NetApp Inc Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Krish Sankar - TD Cowen - Analyst : Congrats on the strong results. And Mike, congrats on the retirement, and thanks for all your help towards the sell side and the buy side. We're going to miss you. And my first question is for Mike. On the higher NAND pricing, from a demand or a top line standpoint, is that impacting the demand for all-flash? And from a cost standpoint, how do you think about its impact on gross margins? Because I understand you made the strategic NAND purchases but how many quarters do you think that lower NAND price purchase can carry you through? And then I have a follow-up for George.

Question: Krish Sankar - TD Cowen - Analyst : Got it. Got it. And then, George, a quick question for you. earlier this year, you released the AFA A Series. It's like a great product as it unifies file block and object storage for customers. Can you just update us how is the product performing. And I understand new products take a while to translate into sales. How is the order flow pipeline looking like? And any kind of customer pushback for using a unified product versus the best-of-breed solution. Any feedback on there would be helpful. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 28, 2024 / 9:30PM, NTAP.OQ - Q1 2025 NetApp Inc Earnings Call

Question: Samik Chatterjee - JPMorgan - Analyst : Before I ask my question again, Mike. Thanks for working with us so closely. I know there's some time, but it was great working with you, best of luck as well. I guess if I can start for the question, George, I had a more of a question on the comments that you had relative to uncertain macro and how that's impacting storage demand? Because when I look at the progression of revenue here, which you've been doing a great job on sort of executing to plan. The sequential trends are pretty much in line with seasonality that you've seen historically. It does look, customers are back to spending in a more sort of normal fashion. So when you think about how the uncertain macro is impacting your customers' appetite to spend, what are you really seeing in terms of what would even concern you because you're on track to do record revenue at this point, trends look pretty sequential in line with seasonality. So just curious like what is the -- what are you seeing in terms of your customers' appetite to spend in a normal fashion. Is there anything that is giving you some hesitation on that front? And I have a follow-up.

Question: Samik Chatterjee - JPMorgan - Analyst : Got it. Got it. And in terms of -- when you talk about AI workloads and you talk about sort of AI is truly going to be more of a hybrid sort of environment play with both public cloud and sort of your hybrid solutions. And you talked about in the prepared remarks, ASA driving some of those wins as well. How do you think about fiscal '25 in the context of what contribution you're expecting from these wins that are more specific to customers saying these are going to be dedicated towards their AI deployments or AI workloads, both covering sort of public cloud and hybrid, how you're thinking about what that looks like for your fiscal year.

Question: Victor Chiu - Raymond James - Analyst : This is Victor Chiu in for Simon. Can you just provide some color around the sequential improvement in public cloud this quarter. Kind of what was the driver behind the strike there? And how should we think about the sustainability and trajectory of the improvement from this point going forward?

Question: Victor Chiu - Raymond James - Analyst : Okay. So the strength was kind of largely in line with what you were expecting for the most part?

Question: Victor Chiu - Raymond James - Analyst : Okay. That's helpful. And just one quick follow-up. How should we think about a follow-up on the last question. How should we think about the mix of the type of customers behind the initial AI contributions? Are you seeing demand from enterprises? Or is it biased towards kind of hyperscale cloud-type operators. How do we think about where the demand is coming from initially and how that evolves over time as the type of AI workloads evolve?

Question: Steven Fox - Fox Advisors LLC - Analyst : Mike, congrats on your retirement. I guess just in terms of thinking about competitive dynamics, George, it seems like you called out like you mentioned, a broad set of sort of positives that could be winning market share. Can you sort of give us a sense versus now versus 90 days ago where you're seeing the most gains and why? And where maybe you're more confident going forward on share gains?

Question: Amit Daryanani - Evercore ISI - Analyst : I have two as well. I guess, George, maybe to start with you folks are seeing some really good growth on the all-flash array side. I think it's up 21% this quarter. Can you just talk about is this cyclical recovery in demand? Or is it share gains? Or you just converting your installed base, perhaps more towards all flash. Just trying to understand what's driving the strength here? And then crucially, what do you think the durability of this 20% plus growth is on the all-flash side as you go forward?

Question: Amit Daryanani - Evercore ISI - Analyst : Got it. That's really helpful, George. And then Mike, congrats as well on your retirement. Could you just maybe just touch on how should we think about product gross margins from the 60% ZIP code that you had in Q1? Really for the rest of the fiscal year? Just maybe any parameters on how to think about product gross margins as we go through the year would be helpful.

Question: Mehdi Hosseini - Susquehanna International Group - Analyst : I want to go back to George's commentary, you talked about all-flash array record 3,400, actually year-over-year growth of 21%, another record. But George, consistent with the prior question. Every time we get to this kind of a 20% plus growth, the concern is, okay, when is it going to accelerate? And I understand that you laid out your targets for FY27, but could we see a deacceleration in FY26, especially if overall spending environment were to remain constrained? And then a more broader upgrade cycle would come in, in FY27. Could we see that kind of cycle materializing because given what we have seen over the past 20 years, every time you had this kind of a strong growth, it's followed by the acceleration. I want to understand what gives the confidence and I have a follow-up.

Question: Mehdi Hosseini - Susquehanna International Group - Analyst : Thanks for additional insight to a repeat question. And just one quick follow-up for me. How should I think about the mix of NAND that are using in terms of QLC versus other technology and how the QLC mix would trend over the next couple of quarters? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 28, 2024 / 9:30PM, NTAP.OQ - Q1 2025 NetApp Inc Earnings Call

Question: Jake Wilhelm - Wells Fargo - Analyst : This is Jake on for Aaron. I was just hoping you could double-click a little bit on the enterprise demand you're seeing for AI products. It sounds like it's still pretty early days for AI inprints. I'm wondering what inning of adoption you think we're in and what's the competitive landscape like there?

Question: Ananda Baruah - Loop Capital Markets - Analyst : Mike, congratulations, we'll miss working with you, but job well done, obviously. I guess, George, speaking right there. I just have one. Speaking right there, piggybacking off the Analyst Day. So inferencing is 80% to 90% of the storage market opportunity over time. Can you -- the comments you made about RAG a moment ago and the growth there, the data getting thrown out there. Like how does that -- I guess, is that like in the other 10% of the opportunity? Or does that actually, in some way, feed and amplify the interesting opportunity? And then can you just remind us -- you got -- you just mentioned access to data installed base that you guys have. But can you also remind us from a capability perspective, how you stack up to the other companies that could be sort of have a place in, say, inferencing and RAG? And then also, could you include your thoughts on how you stack up relative to say vect in WECA and EDN, just to (inaudible)

Question: Ananda Baruah - Loop Capital Markets - Analyst : That's super helpful. I'm going to just do a quick follow-up. Does this mean, like just given all the capabilities you spoke about, George, does that suggest that you believe the company could have an amplified share position in Gen AI storage going when that kicks in?

Question: Wamsi Mohan - Bank of America Merrill Lynch - Analyst : George, you just said that you had in all-flash new to NetApp and new to all Flash. Can you just elaborate a little bit what parts of the all-flash market are you seeing the most traction between hybrid capacity and performance? And who do you think you're taking the most share from? And I have a follow-up.

Question: Wamsi Mohan - Bank of America Merrill Lynch - Analyst : Okay. And one for Mike, my congrats as well. Can you talk about the drivers for the lower tax rate? And if you look at the higher interest income and lower tax rate, it does not show much increase in the operational level for operating dollars despite the higher -- slightly higher revenue. So just wondering what some of the puts and takes there, if there are anything that you'd like to call out? And are you still expecting gross margins to step down a little in the second half versus first half? Or does that change now because you have these pre-buys that you've made during the quarter.