The NetApp First Quarter of Fiscal Year 2024 Earnings Call was led by Vice President of Investor Relations, Kris Newton, and CEO, George Kurian, and CFO, Mike Berry. During the call, they made forward-looking statements and projections with respect to the company's financial outlook and future prospects. The company reported revenue above the midpoint of guidance, while their operational discipline yielded operating margin and EPS above their guidance ranges. They are focused on managing elements within their control, reinvigorating efforts to drive better performance in their storage business, and building a more focused approach to their Public Cloud business.

NetApp is seeing positive early indicators from its plan to sharpen its execution and increase profitability. In the quarter, the AFF C-series and AFF A150 had strong demand. Additionally, the Storage Lifecycle Program is seeing good early uptake. NetApp also announced the ASA A-series, a family of SAN-specific all-flash arrays with virtual machine and application-granular data protection mechanisms. They have implemented go-to-market changes to focus their enterprise sellers on the flash opportunity and build a dedicated model for cloud. They held their annual sales kickoff meeting and included training to sharpen their attack on new opportunities.

NetApp has seen success with their changes and pipeline expansion, and is expecting top line growth in the second-half. AI has been a major topic of conversation for customers and investors, and NetApp has been a leader in storage for predictive AI and machine learning workloads since 2018. NetApp's high performance, highly scalable hybrid cloud storage and data management positions them as a leader in the Gen AI market.

NetApp is working with customers to leverage the Gen AI offerings of hyperscalers and Cloud Volumes services, and they have a robust cyber resilience portfolio to protect and secure data. Additionally, they are taking action to improve their cloud portfolio and subscription performance, and in Q1 their Public Cloud segment revenue increased 17% year-over-year, although subscription services were weak.

This paragraph discusses NetApp's strategic focus on first-party cloud storage services, and how their partnerships with the major cloud providers are delivering growth. It also mentions that they have won a large enterprise deployment with FSx for NetApp ONTAP, and that customers are moving forward with strategic initiatives to drive business productivity and growth. NetApp's modern approach to hybrid, multi-cloud infrastructure and data management enables IT organizations to leverage data across their entire estate.

NetApp reported strong results in a challenging macro environment, with disciplined operational management and customer acceptance of innovation driving growth and operating margin expansion. Gross margin was strong at 55%, and cash from operations was a first quarter all-time high. NetApp will be hosting its INSIGHT user conference in Las Vegas this October.

NetApp reported a decrease in billings and revenue of 17% and 10% year-over-year, respectively, in Q1 fiscal '24 due to the challenging macro environment. Hybrid Cloud revenue was down 12%, while Product revenue decreased 25%. Support revenue grew 2%, and Public Cloud ARR and revenue increased 6% and 17%, respectively. Consolidated gross margin was 71%, up 400 basis points from a year ago, and Product gross margin was 55%. The company plans to return 100% of free cash flow in the current fiscal year.

In Q1, the company was able to lock-in record low NAND pricing, improving their product gross margin. Operating expenses were flat year-over-year and operating margin was 22%, above expectations. Operating cash flow was up 61% year-over-year and free cash flow increased 94%. The company returned $506 million to stockholders through shares repurchased and cash dividends, and ended the quarter with approximately $3 billion in cash and short-term investments. The company is reiterating its guidance for the full-year.

NetApp reported that their revenue growth is expected to be lower than initially expected due to softness in their subscription services. They expect Q2 revenue to range between $1.455 billion and $1.605 billion, with a midpoint of 8% year-over-year decline. Operating margin is expected to be 24% and EPS to be in the range of $1.35 to $1.45. NetApp noted that large enterprise spending is cautious, which could affect their results.

George Kurian was asked about the utilization rate level that will indicate an increase in demand and what trends can be seen in small and medium businesses. Kurian stated that the spending environment this past quarter was unchanged from the prior fiscal year, with mid-sized enterprise doing better than large enterprise. He noted that large enterprise are running infrastructure at higher levels of utilization than usual, but that is not a long-term trend. He also expressed confidence in the changes made to their go-to-market and product portfolio. Mehdi Hosseini followed up with a question about repatriation.

George Kurian discussed the three common patterns of generative AI projects that enterprises are engaging in: unstructured data, data management, and deployment architecture. He noted that public cloud offers faster feature velocity and prepackaged models, while on-prem environments offer data security and privacy. Mike Berry added that they are procuring more QLC NAND and expect that to continue as a percentage throughout fiscal '24.

Mike Berry discussed the impact of premiums on the gross margin performance in the quarter, noting that they were fully out of the number in Q1 and that the company expects to be marginally more aggressive in certain situations going forward. He also noted that ARR growth had slowed significantly in the quarter.

George Kurian explains that the company has two models of serving customers: a pay-as-you-go consumption model and a subscription model. The consumption model has grown to three quarters of the total business, while the subscription model is a quarter. The cloud storage and consumption businesses continue to perform well, but there is a challenge with the subscription model. The all-flash business is down 7%, which is due to the backlog from the same quarter last year.

Mike Berry explains that the company has secured a large portion of their NAND purchases for the current fiscal year and some of those agreements extend into the next fiscal year. He states that they feel good about their pre-buys and price locks, but they have not yet guided for the next fiscal year.

George Kurian and Victor Chiu discuss the legacy part of NetApp's business, particularly the sharp declines in shipments of legacy spinning drives. Kurian believes that NetApp offers the best spinning media and flash technologies, and will continue to invest in a broad range of technologies to give customers choice. He disagrees with the view that there won't be any new spinning disk drives manufacturer in five years, noting that five years is a long time in technology.

NetApp is expecting 48% of their revenue to come in the first half of the year and 52% in the second half, which is consistent with their historical linearity. They are not updating their guidance for cloud revenue, but they have taken into account the expected growth year-over-year and baked it into their full-year number.

George Kurian discusses the use of unified file and object storage solutions for AI workloads. He states that unstructured data is the priority for AI, and that unified storage offers a strong track record across file, block, object, and cloud. He also notes that customers typically store their trading workloads on high-performance all-flash systems, and keep models available to observe the implications of changes to models and data sets.

George Kurian addresses two questions related to AI and public cloud: customers' investment priorities between high-end, high-performance storage and mass capacity, and the potential of public cloud to be a key driver of the business. He states that AI involves a broad life cycle of tasks, with some portions running on high-performance systems.

The speaker discusses the outlook for all-flash arrays, noting that the capacity flash products are growing more quickly than the performance flash products. They are also excited about the growth of their cloud storage services and have more news coming with Google in the next couple of weeks. They are one quarter in and the cloud storage and consumption offerings have performed well, but they have work to do on the subscription side and will give an update next quarter.

George Kurian explains that the subscription cloud software business was impacted due to optimization of consumption. He acknowledges that they need to refine their portfolio, sharpen their value proposition, and optimize pricing to better meet customer expectations. Wamsi Mohan inquires about the magnitude of the backlog-related headwind from the prior year and if there will be a 4-5 point acceleration in Hybrid Cloud growth in the second half of the fiscal year.

Mike Berry answers a question from Wamsi Mohan regarding the upside of hybrid cloud offsetting the weakness in public cloud. He states that the growth in the second-half of fiscal '23 is expected to be slightly negative, but there is confidence in the progress seen in Q1 related to C-Series, new products, and go-to-market changes. He also notes that the storage and consumption piece of the business is growing at market rate and that optimization has stabilized.

George Kurian of C-Series reported that customers have slowed their optimization, but there has been an increase in new customers and new workloads. He also noted that capacity flash had seen strength in both general purpose private cloud environments and smaller environments with the A150 product.

George Kurian discussed the shift in the cloud business mix from subscription to consumption, and the impact that was more pronounced in subscription rather than consumption. He pointed out that the miss was a mix of macro and micro factors, such as budget constraints and customers not being ready to deploy the product. In response, the company is conducting a review of their products and making changes to pricing and value share in order to better meet customer needs.

In Q1, NetApp's free cash flow was higher than expected due to a reduction in supply chain spending, lower pricing, and lower incentive compensation and CapEx. This was compared to the same period the year before when they were bulking up on inventory in anticipation of growth. Going forward, they expect the free cash flow to remain high, but not as high as it was in Q1 due to the one-time benefit.

NetApp's ONTAP AI is being sold to data science and AI teams in both existing and new customers, with a focus on areas such as rapid drug discovery, clinical data analysis, and digital twin prototypes. The product combines high-performance GPUs from NVIDIA with large-scale data storage from NetApp.

George Kurian of NetApp explains how the company is using AI in three ways: to accelerate software development and increase innovation for customers, to integrate AI into products and services for proactive advice, and to improve marketing, documentation, multilingual support, and customer service with chatbots. He also mentions that despite the challenging macro backdrop, the company is focusing on their FY '24 priorities, which include being fiscally responsible, reinvigorating the storage systems business, and having a more focused approach to their Public Cloud business.

The early results of the company's focus are positive and indicate that they are on track to expand their margins and earnings while growing their top line in the second half of the year. The new products have been well-received, and the company is continuing to differentiate and grow their first-party public cloud storage services. Lastly, the company looks forward to updating their progress on the next quarter's call.

This summary was generated with AI and may contain some inaccuracies.