The operator introduces the NetApp Third Quarter of Fiscal Year 2024 Earnings Call and turns it over to Kris Newton, Vice President of Investor Relations. Newton discusses the company's forward-looking statements and projections, emphasizing the risks and uncertainties involved. CEO George Kurian then speaks, reporting exceptional performance in Q3 FY 2024, with revenue exceeding expectations and all-time highs for gross margin, operating margin, and EPS.

In FY 2024, the company implemented a plan to improve performance in their Storage and Public Cloud businesses while managing the uncertain economy. This has resulted in strong results and an improved outlook for the year. NetApp offers a comprehensive architecture that supports any application or data type and is available in various procurement models. Their unified data solutions address IT priorities such as modernizing infrastructure and improving security. The company saw strong growth in their Hybrid Cloud segment, driven by demand for their all-flash products, which now make up 60% of segment revenue.

The company is expecting an increase in product gross margin due to the shift to all-flash revenue. The AFF C-Series and newly introduced ASA families outperformed expectations and are driving share gains in the SAN market. The company also had successful competitive take-outs and strong interest in their Ransomware Protection Solutions. Their ONTAP solution has been validated by the NSA for its data protection and cybersecurity capabilities. The company also saw success in the AI market with multiple customer wins.

NetApp helps organizations with a variety of use cases, from unifying data in modern data lakes to deploying large model training environments. They also help customers capture and prepare their data for AI through their high-performance data storage systems. NetApp offers a range of buying options, including as-a-service and cloud native offerings, to meet customer budget requirements. Their Storage-as-a-Service offering, Keystone, saw strong growth in the past quarter. NetApp also partners with leading hyperscalers to deliver cloud-native storage services, which are growing rapidly and aligned with customer buying preferences.

The company is focused on strengthening its partnerships with hyperscalers and growing its customer base, capacity, revenue, and ARR in the hyperscaler portfolio. They have made changes to their Public Cloud business strategy and are anticipating some ARR headwinds in the upcoming quarter. The company is also positioning itself to address the growing GenAI opportunity in the cloud and has a customer using their FSx for NetApp ONTAP solution for AI/ML workloads. Despite macro uncertainty, the company is in a strong position and their unified data storage approach is resonating in the market. They are successfully executing their top priorities and experiencing growth in all flash and cloud storage services.

The company has experienced record-setting results, with all-time highs in key profitability measures such as gross margin and operating margin. This is due to the success of their new all-flash products and changes in their go-to-market strategy. They also have high levels of operating discipline and strong financial performance, with operating cash flow of $484 million and free cash flow of $448 million in the third quarter. They expect continued success and will provide updates on their long-term strategy and business model at their upcoming Investor Day on June 11.

The company's strong execution of its priorities and record-setting profitability have led to an increase in full year revenue and EPS guidance. In the third quarter, billings and revenue increased thanks to momentum in all-flash array product families. Hybrid cloud and product revenue also saw growth, while support revenue increased due to a shift in renewal responsibility. Operating expenses remained in line with expectations.

In the third quarter, the company's operating profit increased by 30%, operating margin increased by 580 basis points, and EPS grew by 42%. The company's tax rate was lower than expected, resulting in a record high EPS of $1.94. Operating cash flow and free cash flow also increased significantly. The company returned $203 million to shareholders through share repurchases and dividends and has generated $963 million in free cash flow so far this year. The company's balance sheet remains healthy, with $4.1 billion in deferred revenue and $2.9 billion in cash and investments. Going forward, the company expects product gross margin to expand to the upper 50% to 60% range due to a shift to higher-margin all-flash products, although fluctuations may occur due to factors such as commodity prices and product mix.

The company expects its product gross margins to expand to the upper 50% to 60% level due to the shift to all-flash products. They have raised their revenue guidance for FY 2024 and expect continued strength in all-flash products and Hyperscaler First Party and Marketplace Services. The consolidated gross margin for FY 2024 is expected to be in the range of 71% to 72%, with product gross margin at approximately 60%. Operating margin is expected to be around 27% and EPS to be in the range of $6.40 to $6.50. For Q4, they expect revenue to range between $1.585 billion and $1.735 billion, with a projected increase of 5% year-over-year. The consolidated gross margin for Q4 is expected to be around 71%, with product gross margin at approximately 60%. Operating margin is projected to be in the range of 27% to 28%. The company expects operating expenses to increase in Q4 due to higher incentive compensation and targeted investments. The tax rate is expected to be 20% and EPS is projected to be in the range of $1.73 to $1.83.

The speaker discusses the impact of their purchase commitments for NAND on their cash flow and inventory turns, and expresses gratitude to customers and stockholders. They then answer a question about the timing of investments in AI and the competitive environment in the market. They state that the company is in the early stages of the GenAI opportunity, with customers starting to collect and unify data for Generative AI models.

NetApp expects the deployment of production models and the transition from training to inferencing to become more relevant in the coming months and year. The company had a strong quarter in the flash business, with several eight-figure deals, including partnerships with one of the world's largest oil and gas companies, genomics company, media company, and open source model provider. NetApp's strengths in scale, performance, super part certification, hybrid cloud data pipeline building, and data management capabilities make them well-positioned in the AI market. Some may still underestimate the impact of file services in the AI space.

George Kurian discusses the importance of unstructured data in Generative AI and how NetApp's solutions can help enterprises in this area. NetApp's FSX offers file services for developers using AWS SageMaker and has a high percentage of enterprises' unstructured data stored. NetApp also provides high-performance scale-out solutions for model training and has certifications with NVIDIA for deploying trained models into production. The company is confident about its expanding opportunity in this space and has had several good wins. Mike will address another question.

The analyst asks for a reminder on how customer behavior changes when NAND prices increase rapidly. He wonders if this leads to a decrease in all flash array purchases and an increase in hybrid purchases. The company responds by stating that customers budget based on dollars and the decline in NAND prices has made SSD flash technology more affordable, leading to a shift towards it. They also mention that SSDs are less than 50% of their bill of materials. The next question is about the strong momentum of the C-Series and other new flash products, which have exceeded expectations in each quarter. The company confirms that this momentum has continued through 3Q and into 4Q, and they are not seeing any signs of it slowing down.

George Kurian, CEO of NetApp, believes that the company is still in the early stages of product cycles with their customers. The first use case is modernizing traditional hybrid flash systems and deploying new private cloud environments, which Kurian sees as a continuing trend. The second opportunity is the ASA product family, which is focused on the block storage market. Finally, Kurian sees rapid growth potential in the AI space. He attributes the increasing demand for consumption-based storage to the current economic climate, but also notes the maturity of the offerings and go-to-market strategies as contributing factors. NetApp has a strong focus on execution and has consistently exceeded internal targets, leading to raised external targets.

The speaker, George Kurian, is discussing the current competitive landscape for fiber storage market and mentions three factors that have contributed to the increase in customer interest: the maturity of offerings, customer comfort with procuring cloud-like models, and the transition of customers from one environment to another. He also mentions that there is strong momentum in the category of Keystone service, a new way for the company to address customer buying preferences. The next question from a caller asks for further clarification on the competitive landscape for AI applications.

The speaker discusses the current market for vendors and the importance of unstructured data in building data pipelines for AI and ML applications. They mention NetApp's strong position in this market and their solutions for building hybrid cloud pipelines. The speaker also mentions the use of QLC technology and the potential for increased flexibility in pricing and higher product gross margins. They express confidence in their position and their ability to target other vendors without QLC support.

The speaker discusses the value of AI and enterprise applications, stating that they are not just about price but also about value for customers. They mention the importance of data management and security in the AI field, particularly in light of regulations in the European Union. The speaker also discusses the company's capabilities in building secure environments for AI in both public cloud and customers' data centers. In response to a question, the speaker briefly mentions fiscal year 2025 and suggests considering key factors when modeling for that year.

The speaker is answering a question about the company's plans for fiscal 2025. They express confidence in their momentum and the industry trends that will benefit them. They also mention their product gross margins and the importance of the support business for profitability. The company will be disciplined in their spending but will also invest in driving growth, particularly in the cloud. They also mention their focus on returning capital to shareholders. The speaker is unable to give specific guidance for 2025 but mentions that support revenue has been declining for the past four quarters and they are closely monitoring it.

The speaker, George, discusses the recent decline in deferred revenue and explains that this is due to a trend of customers renewing their support for up to a year instead of purchasing tech refreshes. He also mentions that growth in product revenue will drive additional support revenue in the future. The questioner, Ananda, congratulates the company on their strong performance and asks about the factors contributing to their recent product growth, such as new features and changes in customer behavior.

The speaker discusses the factors that have contributed to the company's recent improvements in results. These include bringing their operating system to new markets, focusing on go-to-market execution, and prioritizing the hyperscaler marketplace and first-party cloud storage services. The speaker also mentions the continued uncertainty in the macro environment, but notes that the company's product demand outlook looks promising for the future.

Ananda Baruah asks a follow-up question to Mike Berry about operating margins and the potential for reaching 30%. Mike explains that they are excited about achieving 30% in the current quarter and will continue to invest in growing the business while keeping operating expenses lower than revenue. The target for margins is not set and will depend on product revenue and storage. Both product gross margins and operating margins are important.

George Kurian, the CEO of the company, mentioned that they have been able to win new customers by replacing competitor's 10K hard disk drives and hybrid deployments with their C Series products. This has also opened up opportunities for them to upsell their other product lines, such as A Series and public cloud services, to these new customers. The company's unified architecture and offerings across different landscapes have resonated well with customers, leading to potential future wins for all of their products. Additionally, their work in the public cloud has allowed them to reach new customers and expand their sales reach.

The company, NetApp, is seeing strong growth in new customers in the public cloud sales sector. They have also seen good progress in this area in the past quarter. There was a dip in their U.S. public sector revenue, but this is attributed to normal seasonality. The CEO, George Kurian, is confident in the company's ability to continue growing and being profitable despite uncertain economic conditions. They have focused on improving execution and introducing new products to expand their market. They are performing well in areas such as capacity flash, block storage, and AI. They have also taken steps to improve the health of their cloud business and expect continued growth in fiscal 2025. They will maintain operating discipline to maintain record profitability. The CEO invites investors to attend their upcoming Investor Day on June 11.

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