness of your portfolio, to support Enterprise initiatives, and whether you've got more products in the pipeline, uh, to perhaps move up the value chain to support, uh, initiatives for AI at the Enterprise. Thank you.

Thank you for taking the question. I, I wanted to, um, try to get a better sense of the longer term. Uh, AI product strategy. In other words, I, I, I know you don't want to front run your Insight event for October, but what I'm trying to get a better sense of is the Readiness of your portfolio, to support Enterprise initiatives, and whether you've got more products in the pipeline, uh, to perhaps move up the value chain to support, uh, initiatives for AI at the Enterprise. Thank you.

Speaker 8: Okay, that's helpful. And then just some operating leverage, right? If I just think about this roughly flattish gross margins, but quarter on quarter, your operating margin is up maybe similar to how it was last year. So your operating leverage is improving because last year you had gross margin improvement too. So should we expect that operating leverage benefit to continue in the back half of the year as well? Thank you.

Data storage.

There are 3 or 4, you know, technologies that clients look for from a data infrastructure provider to help them in their AI initiatives. The first, of course, is high-performance, high-scale data storage for, you know, model training or inferencing for identical environments, as well as for data links. We feel very good about our solutions for that.

For, you know, model training or inferencing. For agentic environments, as well as for data links, we feel very good about our solutions for that.

Wissam Jabre: Yeah, Wenzie. I would anticipate operating leverage to continue in the back half of the year. The reason we're probably the only dynamic you're seeing with respect to Q2 and operating leverage is that gross margin differential. If you recall, last year, product margin was in the 60% range and much higher than what we've experienced of late.

The second is solutions that customers who want to use the cloud with equivalent storage capabilities, so that they can use cloud-based tools rather than on-prem tools. We have made good progress. We have more work going on with the hyperscalers, and we'll tell you more about that at our Insight customer conference.

The second is solutions that customers who want to use the cloud with equivalent storage capabilities, so that they can use cloud-based tools rather than on-prem tools. We have made good progress; we have more work going on with the hyperscalers, and we'll tell you more about that at our Insight customer conference.

Speaker 8: Okay. Thanks, Wissam.

Wissam Jabre: You're welcome.

Operator: Our next question comes from the line of Kim Long with Barclays.

Speaker 8: Thank you. Two as well, if I can. First, maybe just talk about the comment about the installed base 45% of the systems on all-flash. Could you talk a little bit about what NetApp's doing to try to convert the rest of that install base and what that would mean for financials and margins, revenue opportunity, as well as the competition you would see there? And then secondly, if you could just touch on Keystone, another very impressive quarter. I get it's small, but could you just talk a little bit about what you're expecting mid-long term from Keystone, given how successful the public cloud business has been? Are you drawing corollaries on what Keystone can be to the on-prem business? Thank you.

The third area from a technology standpoint that we have advantages and we are providing a lot more, you know, kind of capabilities, moving forward, are things that allow clients to actually manage their data more efficiently. This could be, they want to be able to search the data, they want to organize it so that they can align certain data sets to certain volumes uh to certain models and keep track of it. They want to implement guard rails and access controls, they want to automate the vectorization and the ragging. You know, rag Readiness of the data, we have a lot of those capabilities coming at our inside conference. And then, the last piece is ecosystem, right? So we already have reference architectures with Nvidia. We

The third area from a technology standpoint that we have advantages and we are providing a lot more, you know, kind of capabilities, moving forward, are things that allow clients to actually manage their data more efficiently. This could be, they want to be able to search the data, they want to organize it so that they can align certain data sets to certain volumes uh to certain models and keep track of it. They want to implement guard rails and access controls, they want to automate the vectorization and the raggy, you know, rag Readiness of the data we have a lot of those capabilities coming at our inside conference and then the last piece is ecosystem, right? So we already have reference architectures with Nvidia, we are working on reference architectures more and more of them with the hyperscaler tool and you'll see more about announcements around that. And

Our customer conference.

We are working on reference architectures—more and more of them—with the hyperscaler tools, and you see more announcements around that at our customer conference.

George Kurian: Yeah, thank you for your questions. You know, with regard to, I'll take the Keystone question first. Keystone has done well. It's an as-a-service model. There are more and more clients who are, you know, who are comfortable with an as-a-service model. And so they are, you know, probably looking to harmonize their IT operating model or infrastructure to more of an as-a-service. We also see clients who are either doing transitional work, going from one data center to another, or going from a data center to the cloud, where they want to have a bridge between our on-prem technology and our cloud technology that will buy a Keystone service for the transitional period. So I'm excited about that.

So, good, good stuff today, but a lot more to come.

Thank you.

Our next question is from Ari Tannian with Cleveland Research.

Our next question is from Ari Tjan with Cleveland Research.

Oh, thanks for taking the questions. Um, good to hear from everybody. Uh, just a couple from my end first.

Oh, thanks for taking the questions. Um, good to hear from everybody. Just a couple from my end first, just on, you know,

The competitive landscape looks really cool. Great CD. You know, we have a leadership position in IDC for all-flash.

Competitive, like, really cool. Great to see the, you know, leadership position in IDC All Flash.

Um, but you know, I mean, it seems like today there are some different results, you know, from one of your peers raising their outlook. So, just any update on, you know, the all-flash kind of competitive landscape and what you're seeing out there? And then second, just in terms of pricing, I know there were some pricing actions taken last year that would flow through the model this year. Any updates just on that?

Um, but you know, I mean, it seems like today there's some different results. You know, if one of your peers is raising their outlook. So, just any update on, you know, the all-flash competitive landscape and what you're seeing out there? And then second, just in terms of pricing, I know there were some pricing actions taken last year that would flow through the model this year. Any updates just on that?

George Kurian: We are also using Keystone to help in competitive situations where the customer may have a capital commitment in another, you know, vendor's technology and wants to, you know, kind of not have to pay two capital investments at the same time. Ultimately, our view is we give customers choice, and we're not going to try to force them into one model, but we are going to continue to make Keystone an ever-better offering, just like we make our products. With regard to your other question about the install base, listen, we have a very, very large install base of systems, and we continue to sell our, you know, flash technologies to customers who are not existing customers of NetApp or/and customers who are existing customers of NetApp. They refresh their technologies when it is time for them to refresh.

Um, you know, the take rates of the price increases that you're seeing with your customers. Thank you so much.

Um, you know, the take rates of the price increases that you're seeing with your customers. Thanks so much.

I'll take the first 1 on the competitive landscape. Listen, it's always been a competitive. Uh, you know, uh, environment. We are more exposed to some of the, you know, environments that our markets that have had challenges like us public sector, then some of our competitors. But listen, we get up every day and go and

From it, we feel good about our competitive position. We did not see any.

George Kurian: And we have an extremely high win rate in those, you know, refreshes because the software layer is essentially entirely consistent. The operational layer is entirely consistent. At the same time, if you look at, you know, the number of flash systems that we sell a quarter, you can intuit the fact that, you know, we are growing 1% in our install base, means we are winning a large number of customers outside our install base. So we have both selling motions. We are providing clients the right choice for their right use case. Hard drive-based solutions are still the cheaper solution for things like backup or cold storage. And so it has a place in our portfolio.

You know, uh, in the environment, we are more exposed to some of the, you know, environments that our markets that have had challenges like us in the public sector than some of our competitors. But listen, we get up every day and go and compete. We feel good about our competitive position. We did not see any specific adverse, um, you know, kind of pattern in the quarter. And, uh, we're going to go out there and post another strong quarter, and they'll take care of the competitive landscape with regards to pricing. Listen, we have not taken pricing action related to the tariffs. We are in a wait-and-see mode in terms of pricing actions that we took as we introduced our new system. Those systems have performed well, and they have done well in the mix. I think with regard to the gross margin product, gross margin commentary, it's primarily related to the cost increases from a year ago, and so if...

You go to about the mix between high performance, uh, Flash and and the capacity flash, uh, the high performance flat systems have grown for 2 consecutive quarters, nicely in the mix.

Specific adverse, um, you know, kind of pattern in the quarter. And, uh, we're going to go out there and post another strong core and that'll take care of the competitive landscape with regard to pricing. Listen, we have not taken pricing action related to the tariffs. We are in a wait and see mode in terms of pricing actions. That we took as we introduced our new system, those systems have performed well and they have done. Well in the mix. I think with regard to the gross, margin product, gross margin commentary, it's primarily related to the cost increases from a year ago. And so if you go to about the mix between high performance, uh, Flash and and capacity flash, uh, there are high performance flat systems that have grown for 2 consecutive quarters, nicely in the mix.

Uh, and we're just going to keep working on it. I think with regard to the outlook for the rest of the year, listen, the cost comparisons get more in line through the rest of the year, which gives us confidence that our gross margin should return to the, you know, the original ranges that we had shared.

Uh, and we're just going to keep working on it. I think with regard to the outlook for the rest of the year, listen, the cost of their get more of the line through the rest of the year, which gives us confidence that our gross margins should return to the, you know, the original ranges that we had shared.

Thanks.

Our next question is from the line of Doug Vault with UBS.

Speaker 8: Okay. Thank you.

Operator: Your next question comes from the line of Simon Leopold with Raymond James.

Hey guys, it's David Vert. Hey listen. Hey George, I don't want.

You go back to.

Speaker 9: Thank you for taking the question. I wanted to try to get a better sense of the longer-term AI product strategy. In other words, I know you don't want to front-run your insight event for October, but what I'm trying to get a better sense of is the readiness of your portfolio to support enterprise initiatives and whether you've got more products in the pipeline to perhaps move up the value chain to support initiatives for AI at the enterprise. Thank you.

Where we are from a free body perspective, I mean, it's a balance sheet.

The landscape you you talked about performative, you know, high-end storage, being a little bit weaker than you thought and shipped it. A little bit more to capacity storage. Was that in any particular region vertical? I know Mia in public sector was a little bit softer and then with some I'll give you my second question, you know, you mentioned obviously, Nick supply chain. Uh, excuse me, components have an issue in gross margin, you share, where we are from a free body perspective. I mean, it's a balance sheet.

George Kurian: There are three or four, you know, technologies that clients look for from a data infrastructure provider to them to help them in their AI initiatives. The first, of course, is high-performance, high-scale data storage for, you know, model training, for inferencing, for agentic environments, as well as for data lake. We feel very good about our solutions for that. The second is solutions that customers who want to use the cloud with equivalent storage capabilities so that they can use cloud-based tools rather than on-prem tools. We have made good progress. We have more work going on with the hyperscalers, and we'll tell you more about that at our inside customer conference.

Effectively, we are no longer carrying excess inventory that we purchased previously. So, how should we think about your strategy with Prebys from a component perspective going forward? Thanks.

Yeah. Hi David. Let me let me take the both questions uh on the first part of the question, my comment was relative to what we guided and relative to uh our expectations. I would say this is really there's weakness in 1 versus the other. It's just that the mix that we had anticipated is slightly different that contributed to a little bit of pressure on the product margin. So high performance slash

Yeah. Hi David. Let me, let me take both questions. On the first part of the question, my comment was relative to what we guided and relative to our expectations. I would say necessarily there's weakness in one versus the other. It's just that the mix that we had anticipated is slightly different, which contributed to a little bit of pressure on the product margin. So, high performance slash actually our group about the flash year on year.

Actually, our group about the Flash year on year.

George Kurian: Then the third area from a technology standpoint that we have advantages and we are providing a lot more, you know, kind of capabilities moving forward are things that allow clients to actually manage their data more efficiently. This could be they want to be able to search the data. They want to organize it so that they can align certain data sets to certain volumes, to certain models, and keep track of it. They want to implement guardrails and access controls. They want to automate the vectorization and the RAG, you know, RAG readiness of their data. We have a lot of those capabilities coming at our inside conference. And then the last piece is ecosystem, right? So we already have reference architectures with NVIDIA. We are working on reference architectures, more and more of them with the hyperscaler tools.

Yeah, exactly. And with respect to the question on product margin, uh, look as we said earlier, it's they I expected to improve from here and part of it of course, has to do with the cost and we do have we do have certain volumes with locked up pricing, that gives us confidence that we we anticipate to see some improvement from here. Uh, so um, I don't know if this helps with respect to other

Yeah, exactly. And with respect to the question, on the product margin. Uh, look, as we said earlier, it's they I expected to improve from here and part of it, of course, has to do with the cost. And we do have uh, we do have certain volumes with locked up pricing that give us confidence that we we anticipate to see some improvement from here. Uh, so, um, I don't know if this helps with respect to other

Uh, uh, took a part of the question related to the components. In our supply chain, we don't see any issues there. I mean, there's nothing really problematic.

great. Thanks guys.

Your next question is from Ananda barua.

Hey guys. Yes thanks for taking the question, really appreciate it. Um George just going back to going back to AI. You mentioned you mentioned a a model training wins and I think you said that are very large um and you also mentioned

George just went back to going back to AI. You mentioned a model training win, and I think you said that they are very large. Um, and you also mentioned...

AI as a service, which sounds like Neo clouds. You know, please clarify if it's something bigger than just that. But I guess the question is.

AI is a service which sounds sounds like Neo clouds. Uh, you know, please clarify if it's something bigger than just that but the quite I guess the question is is

George Kurian: And you'll see more about announcements around that at our customer conference. So good stuff today, but a lot more to come.

You know, for the last couple of years, it sounds like RAG is still a focus, as you spoke and see what it sounds like. You might be expanding.

You know, for the last couple of years, it sounds like and rag is still a focus, as you spoke, and see what it sounds like. You might be expanding.

Your cam.

Speaker 9: Thank you.

Operator: Our next question is from Ari Trajanian with Cleveland Research.

Um, when you talked about references designs with the, with the hyperscalers as well. So are you, are you seeing Tam expansion here? And uh, and if so, you know what, the useful way to think about,

Your cam, um, you talked about reference designs with the, with the hyperscalers as well. So are you, are you seeing Tam expansion here? And uh, and if so, you know what, the useful way to think about,

Speaker 8: Hi, all. Thanks for taking the questions. Good to hear from everybody. Just a couple from my end. First, just on, you know, competitive landscape, like really cool. Great to see the, you know, leadership position in IDC all-flash. But, you know, I mean, it seems like today there's some different results, you know, if one of your peers is raising their outlook. So just any update on, you know, the all-flash kind of competitive landscape and what you're seeing out there. And then second, just in terms of pricing, I know there were some pricing actions taken last year that would flow through the model this year. Any updates just on, you know, the take rates of the price increases that you're seeing with your customers? Thank you so much.

Kind of magnitude of TAM expansion in the context of the metrics that you provided the last, uh, the last couple years, you know, uh, posting Analyst Day. Thanks, and have a good follow-up too. Thanks.

Kind of magnitude of the TAM expansion, in the context of the metrics that you provided, the last, uh, the last couple of years, you know, uh, posting with today. Thanks and have a good follow-up too. Thanks.

The park technology for their Enterprise Cloud business.

Yeah, I think, first of all, you know, we have several, you know, kind of large scale, Sovereign providers, who are users of our technology for their Enterprise Cloud business.

George Kurian: I'll take the first one on the competitive landscape. Listen, it's always been a competitive, you know, environment. We are more exposed to some of the, you know, environments or markets that have had challenges, like US public sector, than some of our competitors. But listen, we get up every day and go and compete. We feel good about our competitive position. We did not see any specific adverse, you know, kind of pattern in the quarter. And we're going to go out there and post another strong quarter, and that'll take care of the competitive landscape. With regard to pricing, listen, we have not taken pricing action related to the cash. We're in a wait-and-see mode. In terms of pricing actions that we took as we introduced our new system, those systems have performed well, and they have done well in the mix.

And as many of them have stepped into the AI business, we needed to get certified as a net as an Nvidia NCP, provider and we have met those certification requirements and it allows us to bring technology that is familiar to them for a broad range of use cases for AI as a service use cases where all our advantage around multi-channel cybrid operating models and so on play in. But also for model training, especially for you know, countries that have Sovereign models. We are seeing good progress. You know, at this point we still believe that the data storage opportunity is predominantly in the Enterprise, you know, influencing you know, part of the world. But we are going to be opportunistic and compete where we see opportunities for other use cases as well and we feel good about our prospects there.

And as many of them have stepped into the AI business, we needed to get certified as a net as an Nvidia NCP, provider and we have met those certification requirements and it allows us to bring technology that is familiar to them for a broad range of use cases for AI as a service use cases where all our advantage around multi tenancy hybrid operating models and so on play in. But also for model training, especially for you know, countries that have Sovereign models. We are seeing good progress. You know, at this point we still believe that the data storage opportunity is predominantly in the Enterprise, you know, inferencing, you know part of the world but we are going to be opportunistic and compete where we see opportunities for other use cases as well and we feel good about our prospects there.

That's that's that's super helpful.

That's that's that's super helpful. Um, explanation and I guess just a quick follow-up in that context is just on the rag, on the rag front. How are you seeing, uh,

Um, explanation and I guess just a quick follow-up in that context is just on the rag, on the rag front. How are you seeing, uh,

Reasoning agents.

George Kurian: I think with regard to the gross margin, product gross margin commentary, it's primarily related to the cost increases from a year ago. And so you feel good about the mix between high-performance flash and capacity flash. There are high-performance flash systems that have grown for two consecutive quarters nicely in the mix. And we're just going to keep working on it. I think with regard to the outlook for the rest of the year, listen, the cost compares to get more of the nine through the rest of the year, which gives us confidence that our gross margin should return to the, you know, the original ranges that we had shared.

You know, impact the RAG pipeline. Is it helping? Is it, you know, seemingly going to grow the TAM? Are you seeing, uh, sort of...

You know, impact the Ragged pipeline is it, is it helped, is it? You know, seemingly would grow the TAM. Are you seeing, uh, sort of?

You know, I guess like engagement, push out as a result of that as well. Just any context there that impact on your, on your, on your business? And your pipeline would be great. And that's it. Thanks.

You know, I guess like engagement, push out as a result of that as well. Just any context there that impact on your, on your, on your business? And your pipeline would be great. That's it. Thanks.

Yeah, I think broadly speaking, you know, the biggest challenge that clients deal with in getting AI to be applicable for their enterprise use cases is really around organizing their data.

Speaker 8: Thanks.

Operator: Our next question is from the line of Doug Vaught with UBS.

Speaker 8: Hey, guys. It's David. Hey, Wissam. Hey, George. I don't want to do this at horsepits. Can you go back to, George, the competitive landscape? You talked about performative, you know, high-end storage being a little bit weaker than you thought and shifted a little bit more to capacity storage. Was that in any particular region? Vertical, I know EMEA and public sector was a little bit softer. And then, Wissam, I'll give you my second question. You know, you mentioned, obviously, Nook supply chain, excuse me, components have an issue in gross margin. Can you share where we are from a pre-buy perspective? I mean, it's a balance sheet effectively no longer carrying excess inventory that you purchased previously. And so how should we think about your strategy with pre-buys from a component perspective going forward? Thanks.

Yeah, I think broadly speaking, you know, the biggest challenge that clients deal with in getting AI to be applicable for their enterprise use cases is really around organizing their data tagging in a way that they can have the right controls around it. This allows them to then apply vectorization, knowledge graphs, and other techniques to that data so that it’s ready for use in an AI device pipeline. We have a lot of tools that we are bringing to market and many tools that we already have that will help us provide extra value to clients because we have this gigantic installment of unstructured data that clients are anxious to mine, and that we can monetize with these tools. So that’s the first thing. The second part of the interesting thing is, you know, people are using more kind of...

Wissam Jabre: Yeah. Hi, David. Let me take both questions. On the first part of the question, my comment was relative to what we guided and relative to our expectations. I wouldn't say necessarily there's weakness in one versus the other. It's just that the mix that we had anticipated is slightly different that contributed to a little bit of pressure on the product margin. So.

Knowledge graphs and other things to that data. So that it's ready for use in an AI Pipeline. And so we have a lot of tools that we are bringing to Market and many tools that we already have that will help us provide Extra Value to clients because we have this gigantic installment of unstructured data that clients are anxious to mine and that we can monetize with these tools. So that's the first thing. The second part of interesting thing is, you know, people aren't using more kind of reasoning models, where the model goes to storage request. Data searches, you know, works that data and then comes back to the storage again. There are some, you know, clever capabilities that we have built that allows for that functionality to be more efficient, as well as to avoid having to go to the original data source.

George Kurian: High-performance flash actually outgrew capacity flash year on year.

Reasoning models, where the model goes to storage request data searches, you know, works with that data and then comes back to the storage again. There are some, you know, clever capabilities that we have built that allow for that functionality to be more efficient as well as to avoid having to go to the original data source multiple times. We'll share more about that at our user conference, which allows those reasoning models to be a lot more effective and fast at getting to the answer.

Multiple times, and so we'll share more about that at our user conference. That allows those reasoning models to be a lot more effective and fast at getting to the answer.

Wissam Jabre: Yeah, exactly. And with respect to the question on product margin, look, as we said earlier, I expect it to improve from here. And part of it, of course, has to do with the cost. And we do have certain volumes with locked-up pricing that gives us confidence that we anticipate to see some improvement from here. So I don't know if this helps. With respect to other part of the question related to the components in our supply chain, we don't see any issues there. I mean, there's nothing really problematic.

Thanks a lot. Appreciate it.

Thank you.

And our final question comes from the line of Asaya Merchant. What city groups?

And our final question comes from the line of Asaya Merchant. What is the City Group?

Great. Thanks for squeezing me in here. Um, just how do you guys think about your hypervisor offering? See, I understand you, anything you can comment on that, as it relates to Nutanix, or, you know, the disruptions that you're still continuing to see due to VMware licensing? How do you think about your product offerings on this hyper-converged infrastructure? Thank you.

Great. Thanks for squeezing me in here. Um, just how do you guys think about, you know, your hypervisor offerings? I understand anything you can comment on that, as it relates to Nutanix or, you know, the disruptions that we're still continuing to see due to VMware licensing. How do you think about your product offering on this hyper-converged infrastructure? Thank you.

Speaker 8: Great. Thanks, guys.

We support a broad range of hypervisors.

Operator: Your next question is from Ananda Barua.

Speaker 9: Hey, guys. Yeah, thanks for taking the question. Really appreciate it. George, just going back to AI, you mentioned model training wins, and I think you said that are very large. And you also mentioned AI as a service, which sounds like NeoCloud. You know, please clarify if it's something bigger than just that. But the question, I guess the question is, you know, for the last couple of years, it sounds like and RAG is still a focus, as you spoken to, but it sounds like you might be expanding your TAM. And you talked about reference designs with the hyperscalers as well. So are you seeing TAM expansion here? And if so, you know, what's a useful way to think about kind of magnitude of TAM expansion in the context of the metrics that you provided the last couple of years, you know, post the analysts' day? Thanks.

You know, and we will continue to support as many hypervisors as our customers want, right? And so those could be on-prem hypervisors like the ones that you mentioned that we will work to support if we don't already support, as well as cloud hypervisors where people are using the cloud providers' hyperscalers' own tools. And so this is a wide range of, you know, we can have, we're happy to share more of that with you. Our general view of the world is...

You know and uh we will continue to support as many hypervisors as our customers want, right? And so those could be on-prem hypervisors like the ones that you mentioned that we will work to support if you don't already support as well as Cloud hypervisors where people are using the cloud providers. The hyperscalers own tools, and so this is a wide range of, you know, we can have, we're happy to, you know, share more of that with you. Our general view of the world is

We believe in operating with as many of them as clients want.

Okay. I look forward to hearing about that at your insight. Thank you.

Okay. I look forward to hearing about that at your Insight. Thank you.

Thank you. All right, well thank you, AIA. Um, I'm going to pass it over to George for some final remarks.

Thank you. All right, well thank you, AIA. I'm going to pass it over to George for some final remarks.

Wrong stock. This is clear 2026 building on a position of strength.

Thank you. Chris, we delivered a strong start to this clear 2026, building on a position of strength.

Speaker 9: And I have a quick follow-up too. Thanks.

We've taken the number one position in the all-flash market by helping customers modernize with cutting-edge data infrastructure and industry-leading cyber resilience for storage.

We've taken the number one position in the all-flats market by helping customers modernize with cutting-edge data infrastructure and industry-leading cyber resilience for storage.

George Kurian: Yeah. I think, first of all, you know, we have several, you know, kind of large-scale sovereign providers who are users of our technology for their enterprise cloud business. And as many of them have stepped into the AI business, we needed to get certified as an NVIDIA NCT provider. And we had met those certification requirements. And it allows us to bring technology that is familiar to them for a broad range of use cases, for AI as a service use cases, where all our advantage around multi-tenancy, hybrid operating models, and so on play in. But also for model training, especially for, you know, countries that have sovereign models, we are seeing good progress. You know, at this point, we still believe that the data storage opportunity is predominantly in the enterprise, you know, inferencing, you know, part of the world.

Our highly differentiated cloud services enable hybrid and multicloud transformations. We are well positioned and growing in the emerging area of enterprise AI.

Our highly differentiated cloud services enable hybrid and multi-cloud transformations, and we are well positioned and growing in the emerging area of enterprise AI.

Thank you for joining us today, and I hope to see you at NetApp Insight in October.

Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.

George Kurian: But we are going to be opportunistic and compete where we see opportunities for other use cases as well. And we feel good about our prospects there.

Speaker 9: That's super helpful explanation. And I guess just a quick follow-up in that context is just on the RAG front, how are you seeing reasoning agents, you know, impact the RAG pipeline? Is it help? Is it, you know, seemingly would grow the TAM? Are you seeing sort of, you know, I guess, like engagement push out as a result of that as well? Just any context there, that impact on your business and your pipeline would be great. And that's it. Thanks.

George Kurian: Yeah, I think broadly speaking, you know, the biggest challenge that clients deal with in getting AI to be applicable for their enterprise use cases is really around organizing their data, tagging it so that they can have the right controls around it, being able to then, you know, kind of apply vectorization, knowledge graphs, and other things to that data so that it's ready for use in an AI pipeline. And so we have a lot of tools that we are bringing to market and many tools that we already have that will help us provide extra value to clients because we have this gigantic install base of unstructured data that clients are anxious to mine and that we can monetize with these tools. So that's the first thing.

George Kurian: The second part of inferencing is, you know, people are using more kind of reasoning models where the model goes to storage, requests data, searches, you know, works that data, and then comes back to the storage again. There are some, you know, clever capabilities that we have built that allow for that functionality to be more efficient, as well as to avoid having to go to the original data source multiple times. And so we'll share more about that at our user conference that allows those reasoning models to be a lot more effective and fast at getting to the answer.

Speaker 9: Thanks a lot. Appreciate it.

George Kurian: Thank you.

Operator: And our final question comes from the line of Asaya Merchant with Citigroup.

Asiya Merchant: Great. Thanks for squeezing me in here. Just how do you guys think about, you know, your hypervisor offerings? I understand anything you can comment on that on as it relates to Nutanix or, you know, the disruptions that we're still continuing to see due to VMware licensing. How do you think about your product offerings on this hyper-converged infrastructure? Thank you.

George Kurian: We support a broad range of hypervisors, you know, and we will continue to support as many hypervisors as our customers want, right? And so those could be on-prem hypervisors like the ones that you mentioned that we will work to support if we don't already support, as well as cloud hypervisors where people are using the cloud providers, the hyperscalers' own tools. And so there's a wide range. Yeah, we can have, we're happy to, you know, share more of that with you. Our general view of the world is we believe to operate with as many of them as clients want.

Asiya Merchant: Okay. Look forward to hearing about that at your insight. Thank you.

George Kurian: Thank you.

Kris Newton: All right. Well, thank you, Asaya. I'm going to pass it over to George for some final remarks.

George Kurian: Thank you, Chris. We delivered a strong start to fiscal year 2026, building on a position of strength. We've taken the number one position in the all-flash market by helping customers modernize with cutting-edge data infrastructure and industry-leading cyber resilience for storage. Our highly differentiated cloud services enable hybrid and multi-cloud transformations, and we are well-positioned and growing in the emerging area of enterprise AI. Thank you for joining us today, and I hope to see you at NetApp Insight in October.

Operator: Thank you again for joining us today. This does conclude today's presentation. You may now

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