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    NTAP
    Earnings call· Jul 2025(Q1 FY26)

    NetApp, Inc. NTAP

    Aug 27, 2025 Source

    Executive summary

    NetApp Q1 FY26 — Strong AI and All-Flash Demand Drive Solid Start

    NetApp delivered a solid Q1 FY26, driven by robust demand for all-flash offerings, cloud storage, and AI solutions, which helped offset softness in the U.S. public sector and EMEA. The company is capitalizing on the emerging enterprise AI market by providing unified data infrastructure, leading to significant AI deal wins and an expanded ecosystem. NetApp remains focused on innovation and disciplined execution to drive share gains and enhance profitability.

    Highlights

    5

    • Total revenue of $1.56 billion, above the midpoint of guidance.

    • All-flash array revenue grew 6% year-over-year to $893 million, achieving the #1 market position in calendar Q1 2025.

    • First-party and marketplace cloud storage services grew 33% year-over-year.

    • Public Cloud gross margin reached 80.1%, leading to an increased long-term target of 80% to 85%.

    • Record Q1 cash flow from operations of $673 million and free cash flow of $620 million.

    Concerns

    3

    • Product revenue was down 2% year-over-year to $654 million.

    • Product gross margin was 54%, impacted by higher flash costs and an unfavorable mix.

    • Softness in the U.S. public sector and EMEA, which was offset by strength in Americas enterprise.

    Guidance & targets

    7
    CategoryTargetConfidence
    Q2 FY26 Revenue
    $1.69 billion, plus or minus $75 million
    high materiality
    High
    Q2 FY26 Consolidated Gross Margin
    71%, plus or minus 0.5%
    medium materiality
    High
    Q2 FY26 Operating Margin
    28% to 29%
    medium materiality
    High
    Q2 FY26 Diluted EPS
    $1.84 and $1.94
    high materiality
    High
    FY26 Total Revenue
    $6.625 billion and $6.875 billion
    high materiality
    High
    FY26 Diluted EPS
    $7.60 to $7.90
    high materiality
    High
    Long-term Public Cloud Gross Margin
    80% to 85%
    medium materiality
    High

    Segment performance

    5
    SegmentRevenueYoYQoQMargin
    Hybrid Cloud
    Revenue was up 1% year-over-year, driven by strong Support and Professional Services growth, but product revenue declined. Gross margin improved sequentially due to a favorable mix of highly profitable Support revenue.
    Support revenue: $647 millionSupport revenue growth YoY: 3%Professional Services revenue: $97 millionProfessional Services revenue growth YoY: 18%Product revenue: $654 millionProduct revenue growth YoY: -2%Gross margin sequential change: 1.6 percentage points
    		$1.4 billion1%—70%
    Public Cloud
    Revenue increased 1% year-over-year, or 18% excluding the divested Spot business. Gross margin improved significantly, reaching the high end of the prior long-term target range.
    Revenue growth YoY (ex-Spot): 18%Gross margin sequential change: 80 bpsGross margin YoY change: 9 percentage points
    		$161 million1%—80.1%
    Americas Enterprise
    Showed robust performance, offsetting softness in other regions. Included strength across largest enterprises and mid-market customer segments.
    		—Robust performance——
    U.S. Public Sector
    Experienced significant weakness in the quarter, attributed to delays in budget deployment to agencies. Expected to be a smaller headwind in the second half of the fiscal year.
    		—Very weak——
    EMEA
    Saw localized softness in UKI and some parts of the large enterprise in Germany, while other European teams executed well.
    		—Softness——

    Operational metrics

    24
    Revenue growth (ex-Spot)
    3%YoY
    Q1 FY26

    Total revenue growth excluding the divested Spot business.

    All-flash array revenue
    $893 million6% YoY
    Q1 FY26

    All-flash array revenue grew 6% year-over-year, reaching an annualized run rate of $3.6 billion.

    All-flash systems in installed base
    45%
    Q1 FY26

    45% of systems in the installed base under active support contracts are all-flash.

    First-party and marketplace cloud storage services growth
    33%YoY
    Q1 FY26

    Growth rate for first-party and marketplace cloud storage services.

    Keystone growth
    80%YoY
    Q1 FY26

    Growth of Keystone, the Storage-as-a-Service offering, compared to the same period last year.

    Consolidated gross margin
    71.1%1.6 percentage points sequentially
    Q1 FY26

    Consolidated gross margin improved sequentially.

    Hybrid Cloud gross margin
    70%1.6 percentage points sequentially
    Q1 FY26

    Hybrid Cloud gross margin improved sequentially due to favorable mix of highly profitable Support revenue.

    Product gross margin
    54%
    Q1 FY26

    Product gross margin was 54%.

    Support gross margin
    92.3%
    Q1 FY26

    Recurring Support business is highly profitable.

    Professional Services gross margin
    29.9%
    Q1 FY26

    Professional Services gross margin, driven by Keystone.

    Public Cloud gross margin
    80.1%80 bps sequentially, 9 percentage points YoY
    Q1 FY26

    Public Cloud gross margin improved sequentially and year-over-year, reaching the high end of the prior long-term target range.

    Operating expenses
    $707 milliondown 1% YoY
    Q1 FY26

    Operating expenses were down year-over-year despite unfavorable FX impact.

    Operating profit
    $401 million
    Q1 FY26

    Operating profit for the quarter.

    Operating margin
    25.7%
    Q1 FY26

    Operating margin for the quarter.

    Diluted EPS
    $1.55
    Q1 FY26

    Diluted EPS for the quarter.

    Senior notes redeemed
    $757 million
    Q1 FY26

    Redeemed senior notes due in June 2025, comprising principal and interest.

    Capital returned to shareholders
    $404 million
    Q1 FY26

    Total capital returned to shareholders during the first quarter.

    Share repurchases
    $300 million
    Q1 FY26

    Amount spent on share repurchases.

    Dividends paid
    $104 million
    Q1 FY26

    Amount paid in dividends, at $0.52 per share.

    Diluted share count
    203 milliondown 4% YoY
    Q1 FY26

    Diluted share count decreased by 9 million shares or 4% year-over-year.

    Cash and short-term investments
    $3.3 billion
    Q1 FY26

    Balance of cash and short-term investments at quarter-end.

    Total debt
    $2.5 billion
    Q1 FY26

    Total debt at quarter-end.

    Net cash position
    $840 million
    Q1 FY26

    Net cash position at quarter-end.

    AI infrastructure and data lake modernization deals closed
    125vs 50 a year ago
    Q1 FY26

    Number of AI deals closed in Q1, showing strong momentum compared to the prior year.

    Industry KPIs

    8
    MetricValueDetails
    Capital return FCF$404MUSD
    Gross margin drivers54%%
    Services peripheral attach80%%
    Component supply constraints—
    Installed base refresh runway45%%
    Capacity roadmap qualification—
    Ai server orders revenue backlog125deals
    Revenue mix by end market segment—

    Orderbook & backlog

    3
    Deferred revenue$4.53 billionQ1 FY26 end

    up 9% YoY (6% constant currency)

    Remaining performance obligations (RPO)$4.94 billionQ1 FY26 end

    up 11%

    Unbilled RPO (Keystone)$415 millionQ1 FY26 end

    up 40% YoY

    Product announcements

    2
    ProductTypeDetails
    AIPod Minilaunch
    NetApp reference architecture for NVIDIA Cloud Partnersmilestone

    Deals & partnerships

    2
    IntelCollaboration on AIPod Mini to simplify AI deployment.

    Introduced the AIPod Mini with Intel to address the cost and complexity of deploying AI at the department and team level.

    NVIDIA Cloud PartnersCollaboration on reference architecture for AI service providers.

    Completed the NetApp reference architecture for NVIDIA Cloud Partners, providing ultra-high performance with NetApp's hyperscaler proven data management.

    Risks & headwinds

    5
    Macro-related spending caution

    Observed some macro-related spending caution

    Mitigation: Maintaining unwavering focus on helping customers with their top priorities and driving success in a dynamic market.

    Softness in U.S. public sectorQ1 FY26

    Year-over-year declines

    Mitigation: Moved resources to where budgets are; Q2 is typically a strong budget spending quarter for U.S. public sector, and it's a smaller part of overall business in H2.

    Softness in EMEAQ1 FY26

    Year-over-year declines, localized softness

    Mitigation: Executed well in most countries, with softness localized to UKI and some parts of large enterprise in Germany.

    Higher flash costsQ1 FY26

    More than 5 percentage points of the 5.9% YoY product gross margin decline

    Mitigation: Expect product margin to improve gradually for the rest of the year as cost compares get more benign; have certain volumes with locked up pricing.

    Uncertainty in external landscapeRest of FY26

    Still a decent amount of uncertainty

    Mitigation: Focused on executing a quarter at a time; will provide more full-year visibility after Q2.

    What to watch in Q2 FY26

    5

    U.S. Public Sector performance

    Q2 FY26
    Currentvery weak in the quarter
    TargetImprovement, as Q2 is typically a strong budget spending quarter

    Why it matters

    U.S. public sector was a drag on Q1 performance; recovery is key for overall growth.

    U.S. 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 U.S. public sector, and it's a smaller part of our overall business in the second half of the fiscal year.

    Q&A highlights

    8

    Why did all-flash revenue decelerate, and what's driving the product gross margin decline?

    All-flash deceleration was anticipated due to U.S. public sector and EMEA softness, but FY25 saw mid-teens growth. Product gross margin decline was due to unfavorable mix (less high-performance flash than anticipated) and higher flash costs YoY (over 5 percentage points of the 5.9% decline). Product margin is expected to improve from Q1's low point to mid-to-high 50s for the rest of the year.

    “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.”

    asked by Sreekrishnan Sankarnarayanan · answered by Wissam Jabre

    2 min read6 chapters

    Detailed Narrative

    01

    AI Market Opportunity and Solutions

    The emerging enterprise AI market is driving urgency for data infrastructure modernization, cloud transformations, and cyber resiliency. NetApp's unified data architecture, powered by ONTAP, addresses the complex demands of AI applications by unifying, searching, and organizing massive data volumes across hybrid environments. The company closed approximately 125 AI infrastructure and data lake modernization deals in Q1, up from 50 a year ago, with wins across data lakes, training, and RAG/Agentic AI use cases.

    02

    All-Flash Array Leadership

    NetApp achieved the #1 position in the all-flash array market for calendar Q1 2025, as reported by IDC, with all-flash array revenue growing 6% year-over-year to $893 million. This strength was fueled by healthy customer engagement and strong interest in their unified and block-optimized all-flash storage portfolio, enabling displacement of competitive footprints. Exiting Q1, 45% of systems in their installed base under active support contracts are all-flash.

    03

    Cloud Storage Services Growth and Margin Expansion

    First-party and marketplace cloud storage services continued to deliver rapid growth, increasing 33% year-over-year. These services offer native integration with hyperscalers, providing performance, cost efficiency, data protection, and hybrid multi-cloud capabilities, driving strong win rates in enterprise-critical workloads. Public Cloud gross margin reached 80.1% in Q1, an increase of 9 percentage points year-over-year, leading to an increased long-term target of 80% to 85% due to depreciation roll-off and higher software content.

    04

    Geographic and Sector Performance

    Q1 revenue was driven by robust performance in Americas enterprise, which successfully offset anticipated softness in the U.S. public sector and EMEA. The U.S. public sector experienced significant weakness due to delays in budget deployment to agencies. EMEA saw localized softness in UKI and specific parts of the large enterprise segment in Germany, while other European and Asia Pacific regions performed well.

    05

    Keystone and As-a-Service Model Traction

    Keystone, NetApp's differentiated Storage-as-a-Service offering, grew approximately 80% year-over-year, contributing significantly to professional services revenue growth. Keystone is gaining traction with clients seeking to harmonize their IT operating models to an as-a-service approach, bridge on-premise and cloud transitions, and leverage flexible consumption models in competitive situations.

    06

    Financial Performance and Capital Allocation

    NetApp delivered a strong cash quarter with Q1 records for both cash flow from operations ($673 million) and free cash flow ($620 million), primarily driven by working capital improvement. The company redeemed $757 million in senior notes due in June 2025 and returned $404 million of capital to shareholders, including $300 million in share repurchases and $104 million in dividends. The diluted share count decreased 4% year-over-year.

    AI-generated summary of the company’s earnings call. Not investment advice.