NetApp, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Q2 Performance: Revenue growth driven by 19% Y/Y increase in all-flash storage and strong performance in public cloud. Achieved record Q2 operating margin and EPS.
• Hybrid Cloud Details: Revenue grew 6%, product revenue 9%. All-flash array annualized run rate at $3.8B (19% Y/Y). Keystone Storage-as-a-Service revenue grew ~55% Y/Y.
• AI Business: AI business performed ahead of expectations in Q2 with over 100 AI and data-lake modernization wins. Partnerships with Domino Data Labs, NVIDIA, and Google Cloud for AI deployments.
• Public Cloud Innovations: Public Cloud revenue grew 9% Y/Y. Updated Cloud Volumes ONTAP and Google Cloud NetApp Volumes.
• Financial Metrics: Q2 revenue $1.66B (+6% Y/Y), billings $1.59B (+9% Y/Y). Consolidated gross margin 72%, operating margin 29%, EPS $1.87.

Segment Performance

• Hybrid Cloud: Revenue grew 6% year-over-year, product revenue grew 9%. All-flash array annualized revenue run rate reached an all-time high of $3.8 billion, up 19% year-over-year, with fourth consecutive quarter of high-teens to low-20% growth.
• Public Cloud: First-party and marketplace cloud storage services grew roughly 43% year-over-year. Public Cloud segment revenue grew 9% year-over-year to $168 million.

Guidance

• Full Year FY25: Raised revenue guidance to $6.54B-$6.74B (6% Y/Y midpoint). EPS expected $7.20-$7.40 (13% Y/Y midpoint). Consolidated gross margin 71%-72%, operating margin 28%-28.5%.
• Q3 FY25: Expected revenue $1.61B-$1.76B (5% Y/Y midpoint). Consolidated gross margin 71%-72%, operating margin ~29%. EPS $1.85-$1.95.

Risks

• Macroeconomic uncertainties affecting customer spending.
• Impact of inventory pre-buying on cash flow, though management states no further pre-buys planned.

Q: Asiya Merchant from Citigroup asked about macroeconomic impact and AI deployment.

A: George Kurian noted alignment with customer priority spending areas and strong product portfolio. AI has early wins in verticals but not yet large scale.

Q: Amit Daryanani from Evercore asked about inventory pre-buys.

A: Mike Berry said majority inventory increase was pre-buys, no further pre-buys planned as NAND market softening observed.

Q: Tim Long from Barclays asked about RPO and public sector.

A: Mike Berry explained RPO components and deferred revenue trends. George Kurian noted public sector performance despite continuing resolution.

Q: Jason Ader from William Blair asked about Broadcom-VMware acquisition and Keystone.

A: George Kurian said no material impact, Keystone revenue in professional services.

Q: Simon Leopold from Raymond James asked about software/hardware mix and AI customer patterns.

A: Mike Berry discussed flash mix impact on gross margins. George Kurian noted AI wins across geos/industries.

Q: Param Singh from Oppenheimer asked about public cloud recovery and Keystone.

A: George Kurian and Mike Berry discussed public cloud growth drivers and Keystone positive feedback.

Q: Elizabeth Porter from Meta asked about free cash flow and AI wins.

A: Mike Berry discussed incentive comp normalization and AI win mix.

Q: David Vogt from UBS asked about block portfolio and NAND pricing.

A: George Kurian talked about ASA product momentum. Mike Berry discussed NAND pricing impact on revenue.

Q: Steven Fox from Fox Advisors asked about Google Cloud partnership.

A: George Kurian explained Google Distributed Cloud partnership and early wins.

Q: Aaron Rakers from Wells Fargo asked about public cloud growth.

A: Mike Berry clarified public cloud revenue components and growth outlook.

Q: Ananda Baruah from Loop Capital asked about ASA products and new customers.

A: George Kurian discussed ASA product reception and new customer acquisition.

Q: Nehal Chokshi from Northland Capital Markets asked about AI vision.

A: George Kurian confirmed decoupling of data management components in AI vision.

Q: Ari Terjanian from Cleveland Research Company asked about AI deals and pricing.

A: George Kurian talked about AI deal momentum. Mike Berry discussed pricing impact on revenue.