The paragraph is from the NetApp Third Quarter Fiscal Year 2025 Earnings Call. Kris Newton, the Vice President of Investor Relations, introduces the call and states that it will include forward-looking statements about the company's financial outlook and strategies. These statements are subject to risks and uncertainties, and all financial measures will be presented as non-GAAP. George Kurian, the CEO, then shares that the company achieved a 2% revenue growth year-over-year and an operating margin of 30%, which exceeded expectations, although they are not satisfied with their top-line performance.

The company experienced strong performance in AI, cloud storage, and hybrid cloud revenue, with a notable increase in its all-flash array business. Despite some sales execution challenges in Q3, measures have been implemented to improve deal progression, resulting in several closed deals. The company's Storage as a Service offering, Keystone, saw significant year-over-year growth. They have been recognized in Gartner's 2025 report for their primary storage solutions. Continuing their innovation, the company refreshed its product lines, including new entry and mid-range flash arrays, enhancing scalability and capabilities for customers.

The paragraph discusses the capabilities and successes of ONTAP-powered products, emphasizing their simplicity, scalability, and cost efficiency through integrated data tiering. It highlights the adoption of the AFF A90 by a US financial services firm for AI-enabled fraud detection, and the AFF C60 by an electronics manufacturer for unified data management across multiple locations. The text notes the increasing demand for AI solutions, reflecting the growing market for enterprise Generative AI (GenAI) and the importance of unified data views. In Q3, the AI business exceeded expectations with over 100 infrastructure and data modernization projects. NetApp's StorageGRID object storage solution was enhanced to improve scalability, with a US retail bank adopting it for cloud storage optimization, including AI and data management.

The paragraph discusses NetApp's strategic moves and achievements in the AI and public cloud sectors. NetApp played a crucial role in solving scalability and data integration challenges for a major bank's GenAI workloads by providing a secure, economical data solution. Additionally, NetApp honed its Public Cloud focus by selling the Spot by NetApp business to Flexera, aiming to enhance customer benefits. The company's Public Cloud strategy is anchored by its leading cloud storage services, which saw significant growth and contributed to a 15% revenue increase in the segment, with a strong emphasis on first-party and marketplace storage services.

The paragraph highlights recent innovations and strategic partnerships by NetApp with major cloud providers like Amazon, Microsoft, and Google. These advancements have expanded NetApp's market opportunities and are attracting customers moving to the cloud for improved performance and lower costs. A European bank is migrating a large volume of data to AWS using NetApp's solutions, which promises cost savings and operational efficiency. Despite underperforming in Q3, NetApp remains confident in its strategic direction, emphasizing its modern approach to hybrid, multicloud infrastructure and data management. The company is committed to enhancing its sales execution to recover in Q4, with a vision to maintain market growth and help customers leverage data effectively in the AI era.

The paragraph discusses the financial outlook and recent changes at NetApp. The company has adjusted its FY 2025 guidance due to the divestiture of Spot and CloudCheckr, FX impacts, and short-term challenges in the global public sector, but remains confident in achieving long-term financial goals. This earnings call marks the last for Mike Berry, who is being succeeded by Wissam Jabre. Under Mike's leadership, NetApp has seen growth and improved profitability. The company's Q3 results showed operating margins above guidance and EPS in line with expectations, despite lower revenues. Adjusted projections are also made for Q4 and FY 2025 due to the Spot divestiture and a stronger U.S. dollar.

The paragraph discusses the company's financial performance in Q3. Revenue increased by 2% year-over-year to $1.64 billion, despite being $44 million below the guidance midpoint due in part to foreign exchange impacts. The company took steps to control expenses and maintain pricing discipline, and returned over $300 million to stockholders through dividends and share repurchases, reducing the diluted share count by 3 million year-over-year. Product revenue rose 1%, while support revenue declined 2% but remained constant in constant currency terms. Professional services revenue saw a 14% increase, driven by strong growth in the Keystone Storage-as-a-Service offering. Public cloud revenue grew by 15%, and cloud revenues, excluding Spot by NetApp, grew 21%. The deferred and remaining performance obligations were stable, with unbilled RPO increasing 6% quarter-over-quarter as an indicator of future growth potential in the Keystone business.

In Q3, the company reported a consolidated gross margin of 71%, with product gross margin at 57% and expected to be around 56% in Q4. The recurring support business achieved a high gross margin of 92%, and public cloud gross margins improved by 1,000 basis points to 76% from the previous year, with expectations to reach the high end of a 75% to 80% target by fiscal year 2025. Operating expenses decreased by 2% year-over-year and 7% from Q2 2025, resulting in a 30% operating margin, surpassing expectations. Earnings per share (EPS) were $1.91, aligning with guidance, despite revenues and gross margins being below projections, which were balanced by controlled operating expenses. Operating cash flow was $385 million, and free cash flow was $338 million, both down from the previous year due to lower collections and higher outflows for strategic SSD purchases, which inflated inventory levels and turns. However, these purchases are expected to be utilized by fiscal year-end, reducing inventory. The company predicts lower free cash flow in fiscal year '25 due to non-recurring working capital factors. Days sales outstanding (DSO) rose to 50, matching seasonal patterns, and $306 million was returned to shareholders via share repurchases and dividends.

The company has $600 million left in its repurchase authorization and a strong balance sheet, with $2.3 billion in cash and investments versus $2 billion in debt. Recent changes affecting guidance include a stronger US dollar, which is expected to reduce revenue by $30 million and EPS by $0.08 in the second half of fiscal year '25, and the planned divestiture of Spot in early March, leading to $15 million less in Q4 cloud revenue. Full-year revenue guidance is adjusted to $6.49-$6.64 billion, reflecting 5% growth, with a gross margin of 71%, operating margin of 28%-28.5%, net interest income of $55 million, and a tax rate of 20%-21%. EPS is projected at $7.17-$7.27, representing 12% growth. For Q4, revenue is expected to be $1.65-$1.80 billion, with a gross margin of 69%-70%, an operating margin of 28%, net interest income of $10 million, and a tax rate of 20%-21%.

The paragraph is a part of a conference call where Mike, the CFO of NetApp, expresses gratitude to the company's ecosystem, including employees, customers, and shareholders, as he completes his tenure. He is confident in NetApp's alignment with IT investment priorities and its ability to deliver long-term shareholder value. He hands over the call to Kris for the Q&A session. During the Q&A, Aaron Rakers from Wells Fargo asks George about efforts to improve sales execution. George responds by highlighting a strong pipeline driven by secular and company-specific growth, alongside a refreshed and differentiated product portfolio.

In the paragraph, the company discusses the delay of several large deals expected to close in the last weeks of the quarter due to extended procurement times. This necessitated a more detailed inspection of their transaction closing plans. Many delayed deals have since closed in Q4, especially larger ones, and the company plans to maintain this detailed approach into fiscal year 2026. Meta Marshall from Morgan Stanley follows up, asking if delays were due to execution issues rather than customer uncertainty related to a new administration. George Kurian responds by noting that European markets, specifically France and Germany, display caution due to lack of stable governments. In the U.S., the public sector performed as expected in Q3, but there is caution reflected in their Q4 guidance. He acknowledges that customer budgets at the start of the calendar year can be slow to release, but the company has a clear understanding of their pipeline and continues to progress deals as planned.

The paragraph discusses the competitive landscape and product strategy of George Kurian's company. Kurian states that despite execution issues, the competitive environment has not changed, and the company's product portfolio remains strong. They've refreshed their entire product lineup, including the AFF series and ASA series, and have seen positive traction, especially in the C Series and ASA product families. In terms of product gross margins, Irvin Liu asks about margins beyond Q4. Kurian explains their focus is on driving incremental gross margin dollars, which they've successfully achieved in 2025, and mentions that fiscal Q4 margins will benefit from strategic SSD purchases. The ability to pass higher commodity costs to customers is acknowledged but not elaborated upon.

The paragraph discusses the improvement in gross margin diversification across different product lines, particularly in product support and cloud, as planned at the start of the year. Cloud gross margins have increased significantly, while product gross margins have declined due to strategic prebuys impacting costs in the P&L. As of Q4, the costs from these prebuys are aligning more closely with current market prices. Looking toward fiscal 2026, the company anticipates positive impacts from price adjustments made in Q3 and the introduction of new products, such as the A Series, which should enhance revenues and margins. Additionally, it expects to have used most prebuys by fiscal 2025 and foresees ongoing weakness in the NAND market in fiscal 2026.

The paragraph discusses financial projections and recent performance related to component costs and product gross margins, focusing on expectations for Q4 2025 and fiscal 2026. It anticipates that component costs will peak in Q4 2025 before stabilizing and then declining. Consistent product mix is crucial to achieving anticipated product gross margins, which are expected to increase in 2026. The paragraph also highlights a 1,000 basis point improvement in cloud margins and an additional 100 basis point boost from the divestiture of Spot. In response to a question from David Vogt of UBS, George addresses the reasons behind late or postponed deals, noting that all-flash array business performed well and seeks more details on factors affecting customer decisions, such as deal size, price, technology, and other specifics.

In the paragraph, George Kurian discusses the performance of all-flash product transactions, noting missed opportunities due to delayed client decisions and budget allocations at the beginning of the year. Some clients also wished to consolidate more equipment, which slowed closures. European market softness also led to deal hesitations. Jason Ader from William Blair questions about the financial impact of Spot, generating $15 million in the quarter, and seeks information on U.S. Federal exposure. Mike Berry responds, stating that the divested cloud business had consistently contributed around $94 million in revenue over the trailing 12 months.

The paragraph discusses the financial outlook and operations of a company in relation to its gross margins and U.S. public sector business. The company's gross margins are consistent with their cloud gross margins but slightly lower, and any impact on earnings per share (EPS) is expected to be neutral. They mention a divested business that adjusted the growth numbers from 15% to $21 million. The U.S. public sector is a significant part of their business, and current caution within this sector has been factored into their Q4 outlook. It's anticipated that technology-led productivity improvements will eventually benefit the company. The U.S. public sector, including federal, state, and local governments, accounts for 10% to 13% of the total company revenue. The conversation shifts to Jason Ader clarifying this revenue percentage and concludes with Ruplu Bhattacharya asking about potential cost actions and the company's future financial strategies, including operating expenses and free cash flow, for fiscal fourth quarter.

In the paragraph, Mike Berry discusses the company's financial strategies and performance. He highlights that their operating expenses have remained stable compared to the previous year, despite investing in new projects and products. Berry outlines a decline in operating cash flow by $241 million year-over-year, attributed to strategic purchases and incentive payments. He mentions that these factors will continue to affect working capital in fiscal 2025. Additionally, Berry addresses questions about potential cost-cutting actions and historical strategic pre-buys in the NAND market, acknowledging that the company has used up the benefits from those purchases over the last four quarters.

The paragraph discusses NetApp's position in the competitive landscape, emphasizing that their main advantage lies in their software, hybrid cloud, and AI technologies rather than NAND pricing alone. Although the cost of NAND is a smaller part of the total cost for customers, NetApp offers a range of products utilizing different types of NAND. Despite concerns about the potential risks of being too optimistic about NAND pricing, NetApp maintains strong relationships with major solid-state technology suppliers and is engaged in ongoing discussions with them. The paragraph also mentions leadership changes and future expectations regarding pre-buy strategies in the NAND market.

The paragraph discusses the current state of AI adoption in enterprises, with George Kurian noting that organizations are beginning to establish AI centers of excellence and are integrating GPU-based compute with high-performance storage for AI purposes. The company is experiencing substantial success with several large AI-related projects, including building data lakes to support various data types for large language models. They are also winning AI service provider contracts, advantageous due to their technological features like multi-tenancy, security, AI model versioning, and data mobility. Overall, while still in early stages, their approach and technology in AI are well-received.

In the discussion, Krish Sankar is informed about the cloud revenue expectations for Q4, which include a $9 million contribution anticipated in early March. Simon Leopold from Raymond James inquires about anticipated tariffs and their impact on the gross margin concerning NAND pricing. George Kurian responds by highlighting the company's highly flexible global supply chain, including minimal dependency on China and production capabilities in Mexico, which can be relocated if necessary. Kurian states that tariffs have not been factored into the Q4 guide, suggesting that any tariff impact would affect the entire industry, given the reliance on standard components. Mike is congratulated on his retirement.

In the article paragraph, Lou from Daiwa thanks Mike for his support and asks George for an update on AI's impact on revenue growth. George explains that while AI projects are currently in their early stages, with clients in proof-of-concept phases, they expect these projects to go into enterprise production in the second half of 2025 or 2026. Larger clients are building AI centers of excellence, but broader adoption will take time. He mentions seeing positive developments across industries and geographies. Lou thanks him, followed by a question from Elisa on behalf of Tim Long of Barclays about Keystone’s growth and customer interest in transitioning to as-a-service models. George responds that they offer a broad range of as-a-service models.

The paragraph discusses the strong performance and customer enthusiasm for cloud services, specifically highlighting the flexibility that cloud transformation offers. Clients are adopting hybrid models with both public and on-premises architecture through Keystone, and others are using flexible infrastructure for applications like AI that are not yet at scale. An analyst, Ananda Baruah, inquires about growth targets set for 2027 and if recent quarterly results affect these targets. Mike Berry reassures that despite the current quarter's events, the company remains confident in meeting their long-term growth targets, including mid- to high single-digit growth, margins, and cash flow conversion.

The paragraph details a discussion during a call where Asiya Merchant from Citi asks about the progress of converting the installed base to flash and acquiring new customers. George Kurian responds that the penetration of their all-flash products into the installed base is growing modestly each quarter, reaching 43%. He notes that both flash and public cloud solutions are key to winning new customers. Samik Chatterjee from JPMorgan then inquires about the progress of a disaggregated solution, asking for updates on the launch and its potential impact on the addressable market. The conversation includes well-wishes for Mike on his retirement.

The paragraph discusses George Kurian's remarks on the progress and strategic focus of the company's disaggregated storage solutions for high-performance unstructured data use cases. He highlights their leadership in scalable, high-performance NAS, particularly for AI applications, and their competitive edge in the NAS market. Kurian also addresses their cloud business partnership with major hyperscale providers since 2019, emphasizing its value and profitability. He expresses confidence in the momentum of their hyperscaler business. Samik Chatterjee thanks the speaker, and operator Ari Terjanian from Cleveland Research poses the next question.

The paragraph discusses the dynamics between VMware and Broadcom, with a focus on customers considering new architectures, such as converged, hyperconverged, and cloud solutions. George Kurian expresses confidence in their VMware-related offerings, highlighting that they provide solutions to optimize VMware landscapes and enable clients to transition from on-premise to cloud using VMware and modern container-based architectures. There are also joint solutions with Microsoft and Red Hat for on-premise alternatives. Kurian notes that the direction of customer preferences is still evolving, but they offer good choices regardless. Param Singh asks about deal push-outs, specifically about competitive displacements versus replacing existing footprints, to which Kurian responds that no specific pattern or trend has been observed in the deals being pushed out.

The paragraph discusses the company's efforts to improve visibility into the customer procurement process and ensure transaction closure. It highlights that the company undertakes numerous transactions each quarter, including upgrading existing installations and replacing competitor products. Despite some setbacks in Q3, the company remains confident in its position as a key supplier for AI and data-driven workloads. It is taking steps to recover, citing early successes in Q4, and believes it has a strong product portfolio aligned with IT priorities. The company is optimistic about its ability to grow and gain market share.

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