The paragraph is the introduction to NetApp's Second Quarter Fiscal Year 2025 Earnings Call. The operator introduces the call and Kris Newton, Vice President of Investor Relations, welcomes participants and introduces the company's CEO, George Kurian, and CFO, Mike Berry. The call includes forward-looking statements about NetApp's financial outlook and future prospects. These statements carry risks that could cause actual results to vary. They specify that all financial measures will be presented as non-GAAP unless indicated. George Kurian expresses satisfaction with the Q2 performance, highlighting a 19% year-over-year increase in all-flash storage, success in cloud storage services, and record Q2 operating margin and EPS.

NetApp has experienced strong growth across its strategic areas, such as flash, block, cloud storage, and AI, supported by both market and company-specific drivers. The company has been delivering rapid innovations, enhancing its value proposition, and gaining customer trust. At the INSIGHT Customer Conference, the enthusiasm among attendees highlighted NetApp's capacity to address hybrid multi-cloud IT challenges and support data-driven strategies. The company reported a 6% revenue growth and a 9% product revenue increase in its Hybrid Cloud segment, with all-flash storage revenue hitting a record high of $3.8 billion, marking robust annual growth for four consecutive quarters.

NetApp has strengthened its leadership in the all-flash storage market, achieving recognition as a leader in the 2024 Gartner Magic Quadrant for the 12th consecutive year. The company introduced new high-end products and saw success with new ASA deals across various regions and industries. With a growing pipeline, NetApp emphasizes its message of simplicity, power, and affordability, integrating Cloud Insights into its Keystone Storage-as-a-Service model. Keystone saw a significant 55% revenue growth compared to the previous year. Additionally, NetApp is focusing on enabling organizations to leverage AI with their corporate data, aligning with their vision for AI and data intelligence, and supporting a hybrid cloud model.

The paragraph describes how the company assists customers in integrating AI with their data by eliminating data silos and providing a unified data view. This enables streamlined data preparation for AI applications by leveraging existing AI tools and NetApp’s features like data versioning and model traceability. The solution includes robust policy-based classification, governance, and security throughout the AI lifecycle, with automated updates to ensure data accuracy. The company has seen significant success in various industries, exceeding their AI business expectations in Q2. They continue to enhance their offerings through partnerships and new solutions, including developments in GenAI cloud and hybrid environments, and collaborations with Domino Data Labs and NVIDIA.

The article discusses the expansion of a partnership with Google Cloud to enhance AI-ready infrastructure for public sector and regulated industries using ONTAP and StorageGRID solutions. This collaboration has led to early successes and growth in cloud storage services, with a significant year-over-year increase in revenue. New innovations include updated Cloud Volumes ONTAP with ransomware protection, and enhancements to Google Cloud NetApp Volumes, now available in all Google Cloud regions. The focus remains on expanding the all-flash storage portfolio and meeting customer needs with disciplined execution.

The paragraph discusses NetApp's advancements in public cloud storage, emphasizing increased capabilities, improved security, and ease of use for customers. NetApp is positioned as a leader in innovation, which has allowed it to gain market share and demonstrate strong earnings growth. The company reports a successful quarter, meeting or surpassing guidance expectations. Key financial highlights include a strong gross margin of 72% and a 29% operating margin, both contributing to significant year-over-year growth in gross and operating profits. The narrative expresses confidence in achieving mid to upper-single digit revenue growth and double-digit EPS growth by fiscal year 2027.

In Q2, the company achieved a 6% year-over-year revenue growth, marking the fourth consecutive quarter of similar growth rates. Product, cloud, and professional services outpaced this growth, with professional services up 10% and public cloud revenue growing by 9%. The company returned over $400 million to shareholders through dividends and share buybacks, reducing share count by 1 million year-over-year. The company expects mid-single-digit revenue growth in the second half of the fiscal year and has raised its fiscal year '25 revenue and EPS expectations. Total revenue was $1.66 billion, with a 9% increase in billings to $1.59 billion. Keystone, the company's Storage-as-a-Service offering, showed market traction, contributing to a 2% increase in deferred revenue and an 11% quarter-over-quarter rise in unbilled RPO. The gross margin was 72%.

The paragraph discusses the company's financial performance in Q2, highlighting a product gross margin of 60% and growth in gross profit dollars in line with revenue. Strategic commitments have been made to secure SSD supply for 2024, maintaining confidence in gross margins, despite a slight expected decline in the second half of fiscal year '25. Recurring support business remains highly profitable with a 92% gross margin, while Public Cloud gross margins improved to 74%. Operating expenses increased slightly year-over-year, with an operating margin of 29%. EPS exceeded expectations at $1.87, driven by higher revenues and margins. Operating cash flow decreased to $105 million, and free cash flow was $60 million, both down from the previous year.

In Q2, the company's cash flow decreased year-over-year due to upfront payments for strategic SSD purchases, impacting inventory levels and turns. Share repurchases and debt repayments totaled $406 million and $400 million, respectively, resulting in a strong balance sheet with $2.2 billion in cash and short-term investments against $2 billion in debt. The company raised its full-year revenue guidance to $6.54 billion to $6.74 billion, with expected 6% growth. Fiscal year '25 gross margins are anticipated at 71%-72%, with operating margins at 28%-28.5%. Net interest income is expected to increase slightly to $55 million, and the tax rate should be 20%-21%. EPS is forecasted to be $7.20 to $7.40, indicating a 13% growth.

The article discusses NetApp's financial outlook, noting a decrease in free cash flow year-to-date despite higher revenue and net income, due to timing of cash payments related to incentive compensation and strategic SSD purchases. The company anticipates improved cash flow in the latter half of the year but expects free cash flow in fiscal year 2025 to be slightly lower due to these timing issues. For Q3, NetApp projects revenue between $1.61 billion and $1.76 billion, a gross margin of 71% to 72%, an operating margin of 29%, and EPS between $1.85 and $1.95. Although EPS is expected to decline year-over-year for Q3, growth is anticipated when accounting for previous year anomalies. NetApp predicts double-digit EPS growth from fiscal year 2025 to 2027, remaining confident in achieving customer digital and cloud transformation goals.

The paragraph consists of a Q&A session where Asiya Merchant from Citigroup asks about the impact of macroeconomic factors on company growth and AI developments. George Kurian responds by saying that the macro environment hasn't changed, and the company's growth is not reliant on it but rather on its strong product portfolio focused on priority customer areas like data center modernization and cloud. Regarding AI, George notes that they are in the early stages of preparing data infrastructure for AI applications.

In the paragraph, George Kurian discusses the company's strong performance in AI and all-flash arrays. He notes that the company has made significant wins across various sectors, indicating potential for future large-scale AI deployments. There is also positive momentum with Google's AI cloud deployments in the public sector. Although no new updates are provided, there is an optimistic outlook on growth opportunities expected in the second half of the following year. Amit Daryanani from Evercore questions the durability of the all-flash array growth, which has seen near 20% growth for several quarters. George Kurian confirms the consistent high growth rate in all-flash arrays, which is significantly outpacing the market and competitors.

The paragraph discusses NetApp's strategic positioning and innovation in the market, highlighting their customer-aligned services, advanced cloud capabilities, and competitive advantages. Amit Daryanani and Mike Berry discuss the company's inventory management strategy, particularly their pre-buying of memory components, which has led to an increase in inventory. Mike Berry confirms that the pre-buys are mostly complete, covering anticipated demand for fiscal 2025, and mentions observing a market softening in NAND, leading them to pause further pre-buys while continually monitoring the situation.

The paragraph involves a discussion between analysts and company executives about financial metrics and performance. Analyst Tim Long from Barclays asks about the sequential decline in Remaining Performance Obligations (RPO) and the strong performance in the public sector. Mike Berry, one of the executives, responds by explaining that RPO consists of deferred revenue and unbilled commitments, with the latter not appearing on the balance sheet. He notes that RPO declined as expected due to a typical sequential drop in deferred revenue from Q1 to Q2, but highlights that year-over-year deferred revenue growth is a positive sign that reflects strong billings. Mike anticipates continued growth in unbilled commitments, particularly driven by the Keystone product. He then defers to George Kurian for insights on the public sector performance.

The paragraph discusses the performance of a company's public sector business and its potential implications for future projects with the new administration. Despite a continuing resolution, the public sector segment performed well, partly due to long-term projects tied to annual budget cycles. There is optimism about policy implementation due to alignment between legislative and executive branches. Following this, a question from Jason Ader addresses potential impacts from the Broadcom-VMware acquisition on storage projects. George Kurian responds that there have been no significant effects yet, noting customers are considering optimizing their existing setups, moving to new architectures, or transitioning to public cloud solutions, with the company benefiting in scenarios involving alternative hypervisors and cloud migrations.

In the paragraph, Mike Berry confirms to Jason Ader that revenue associated with certain services is reported under professional services due to its nature. Jason Ader inquires if the growth in professional services is anticipated as Keystone becomes a bigger contributor. Mike Berry affirms this, noting growth due to Keystone and foreseeing continued growth. The conversation shifts to Simon Leopold, who asks about the lack of disclosure on the hardware versus software mix in their hybrid cloud business and its impact on product gross margins. Mike Berry explains that they no longer disclose this breakdown, and instead, he highlights the importance of focusing on the mix of flash in their business as a significant driver of gross margins. Simon also asks if there are specific industries experimenting with AI applications, but this is not directly addressed in the summary.

The paragraph discusses the company's strategic focus on selling high-performance flash products, prioritizing the replacement of their hybrid installed base to maintain high product gross margins. George Kurian highlights their success across various industries, notably in public sector, manufacturing, financial services, and healthcare. In response to a question about the competitive environment, he explains that while the macroeconomic environment remains challenging, there have been no significant changes in competition, and the pricing remains rational. The company, positioned as a specialist, continues to outperform integrated system vendors and feels confident in maintaining their strong position.

The paragraph features a conversation during a business call, where Joe Cardoso asks George Kurian about the potential impacts of the new U.S. administration on tariffs, government inefficiencies, and taxes, and how these might affect their business. George Kurian explains that their business is protected from potential tariffs on China and doesn't foresee significant impacts. He mentions that they will wait for the new administration's policies before providing more updates. The operator introduces Param Singh from Oppenheimer, who asks about improvements in public cloud revenue and the factors driving its recovery. George Kurian responds, beginning to outline three strategies implemented, starting with building a focused go-to-market strategy with hyperscalers.

The paragraph discusses the progress of a company in three areas: expanding its cloud storage services in the first-party and hyperscaler markets, stabilizing its subscription business, and improving gross margins. The hyperscaler and first-party cloud storage services have grown by 43% year-on-year, and the company expects to achieve double-digit growth in the second half of the fiscal year, with plans to hit long-term gross margin targets by the end of fiscal year 2025. Param Singh asks about the Keystone segment, pointing out its current small size despite a $330 million unbilled RPO with typical three-year durations. George Kurian responds that customer feedback for Keystone has been excellent, with no customer churn reported yet.

The paragraph discusses the growth and strategy of a company's cloud and subscription services. The speaker highlights the flexibility and effectiveness of their products and the expansion of their partner network, which is contributing to increased transactions. They express optimism about the future growth of these services, especially in capturing new customers and workloads. Additionally, they address a question about the public cloud segment, noting significant growth in first-party hyperscaler marketplace storage services, with a 43% increase. It also mentions a strategic shift from subscription services to these first-party and marketplace offerings and anticipates changes in this area through the fiscal year.

The paragraph discusses a strategic shift in a company's revenue model, emphasizing the decline of subscription revenue (about 20% currently) in favor of growing first-party and marketplace business, which constitutes more than 80% of revenue. This shift is strategic, aiming to enhance gross margins and set the company up for success in the coming years. Additionally, a discussion follows regarding the company's progress in transitioning its installed customer base to all-flash systems, which remains at 40%. Despite the fast growth of flash, the installed base is also growing significantly, with the company outperforming the market and competitors, indicating success in acquiring new business from existing and new customers.

The paragraph discusses the performance and momentum of a company's flash product families and AI-related business developments. During a conference call, company representatives highlight the success of their on-premise AI solutions, mentioning over 100 wins in various industries and geographic regions, some of which are in proof-of-concept mode or early pilots. They differentiate these from their public cloud AI wins, which are reported separately. Additionally, the conversation shifts to free cash flow, where they note the impacts of annual incentive compensation payments and inventory pre-buys as key factors affecting their current year, without providing guidance for 2026.

The paragraph provides a discussion during an earnings call. It begins with an acknowledgment of working capital and incentive compensation normalization for the coming year, with a plan to discuss pre-purchase strategies later. David Vogt from UBS asks George Kurian about the success and revenue dynamics of their new block portfolio in the flash market, and its impact on margins. George Kurian expresses satisfaction with the ASA product's performance, indicating it's attracting new and existing customers and showing positive momentum. He refrains from breaking down margin specifics for the ASA product but suggests that their shift towards flash products is expected to positively influence gross margins over time.

The paragraph discusses a business strategy and the pricing environment, focusing on future revenue projections and partnerships. Mike Berry indicates that despite changes in pricing, revenue isn't expected to change significantly due to increased prices, and updates on revenue and margin for fiscal years 2025 and 2026 will be provided as needed. Steven Fox asks about a partnership with Google Cloud, and George Kurian explains that the collaboration began with Google's public cloud and expanded to include Google Distributed Cloud for data centers. Early successes and positive momentum have been reported, particularly in high-regulated and public sector businesses, though these are still large-scale, early-stage deployments.

In the paragraph, there's a discussion about growth in the public cloud business and its components. Steven Fox, Aaron Rakers, and Mike Berry are having a financial analysis conversation. Aaron Rakers from Wells Fargo inquires about the growth of first party and hyperscale marketplace storage services, noting it grew over 30% last quarter and comprised two-thirds of the public cloud business. He questions why the growth isn't accelerating further if it's now 80% of the public cloud business. Mike Berry clarifies that at the Analyst Day in June, first party and marketplace constituted less than half of the total cloud revenue, but this percentage is increasing. The 80% figure refers to consumption revenue, which includes more than just first party and marketplace products. Berry expresses confidence in future growth as that segment of the business expands.

In the article paragraph, Aaron Rakers from Diawa discusses the relative strength of different markets, noting that the Americas performed better than Europe, partly due to slower economic conditions in Europe. He suggests that stronger AI application deployment in the U.S. might be contributing to this difference. George Kurian responds by praising the performance of both the European and American teams, noting that the European team has excelled despite macroeconomic challenges. He attributes the success in North America to excellent execution across various customer segments rather than any fundamental differences. The conversation then transitions to a question from Ananda Baruah from Loop Capital.

The paragraph discusses the impact of new high-end ASA products on NetApp's product line. George Kurian explains that while the mid-range products historically attract new customers, especially in the commercial market, the high-end products are helping to increase wallet share within existing customers. This shift is significant as NetApp has not previously sold block-optimized products. The unified AFS and ASA products have been well-received, contributing to a strong sales performance, with a 19% year-over-year increase. Kurian is optimistic about the upcoming year, noting that all products in the flash portfolio have performed well. The dialogue concludes with Ananda Baruah and Kris Newton moving to the next question from the conference call.

In the discussion, George Kurian explains that the 43% growth rate mentioned is not significantly influenced by the conversion from subscription to hyperscale services, as the main contributors are new NetApp customers and expansions from existing clients, along with strong performance in hyperscaler services. Regarding the growth in AI deals, Kurian notes that clients are expanding their storage capacity both to build new GPU clusters and to consolidate data in data lakes using NetApp's infrastructure. NetApp's partnership with Lenovo and NVIDIA on infrastructure and software solutions is also highlighted. Nehal Chokshi of Northland Capital Markets acknowledges the company's strong results.

In a conversation about NetApp's AI vision and future product developments, Nehal Chokshi asks George Kurian about the company's strategy to decouple and scale data management compute and storage. George confirms this is part of their plan and explains that while it won't be as challenging as the transition to Clustered ONTAP, they have been working on scaling their architecture over the years. They anticipate deploying these solutions to customers by the end of next year. In a separate question, Ari Terjanian from Cleveland Research asks about the doubling of AI deals to 100 in the quarter, seeking clarification on this strong result.

The paragraph discusses the company's engagement with AI deals and the impact of SSD pricing changes. George Kurian mentions that the AI deals involve long sales cycles and require broad customer engagement, which has accelerated their pipeline. Mike Berry acknowledges recent pricing changes, noting minor impacts on revenue due to fluctuations in demand, and states that the full effects will be seen over time. George Kurian concludes by emphasizing the company's focus on innovative and differentiated solutions in data infrastructure, which are driving revenue growth and market share gains in key areas like flash, block, cloud storage, and AI.

The conference has ended, and attendees can now disconnect from the presentation.

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