NetApp Q1 2026 Earnings Report

NetApp EPS Results

• Actual EPS: N/A
• Consensus EPS: $1.54
• Beat/Miss: N/A
• One Year Ago EPS: $1.56

NetApp Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $1.54 billion
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

NetApp Announcement Details

• Quarter: Q1 2026
• Date: 8/27/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, August 27, 2025
• Conference Call Time: 5:30PM ET

NetApp (NASDAQ:NTAP) is a global data management and storage solutions provider that delivers hybrid cloud data services across on-premises environments and public cloud platforms. The company’s offerings center on its proprietary ONTAP operating system, which powers a family of all-flash and hybrid storage arrays designed for file and block workloads. In addition to hardware arrays, NetApp provides software-defined storage, data protection, archival solutions and cloud integration services, enabling customers to streamline data mobility, optimize performance and reduce total cost of ownership.

Founded in 1992 under the name Network Appliance and headquartered in Sunnyvale, California, NetApp has grown into a multinational enterprise with sales, support and development operations spanning North America, Europe, Asia Pacific and Latin America. The company went public in 1995 and has since established a reputation for innovation in scalable storage architectures, earning a broad customer base that includes large enterprises, government agencies and service providers across industries such as financial services, healthcare and manufacturing.

Key products and services include the AFF (All Flash FAS) and FAS (Fabric-Attached Storage) series, the E-Series for high-performance workloads, StorageGRID for object storage, and the SolidFire platform for scale-out multitenant environments. NetApp’s cloud data services—such as Cloud Volumes ONTAP, Azure NetApp Files and AWS NetApp ONTAP—allow businesses to deploy consistent data management capabilities across leading public clouds, facilitating disaster recovery, development/​test environments and hybrid application deployments.

Under the leadership of CEO George Kurian, who assumed the role in 2015, NetApp has pursued a strategy focused on cloud-connected storage innovation, expanding its partnerships with major cloud providers and strengthening its software subscription offerings. The company continues to invest in research and development to address emerging requirements around flash performance, data security and machine-learning-driven analytics, positioning itself as a trusted partner for enterprises navigating the complexities of the modern data landscape.

NetApp Q1 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: NetApp reported Q1 FY26 revenue of $1.56 billion, exceeding the midpoint of guidance and delivering 1% year-over-year growth (3% ex-Spot divestiture).
• Positive Sentiment: All flash array revenue grew 6% YoY to $893 million, propelling NetApp to the number one position in the all flash array market and boosting the installed base to 45% all flash systems under active support.
• Positive Sentiment: First-party and marketplace cloud storage services climbed 33% YoY, while public cloud gross margin improved to the high end of its target and management raised the long-term margin goal to 80–85%.
• Positive Sentiment: NetApp closed approximately 125 AI infrastructure and data lake modernization deals in Q1 and expanded its AI ecosystem with the AI Pod Mini and NVIDIA reference architectures, reinforcing its unified data management platform for enterprise AI.
• Negative Sentiment: Softness in U.S. public sector and EMEA weighed on Q1 performance, and product gross margins were pressured by higher NAND costs and unfavorable mix; management expects gradual margin recovery through the rest of FY26.

Presentation

[Operator]

Good day and welcome to the NetApp First Quarter of Fiscal Year twenty twenty six Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Newton, Vice President, Investor Relations. Please go ahead.

[Kris Newton, Vice President, Investor Relations at NetApp]

Hi, everyone. Thanks for joining us. With me today are our CEO, George Kurian and CFO, Wasson Jabra. This call is being recorded live and will be available for replay on our website at netapp.com. During today's call, we will make forward looking statements and projections with respect to our financial outlook and future prospects, including without limitation, our guidance for the second quarter and fiscal year twenty twenty six, our expectations regarding future revenue profitability and shareholder returns and other growth initiatives and strategies.

[Kris Newton, Vice President, Investor Relations at NetApp]

These statements are subject to various risks and uncertainties, which may cause our actual results to differ materially. For more information, please refer to the documents we file from time to time with the SEC and on our Web site, including our most recent Form 10 ks and Form 10 Q. We disclaim any obligation to update our forward looking statements and projections. During the call, all financial measures presented will be non GAAP unless otherwise indicated. Reconciliations of GAAP to non GAAP estimates are available on our website. I'll now turn the call over to George.

[George Kurian, CEO & Director at NetApp]

Thanks, Chris. Good afternoon, everyone. Thank you for joining us. We delivered a solid start to fiscal year twenty twenty six, achieving revenue of $1,560,000,000 above the midpoint of our guidance range.

[George Kurian, CEO & Director at NetApp]

As anticipated, robust performance in The Americas enterprise offset year over year declines in U. S. Public sector and EMEA. This success was fueled by strong demand for our all flash offerings, first party and marketplace cloud storage services and AI solutions. By maintaining an unwavering focus on helping customers with their top priorities, we are driving success in a dynamic market.

[George Kurian, CEO & Director at NetApp]

While we continue to observe some macro related spending caution, the emerging enterprise AI market is driving urgency among customers to modernize data infrastructure, advance cloud transformations and bolster cyber resiliency. The data infrastructure demands of AI applications are complex and relentless, involving the need to unify, search and organize massive volumes of data scattered across multiple silos on premises and in the cloud. Legacy architectures are increasingly becoming bottlenecks, limiting the ability to scale and adapt to new requirements. Organizations are turning to NetApp for data solutions that deliver competitive advantage and operational efficiencies. Our unified data architecture capable of handling any data type anywhere empowers customers to break down silos, eliminate complexity and accelerate their AI journey.

[George Kurian, CEO & Director at NetApp]

Customers seeking to build future proof AI ready infrastructure choose NetApp. In Q1, we secured a number of wins highlighting the unique benefits of our intelligent data infrastructure platform powered by ONTAP as customers modernize their data infrastructure. For example, a leading global bank turned to NetApp to manage massive amounts of highly sensitive structured and unstructured data. The customer needed a centralized hybrid cloud data lake to be the foundational source for its AI initiatives with stringent requirements for cyber resiliency and data protection. Our ability to deliver a secure, high performance, scalable platform with unified management, supporting all data types and spanning both cloud and on premises environments made NetApp the clear choice.

[George Kurian, CEO & Director at NetApp]

In Q1, our all flash array revenue grew 6% year over year to $893,000,000 an annualized run rate of $3,600,000,000 Exiting Q1, 45% of systems in our installed base under active support contracts are all flash. Healthy customer engagement and strong interest in our unified and block optimized all flash storage portfolio have enabled us to displace competitive all flash and hybrid flash footprints. This strength propelled us to the number one position in the all flash array market for calendar Q1 twenty twenty five as reported by IDC. Let me share a couple of examples that highlight why customers are moving to NetApp. In Q1, an aerospace company selected us to replace the competitor's footprint.

[George Kurian, CEO & Director at NetApp]

With ONTAP based all flash arrays, the customer gained cutting edge security and performance for its defense initiatives with consistent data management across multiple data types and domains, streamlining operations, boosting productivity and enhancing security data protection and resilience against cyber threats. Another example from Q1 is a U. K.-based financial services firm that replaced a competitor's storage infrastructure with our block optimized all flash arrays. The customer selected NetApp for our enterprise data management capabilities, which help them to secure, protect and efficiently store sensitive client data. Our modern data infrastructure also helped the customer achieve its sustainability requirements with better total cost of ownership through rack space consolidation and more efficient power and cooling.

[George Kurian, CEO & Director at NetApp]

In Q1, we delivered enhancements to each of our first party cloud storage services, increasing their value to customers and expanding our technology leadership. Our natively integrated services enable customers to discover, deploy and manage storage seamlessly alongside other native services. This integration puts us in front of customers at the point of workload design, ties to hyperscaler committed spend, benefits from hyperscaler seller incentives and reduces procurement and operational friction. In addition to a seamless customer experience, our cloud storage services deliver the performance, cost efficiency, data protection, cybersecurity, multi protocol support and hybrid multi cloud capabilities of ONTAC. Our native integration and advantages over other cloud storage services are driving strong win rates in enterprise critical workloads.

[George Kurian, CEO & Director at NetApp]

Our highly differentiated first party and marketplace cloud storage services continue to deliver rapid growth, increasing 33% from Q1 a year ago. In the first quarter, public cloud services again served as a strong engine for new customer acquisition. A leading energy company migrated from its on premises VMware environment to VMware Cloud on AWS and FSx for NetApp ONTAP. After experiencing ONTAP's rich feature set, this first time NetApp customer decided to expand its use of FSxN for AI and other workloads. A global technology provider migrated from a competitor's on premises environment to NetApp block storage in the cloud for its database environment.

[George Kurian, CEO & Director at NetApp]

The customer chose NetApp for our ability to seamlessly move data across multiple clouds as well as our robust data protection capabilities. NetApp helped to enhance the customer's data security, disaster recovery posture and operational efficiency. We are already in discussions to expand their usage of our cloud services into new areas. Just as we've empowered enterprises to harness public and hybrid cloud environments, we are now helping them achieve faster time to value in their AI journey. Enterprises are beginning to explore and deploy inferencing workloads, shifting demand from proofs of concept to transformational initiatives, which require comprehensive analysis of datasets across the enterprise.

[George Kurian, CEO & Director at NetApp]

Achieving business outcomes from AI investments is our customers and our priority. Unlike training environments, successful enterprise AI deployments require more than just performance and scale. They demand unified data management, enterprise grade data protection, production scale reliability, hybrid multi cloud integration and the ability to consolidate data without compromising privacy or security. Our AI solutions are designed to truly unify enterprise data, delivering outstanding performance and scale, while also seamlessly meeting all these critical requirements. This positions us exceptionally well to address the evolving needs of our customers.

[George Kurian, CEO & Director at NetApp]

In Q1, we closed approximately 125 AI infrastructure and data lake modernization deals across various geographies, industries and use cases. We further expanded our AI ecosystem in Q1. We introduced the AI Pod Mini with Intel to address the cost and complexity of deploying AI at the department and team level. Additionally, we completed the NetApp reference architecture for NVIDIA cloud partners, providing ultra high performance with the richness of NetApp's hyperscaler proven data management. This collaboration allows AI service providers to deliver scalable, high performance enterprise grade data services by combining ONTAP's advanced data management with NVIDIA's compute and networking platform, delivering consistent governance, multi tenancy and security across hybrid and multi cloud environments.

[George Kurian, CEO & Director at NetApp]

Our conversations with customers about AI infrastructure have intensified with organizations recognizing the critical role that data plays. Notable AI wins in Q1 included a leading automaker that chose NetApp to efficiently manage the massive data volumes essential for training advanced AI models and for building an autonomous vehicle software stack. NetApp's data governance, security and auto curing capabilities were key factors in this customer selecting us as the data infrastructure for their NVIDIA SuperPOD deployment. Another example showcases our capabilities for service providers. A large sovereign cloud provider selected NetApp for their AI as a Service platform to support large LLM providers and AI development companies.

[George Kurian, CEO & Director at NetApp]

Critical factors in this win included our certification with NVIDIA cloud partners, confirming compatibility and performance for AI workloads and our secure multi tenancy, delivering storage and data isolation with assured high performance SLAs for each tenant in a shared environment. Looking ahead, we remain committed to executing our innovation road map and are building on a position of strength. We've taken the number one position in the all flash market by helping customers modernize with cutting edge data infrastructure and industry leading cyber resilience for storage. Our highly differentiated cloud services enable hybrid and multi cloud transformations, and we are well positioned and growing in the emerging area of enterprise AI. I'm excited about the advantages we bring to customers in these critical areas.

[George Kurian, CEO & Director at NetApp]

Our commitment to delivering customer value with the industry's best products and cloud services is unwavering. Our focused strategy is delivering share gains and our teams are energized and executing with discipline. I hope to see you all this October at our NetApp Insight Customer Conference, where we will unveil more pioneering innovation for the era of data and intelligence. I'll now turn it over to Vasant.

[Wissam Jabre, EVP & CFO at NetApp]

Thanks, George, and good afternoon, everyone. As a reminder, all numbers discussed are non GAAP unless otherwise noted. We delivered a strong quarter exceeding the midpoint of our revenue and EPS guidance ranges. As expected, first quarter revenue was driven by strength in The Americas enterprise, offsetting softness in U. S.

[Wissam Jabre, EVP & CFO at NetApp]

Public sector and EMEA. Total revenue for Q1 came in above the midpoint of our guidance at $1,560,000,000 up 1% year over year. Excluding the divested spot business, which generated $23,000,000 of revenue in Q1 twenty twenty five, total revenue was up 3% year on year. The effect of foreign currency exchange rates was favorable to revenue growth by approximately one percentage point year on year, though it was immaterial relative to guidance. Q1 hybrid cloud revenue of $1,400,000,000 was up 1% year over year, driven by support revenue of $647,000,000 growing 3% and professional services revenue of $97,000,000 growing 18%.

[Wissam Jabre, EVP & CFO at NetApp]

Keystone, our differentiated storage as a service offering, which was up approximately 80 compared to the same period last year, drove the growth in professional services revenue. Product revenue of $654,000,000 was down 2% year over year. Public cloud revenue of $161,000,000 increased 1% year over year. Excluding spot, public cloud revenue was up 18% year over year. We ended Q1 with $4,530,000,000 in deferred revenue, up 9% year over year and 6% year over year in constant currency.

[Wissam Jabre, EVP & CFO at NetApp]

Q1 remaining performance obligations were $4,940,000,000 up 11. Unbilled RPO, a key indicator of future Keystone revenue, was $415,000,000 up 40% year over year. Q1 consolidated gross margin improved by 1.6 percentage points sequentially to 71.1%. Hybrid cloud gross margin was 70%, up 1.6 percentage points sequentially due to favorable mix of highly profitable support revenue. Product gross margin was 54%.

[Wissam Jabre, EVP & CFO at NetApp]

Our recurring support business continues to be highly profitable with gross margin of 92.3% and professional services gross margin was 29.9% driven by Keystone. Public cloud gross margin was 80.1%, up 80 basis points sequentially and nine percentage points year over year. Our public cloud business was at the high end of the 75% to 80% long term target range in Q1. We are confident that public cloud gross margin will continue to improve and are increasing the long term gross margin target range for this business to 80% to 85%. Operating expenses of $7.00 $7,000,000 were down 1% year over year despite the unfavorable impact of foreign currency exchange rates and flat from Q4 twenty twenty five.

[Wissam Jabre, EVP & CFO at NetApp]

Q1 operating profit was $4.00 $1,000,000 operating margin was 25.7% and diluted EPS was $1.55 all aligned with our expectations. We had a strong cash quarter with Q1 records for both cash flow from operations of $673,000,000 and free cash flow of $620,000,000 This was mainly driven by working capital improvement. During the first quarter, we redeemed the senior notes due in June 2025 for $757,000,000 which comprised principal and interest. We also returned $4.00 $4,000,000 of capital to our shareholders with $300,000,000 in share repurchases and $104,000,000 paid in dividends of $0.52 per share. Q1 diluted share count of $2.00 $3,000,000 was down 9,000,000 shares or 4% year over year.

[Wissam Jabre, EVP & CFO at NetApp]

Our balance sheet remains strong. We ended the quarter with $3,300,000,000 in cash and short term investments and $2,500,000,000 in total debt resulting in a net cash position of approximately $840,000,000 Now turning to guidance starting with Q2. We expect revenue to be $1,690,000,000 plus or minus $75,000,000 This implies 2% growth year over year at the midpoint. Excluding the divested spot business from the year ago comparison, our revenue guidance implies 3% growth. We expect Q2 consolidated gross margin to be 71% plus or minus 0.5% and operating margin to be in the range of 28% to 29%.

[Wissam Jabre, EVP & CFO at NetApp]

Diluted EPS is expected to be between 1.84 and $1.94 with a midpoint of $1.89 Turning now to full year 2026. We are pleased with a solid start to the year and remain confident in our strong portfolio as well as our ability to execute in a dynamic environment. We are reiterating our full year guidance and expect fiscal year twenty twenty six total revenue to be between $6,625,000,000 and $6,875,000,000 which at the $6,750,000,000 midpoint reflects three percent growth year over year. Excluding spot, revenue guidance implies 4% growth year over year. We expect diluted EPS in the range of $7.6 to $7.9 for a midpoint of $7.75 In closing, as we look to the remainder of fiscal year twenty twenty six, we are focused on executing our strategy, capitalizing on our growing opportunities, enhancing profitability and free cash flow and consistently delivering value to our customers and shareholders.

[Wissam Jabre, EVP & CFO at NetApp]

I'll now turn the call over to Chris for Q and A.

[Kris Newton, Vice President, Investor Relations at NetApp]

Thanks, Wasson. Operator, let's begin the Q and A.

[Operator]

Our first question comes from the line of Krish Sankar with TD Cowen. Please go ahead.

[Krish Sankar, Managing Director at TD Cowen]

Yes, hi. Thanks for taking my question.

[Krish Sankar, Managing Director at TD Cowen]

Hassan, the first question is for you. Your all flash revenue growth has decelerated from double digits to just 5% now. Is it pricing or demand or something else? And along the same path, the product gross margins are also down even when compared to similar all flash revenue levels around $900,000,000 Is this due to NAND pricing or what is driving it and how to think about product gross margins going forward? And then I had a long term follow-up for George.

[Wissam Jabre, EVP & CFO at NetApp]

Yes. Thanks, Krish. Look, the dynamics that drove the all flash revenue were very much what we had said earlier in the quarter when we guided. They're very much similar to what we also said in our prepared remarks. We did experience some softness in The U.

[Wissam Jabre, EVP & CFO at NetApp]

S. Public sector and to a much lesser extent EMEA. While it was offset by The Americas, that sort of drove the dynamics on seeing all flash growing slightly lower than previous quarters. But this was already sort of anticipated by us. What I would point out is when you look at fiscal twenty twenty five, all flash grew by mid teens and we just saw some dynamics in Q1.

[Wissam Jabre, EVP & CFO at NetApp]

We anticipate this to basically not continue for the rest of the year. When I look at the second part of your question in relation to the product gross margin, we had a few dynamics also on the product gross margin. If you look at it sequentially, we did see costs improve marginally, but we saw mix being unfavorable. We had anticipated a slightly richer mix of high performance flash versus capacity flash. So that sort of drove that.

[Wissam Jabre, EVP & CFO at NetApp]

But when you look at the product margin on a year over year basis, it's mostly the vast majority of it is cost related. We did have we did see a much bigger uptick in flash cost in Q1 twenty twenty six versus Q1 twenty twenty five. So I would say more than five percentage points of the 5.9% were driven by the cost dynamic. The rest is very much product and customer mix. And if I look at the rest of the year, we expect product margin to improve from here.

[Wissam Jabre, EVP & CFO at NetApp]

I expect the product margin to continue to improve gradually for the rest of the year. We should be operating in our long term range, which is mid to high 50% for the rest of the year. And so that's where I think Q1 was very much the low point in terms of the product margin.

[Krish Sankar, Managing Director at TD Cowen]

Got you. Thanks a little bit. It's very helpful to hear that. And George, had like a longer term question for you. It's kind of very encouraging to see enterprises adopting AI and deploying inference workloads.

[Krish Sankar, Managing Director at TD Cowen]

It seems like they have gone from proof of concept to production. But can you give a sense of some of the architecture these customers are following? Are they buying more storage or more capacity or more software attached? Any color there on enterprise adoption would be helpful. Thanks a lot, John.

[George Kurian, CEO & Director at NetApp]

We saw three types of wins in the quarter. As we noted in our prepared remarks, we had north of a 125 wins for AI in the quarter as compared to 50 a year ago, so strong momentum. The three types of use cases were data lakes, which was about 20% of the total, number. There was training, which is either fine tuning a large model or, you know, taking a smaller model and customizing it for your enterprise or building a sovereign cloud model for model training. We thought that was about 45% of the total number, and the remainder were Rag and agentic u AI use cases.

[George Kurian, CEO & Director at NetApp]

For data lakes, it's typically a combination of flash based storage for the hot tables and hot data and a large archive with object storage. For the other two, they are typically all flash storage.

[Krish Sankar, Managing Director at TD Cowen]

Got it. Thank you very much, Josh. Very helpful. Thank you.

[Operator]

And our next question comes from the line of Mari Hassini with Susquehanna International Group. Please.

[Mehdi Hosseini, Senior Equity Research Analyst at Susquehanna International Group]

Yes. Thanks for taking my question. Two follow ups for me. First, George, does the availability of 128 terabyte QLC based NAND impacting your ability to provide search solutions, especially for the AI application? And then number two, how should we think about the seasonality into the January?

[Mehdi Hosseini, Senior Equity Research Analyst at Susquehanna International Group]

I'm not asking for a guide, but given the is perhaps compares are getting easy. So should seasonality still be a factor looking to January? Thank you.

[George Kurian, CEO & Director at NetApp]

On the first question, listen. We have a broad range of NAND technologies available to customers all the way from 15 terabyte super high performance drives to 60 terabyte, you know, QLC drives, and we are working on, you know, bigger, drive, form factors. So we don't feel like we are gated on any of those. I think, as I said in my previous remarks, we use the right configuration for whether it's a really high performance use case or more of a capacity based use case, or an archival use case. With regard to the second question, the, seasonality listen.

[George Kurian, CEO & Director at NetApp]

We are very confident of the outlook for the year. We are one quarter in. We performed better than we expected at the start of the quarter, and we saw strength particularly in The Americas commercial business and in several other parts of the world. I think as we look through the rest of the year, we are focused on executing in a quarter at a time. There's still a decent amount of uncertainty of outside, you know, in the external landscape, And we'll guide the year as we see visibility to the full year.

[George Kurian, CEO & Director at NetApp]

So we feel good at the end of one quarter, and we'll tell you more at the end of the second quarter.

[Wissam Jabre, EVP & CFO at NetApp]

Thank you.

[Operator]

Our next question comes from Eric Woodring with Morgan Stanley.

[Erik Woodring, MD - Equity Research at Morgan Stanley]

Hey guys, thank you very much for taking my questions and looking forward to working together with you guys. Maybe just to start George, I'd love to get your viewpoints as you kind of have conversations with your customers or look at your pipeline. When you think about strength in Americas commercial versus weakness in public and EMEA, is that expected to persist? Do you see any of your kind of end market customers maybe inflecting in the second half? For example, could SMB get better in the second half here in America? Would just love to know kind of underlying that guide by end market, how you're thinking about these, the strengths or weaknesses or accelerations and decelerations of these different end markets? And then a quick follow-up. Thanks.

[George Kurian, CEO & Director at NetApp]

We had a really strong quarter in The Americas broadly defined as not public sector. This included the largest enterprises. It included, you know, the mid market customer segment as well. Excellent execution, strong demand patterns, and a large number of competitive wins. US public sector was very weak in the quarter.

[George Kurian, CEO & Director at NetApp]

I think we were still awaiting budgets to be deployed to agencies. We saw a change in the budgets allocated to different types of agencies, and we have moved resources to where the budgets are. Q two is typically a strong budget spending quarter for US public sector, and it's a smaller part of our overall business in the second half of the fiscal year. In Europe, we executed well. You know, in most countries, we saw softness in UKI and a small in some parts of, the large enterprise in Germany.

[George Kurian, CEO & Director at NetApp]

But overall, you know, a lot of our European teams executed well. And in Asia Pacific, again, outside of Australia and New Zealand, our teams have performed well. So the thoughts of weakness were localized but pronounced in those areas.

[Erik Woodring, MD - Equity Research at Morgan Stanley]

Okay. Super helpful. Thank you. Thank you for that, George. And then, you know, maybe Wissam, great great to great to work together again.

[Erik Woodring, MD - Equity Research at Morgan Stanley]

I would just love to better understand as you think about the gross margin guide for your public cloud business, it's now 80 to 85 versus the 75 to 80 before. Kind of what has changed that influences that view? And clearly you see that as sustainable, but if you could just unpackage that a little bit to help us understand why that continues to improve and what influenced that change that would be helpful. Thanks so much.

[Wissam Jabre, EVP & CFO at NetApp]

Yes. Thanks, Eric, and good to hear your voice. Look forward to working together. Yes, on the public cloud front, with it look, the business itself has been improving in gross margin very steadily and actually at a very fast pace. And this past quarter, we just hit the high end of the prior long term target range.

[Wissam Jabre, EVP & CFO at NetApp]

And looking at where the business is headed, we feel comfortable that 80% to 85% is a good target range for it going forward and that's why we raised it. The few things I would say that contribute to that are one, we're seeing depreciation roll off for some of the initial installed hardware. So that sort of helps with the margin. In addition, there's more software content in revenue. And so both of these dynamics will help sort of continue to improve the gross margin going forward.

[Wissam Jabre, EVP & CFO at NetApp]

As we think to the rest of the year, and I think I said that also on our call last quarter, we anticipate public cloud gross margin to continue to gradually improve from here. And so hope this helps unpack it for you.

[Erik Woodring, MD - Equity Research at Morgan Stanley]

Yes. Thank you guys and best of luck.

[Wissam Jabre, EVP & CFO at NetApp]

Thank you. Thanks, Eric.

[Operator]

Our next question comes from the line of Samik Chatterjee with JPMorgan.

[Samik Chatterjee, MD & Equity Research Analyst at J.P. Morgan]

Hi, thanks for taking my question. I guess, George, just following up on your earlier comments about the activity or engagement you're seeing on the AI side. With your sort of first couple of quarters of the year, you've settled into this sort of nice run rate of AI wins. If you can give any color in terms of the magnitude or size of those deals with your customers? And should we expect that consistent level of new wins as you go through the year?

[Samik Chatterjee, MD & Equity Research Analyst at J.P. Morgan]

Or is the pipeline telling you that maybe AI wins do accelerate as you go through the rest of this fiscal year? Any color on that on both of those fronts, please? And I have a follow-up.

[George Kurian, CEO & Director at NetApp]

The wins are quite wide. You could see smaller environments being stood up like a AI center of excellence proof of concept for inferencing or rag, and then it could be much larger scale. For example, we have very large scale rag environments in some of the large financial services firms, as well as we have won some big model training environments, which are very large so that you can put a lot of capacity against a large number of GPUs. We are also beginning to have some significant wins in the AI as a service service provider. So this you know, it's a wide range.

[George Kurian, CEO & Director at NetApp]

I think we are excited about the fact that we have more than doubled the number of AI wins year on year. We are continuing to engage more clients around the world. We are bringing more technologies to that part of the market as we head into our November Insight Conference, and we'll tell you more. We should expect that to grow through the course of the year at a steady clip.

[Samik Chatterjee, MD & Equity Research Analyst at J.P. Morgan]

Got it. Got it. And then just on the guide for the full year here, I mean, does imply if you grow 3% export in fiscal 2Q, you do have a back half that needs to be around mid single digit growth. And I think last quarter you did reference you're working with some customers on large data center modernization deals as well. So maybe what's the visibility in terms of that acceleration from the first half into the second half at this point? And does it include any large deals that are in the pipeline to sort of come through to enable you to accelerate that to that modest number? Thank you.

[George Kurian, CEO & Director at NetApp]

We feel good about the comments we made in the, you know, prior call. We are working a number of different opportunities. I think, Samik, we are one quarter in in a pretty dynamic environment. We wanna take it a quarter at a time. And, you know, should we have another strong quarter, we'll tell you more about the full year at the end of q two.

[George Kurian, CEO & Director at NetApp]

So I feel good about the year. All of the things that we're working on, we're executing well. We've had the softness in US public sector start the year. We're going to see a second quarter through and then the rest of the year, the headwind from USPS continues to be much less. In terms of large deals, listen, we've had several large deals this quarter.

[George Kurian, CEO & Director at NetApp]

We continue to work several more deals through the course of the year and we feel confident about those.

[Samik Chatterjee, MD & Equity Research Analyst at J.P. Morgan]

Okay, great. Thank you. Thanks for taking my questions.

[Wissam Jabre, EVP & CFO at NetApp]

Thank you.

[Operator]

Next question is from Wamsi Mohan with Bank of America.

[Wamsi Mohan, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Yes, thank you. Can you just talk a little bit about some of the variables in that gross margin guide for Q2 that might push you lower on a quarter on quarter basis? I mean you guided 70.5% to 71.5%, which at the low end would be 60 bps lower. But if you expect product gross margins up quarter on quarter and you've just taken up your range for public cloud gross margins and support is pretty stable, how do we even get to sequentially down gross margins in that range? Or is there anything else that I'm not taking into account?

[Wissam Jabre, EVP & CFO at NetApp]

Thanks, Wamsi. Just to clarify, we ended Q1 with a gross margin of 71.1, and we're guiding basically flattish. I think it's like 10 basis at the midpoint it's like 10 basis points lower. And so it's not it's just basically fluctuation if you like. But when you think of the various dynamics, we expect the I would say directionally we expect the margins for the various components to improve in this state stay in line or to improve from here.

[Wissam Jabre, EVP & CFO at NetApp]

But then when you look at the mix of revenue, typically product revenue is a bigger component when it gets to Q2 and sort of with the mix of revenue itself, you'd expect some headwinds as well. And so there isn't anything fundamentally problematic. Actually, we're optimistic and we're confident that margins, as I said, for the various components of the revenue should be flat to up from here. It's really the mix of the revenue itself, if that helps.

[George Kurian, CEO & Director at NetApp]

Yes. Hey Wamsi, I think I wouldn't read too much into the sequential. I think the big moving parts within Q1 and Q2 is really the percentage of the total revenue that's product. In Q1, it was lower. And so Q2, it will be probably higher. So that's where it can get right.

[Wamsi Mohan, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Okay. That's helpful. And then just on operating leverage, right, if I just think about this roughly flattish kind of gross margins, but quarter on quarter your operating margin is up maybe similar to how it was last year. So your operating leverage is improving because last year you had gross margin improvement too. So should we expect that operating leverage benefit to continue in the back half of the year as well? Thank you.

[Wissam Jabre, EVP & CFO at NetApp]

Yes, Wamsi. I would anticipate operating leverage to continue in the back half of the year. The reason we're probably the only dynamic you're seeing with respect to Q2 and operating leverage is that gross margin differential. If you recall last year product margin was in the 60% range and much higher than what we've experienced of late.

[Wamsi Mohan, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Okay. Thanks, Wissam.

[Krish Sankar, Managing Director at TD Cowen]

You're welcome.

[Operator]

Your next question comes from the line of Tim Long with Barclays.

[Tim long, Managing Director at Barclays]

Thank you. Two as well, if I can. First, maybe just talk about the comment about the installed base, 45% of the systems on all flash. Could you talk a little bit about what NetApp is doing to try to convert the rest of that installed base and what that would mean for financials and margins, revenue opportunity as well as the competition you would see there? And then secondly, if you could just touch on Keystone, another very impressive quarter.

[Tim long, Managing Director at Barclays]

I get it small, but could you just talk a little bit about what you're expecting mid to long term from Keystone given how successful the public cloud business has been? Are you drawing corollaries on what Keystone could be to the on trend business? Thank you.

[George Kurian, CEO & Director at NetApp]

Yeah. Thank you for your questions. On you know, with regard to I'll take the Keystone question first. Keystone has done well. It's an as a service model.

[George Kurian, CEO & Director at NetApp]

There are more and more clients who are, you know, who are comfortable with an as a service model. And so they are, you know, probably looking to harmonize their IT operating model or infrastructure to more of an as a service. We also see clients who are either doing transitional work going from one data center to another or going from a data center to the cloud where they want to have a bridge between our on prem technology and our cloud technology that will buy a keystone service for the transitional period. So I'm excited about that. We are also using Keystone to help in competitive situations where the customer may have a capital commitment in another, you know, vendor's technology and wants to, you know, kind of not have to pay two capital investments at the same time.

[George Kurian, CEO & Director at NetApp]

Ultimately, our view is we give customers choice, and we're not gonna try to force them into one model. But we are going to continue to make Keystone an ever better offering just like we make our products. With regard to your other question about the installed base, listen. We have a very, very large installed base of systems, and we continue to sell our, you know, flash technologies to customers who are not existing customers of NetApp or and customers who are existing customers of NetApp. They refresh their technologies when it is time for them to refresh.

[George Kurian, CEO & Director at NetApp]

And we have an extremely high win rate in those, you know, refreshes because the software layer is essentially entirely consistent. The operational layer is entirely consistent. At the same time, if you look at, you know, the number of flash systems that we sell a quarter, you can impute the fact that, you know, we are growing 1% in our installed base means we are winning a large number of customers outside our installed base. So we have both selling motions. We are providing clients the right choice for their right use case.

[George Kurian, CEO & Director at NetApp]

Hard drive based solutions are still the cheaper solution for things like backup or cold storage. And so it has a place in our portfolio.

[Wissam Jabre, EVP & CFO at NetApp]

Okay. Thank you.

[Operator]

Your next question comes from the line of Simon Leopold with Raymond James.

[Simon Leopold, Managing Director at Raymond James Financial]

Thank you for taking the question. I wanted to try to get a better sense of the longer term AI product strategy. In other words, I know you don't want to front run your Insight event for October, but what I'm trying to get a better sense of is the readiness of your portfolio to support enterprise initiatives and whether you've got more products in the pipeline, to perhaps move up the value chain to support initiatives for AI at the enterprise? Thank you.

[George Kurian, CEO & Director at NetApp]

There are three or four technologies that clients look for from a data infrastructure provider to them to help them in their AI initiatives. The first, of course, is high performance, high scale data storage for, you know, model training or inferencing for agentic environments as well as for data lakes. We feel very good about our solutions for that. The second is solutions that customers who want to use the cloud with equivalent storage capabilities so that they can use cloud based tools rather than on prem tools. We have made good progress.

[George Kurian, CEO & Director at NetApp]

We have more work going on with the hyperscalers, and we'll tell you more about that at our insight customer conference. The third area from a technology standpoint that we have advantages and we are providing a lot more, you know, kinda capabilities moving forward are things that allow clients to actually manage their data more efficiently. This could be they want to be able to search the data. They want to organize it so that they can align certain datasets to certain volumes, to certain models, and keep track of it. They want to implement guardrails and access controls.

[George Kurian, CEO & Director at NetApp]

They want to automate the vectorization and the raggy you know, rag readiness of their data. We have a lot of those capabilities coming at our inside conference. And then the last piece is ecosystem. Right? So we already have reference architectures with NVIDIA.

[George Kurian, CEO & Director at NetApp]

We are working on reference architectures, more and more of them with the hyperscaler tools, and you'll see more of our announcements around that at our customer conference. So good good stuff today, but a lot more to come.

[Simon Leopold, Managing Director at Raymond James Financial]

Thank you.

[Operator]

Our next question is from Ari Tarjanian with Cleveland Research.

[Ari Terjanian, Partner at Cleveland Research Company]

Hi, Thanks for taking the questions. Good to hear from everybody. Just a couple from my end. First, just on competitive landscape, like really cool, great to see the leadership position in IBC All Flash. But I mean, seems like today, there's some different results from one of your peers raising their outlook. So just any update on the all flash kind of competitive landscape and what you're seeing out there? And then second, just in terms of pricing, I know there are some pricing actions taken last year that would flow through the model this year.

[Ari Terjanian, Partner at Cleveland Research Company]

Any updates just you know, the take rates of the price increases that you're seeing with your customers? Thank you so much.

[George Kurian, CEO & Director at NetApp]

I'll take the first one on the competitive landscape. Listen. It's always been a competitive, you know, environment. We are more exposed to some of the, you know, environments that our markets that have had challenges like US public sector than some of our competitors. But listen.

[George Kurian, CEO & Director at NetApp]

We get up every day and go and compete. We feel good about our competitive position. We did not see any specific adverse, you know, kind of pattern in the quarter, and we're gonna go out there and post another strong quarter, and that will take care of the competitive landscape. With regard to pricing, listen. We have not taken pricing action related to the tariffs.

[George Kurian, CEO & Director at NetApp]

We are in a wait and see mode. In terms of pricing actions that we took as we introduced our new system, those systems have performed well and they have done well in the mix. I think with regard to the gross margin, product gross margin commentary, it's primarily related to the cost increases from a year ago. And so if you do about the mix between high performance flash and and capacity flash, there are high performance flash systems that have grown for two consecutive quarters nicely in the mix, and we're just gonna keep working on it. I think with regard to the outlook for the rest of the year, listen, the cost compared get more benign through the rest of the year, which gives us confidence that our gross margin should return to the, the original ranges that we had shared.

[Krish Sankar, Managing Director at TD Cowen]

Thanks.

[Operator]

Our next question is from the line of Doug Vaught with UBS.

[David Vogt, Managing Director at UBS Group]

Hey, this is David. Hey, Wes and hey, George. I don't want to beat a dead horse, but can you go back to George, the competitive landscape? You talked about performative, high end storage being a little bit weaker than you thought and shifted a little bit more to capacity storage. Was that in any particular region, vertical?

[David Vogt, Managing Director at UBS Group]

I know EMEA and public sector was a little bit softer. And then, Wissam, I'll give you my second question. You mentioned, obviously, mix supply chain excuse me, components had an issue in gross margin. Can you share where we are from a pre buy perspective? I mean, is the balance sheet effectively no longer carrying excess inventory that you purchased previously?

[David Vogt, Managing Director at UBS Group]

And so how should we think about your strategy with pre buys from a component perspective going forward? Thanks.

[Wissam Jabre, EVP & CFO at NetApp]

Yes. Hi, David. Let me take both questions. On the first part of the question, my comment was relative to what we guided and relative to our expectations. I wouldn't say necessarily there is weakness in one versus the other.

[Wissam Jabre, EVP & CFO at NetApp]

It's just that the mix that we had anticipated is slightly different that contributed to a little bit of pressure on

[George Kurian, CEO & Director at NetApp]

the product margin. High performance flash actually outgrew capacity flash year on year.

[Wissam Jabre, EVP & CFO at NetApp]

Yes, exactly. And with respect to the question on product margin, look, as we said earlier, it's I expect it to improve from here. And part of it, of course, has to do with the cost. And we do have certain volumes with locked up pricing that gives us confidence that we anticipate to see some improvement from here. So I don't know if this helps.

[Wissam Jabre, EVP & CFO at NetApp]

With respect to other to the part of the question related to the components in our supply chain, we don't see any issues there. Mean, there's nothing really problematic.

[Simon Leopold, Managing Director at Raymond James Financial]

Great. Thanks guys.

[Operator]

Your next question is from Ananda Baruah.

[Ananda Baruah, Director - Research & Senior Equity Analyst - Equity research at Loop Capital Markets LLC]

Hey guys. Yes, thanks for taking the question. Really appreciate it. George, just going back to AI, you mentioned model training wins and I think you said that are very large. And you also mentioned AI as a service, which sounds like neo clouds.

[Ananda Baruah, Director - Research & Senior Equity Analyst - Equity research at Loop Capital Markets LLC]

Please clarify if it's something bigger than just that. But I guess the question is, for the last couple of years, it sounds and Rag is still a focus as you spoke and see, but it sounds like you might be expanding your TAM. You talked about reference designs with the hyperscalers as well. So are you seeing TAM expansion here? And if so, what's a useful way to think about kind of magnitude of TAM expansion in the context of the metrics that you provided the last couple of years post the Analyst Day? Thanks. And I have a quick follow-up here. Thanks.

[George Kurian, CEO & Director at NetApp]

Yeah. I think, first of all, we have several kind of large scale sovereign providers who are users of our technology for their enterprise cloud business. And as many of them have stepped into the AI business, we needed to get certified as a net app as an NVIDIA NCP provider, and we have met those certification requirements. And it allows us to bring technology that is familiar to them for a broad range of use cases for AI as a service use cases where all our advantage around multi tenancy hybrid operating models and so on play in. But also for model training, especially for, you know, countries that have sovereign models, we are seeing good progress.

[George Kurian, CEO & Director at NetApp]

You know, at this point, we still believe that the data storage opportunity is predominantly in the enterprise, you know, interesting, you know, part of the world, but we are gonna be opportunistic and compete where we see opportunities or other use cases as well. And we feel good about our prospects there.

[Ananda Baruah, Director - Research & Senior Equity Analyst - Equity research at Loop Capital Markets LLC]

That's super helpful explanation. And I guess just a quick follow-up in that context is just on the Rag front, are you seeing reasoning agents impact the Rag pipeline? Is it help is it seemingly would grow the TAM? Are you seeing sort of, I guess, like engagement push out as a result of that as well? Just any context there that impact on your business and your pipeline would be great. That's it. Thanks.

[George Kurian, CEO & Director at NetApp]

Yeah. I think broadly speaking, you know, the biggest challenge that clients deal with in getting AI to be applicable for their enterprise use cases is really around organizing their data, tagging it so that they can have the right controls around it, being able to then, you know, kind of apply vectorization, graphs, and other things to that data so that it's ready for use in an AI pipeline. And so we have a lot of tools that we are bringing to market and many tools that we already have that will help us provide extra value to clients because we have this gigantic installed base of unstructured data that clients are anxious to mine and that we can monetize with these tools. So that's the first thing. The second part of inferencing is, you know, people are using more kind of reasoning models where the model goes to storage, request data, searches, you know, works that data and then comes back to the storage again.

[George Kurian, CEO & Director at NetApp]

There are some, you know, clever capabilities that we have built that allows for that functionality to be more efficient as well as to avoid having to go to the original data source multiple times. And so we'll share more about that at our user conference that allows those reasoning models to be a lot more effective and fast at getting to the answer.

[Ananda Baruah, Director - Research & Senior Equity Analyst - Equity research at Loop Capital Markets LLC]

Thanks a lot. Appreciate it.

[George Kurian, CEO & Director at NetApp]

Thank you.

[Operator]

And our final question comes from the line of Asiya Merchant with Citigroup.

[Asiya Merchant, Technology Equity Research at Citigroup Global Markets Inc.]

Great. Thanks for squeezing me in here. Just how do you guys think about your hypervisor offerings? I understand anything you can comment on that on as it relates to Nutanix or you know, the disruptions that we're still continuing to see due to VMware licensing? How do you think about your product offerings on this hyper converged infrastructure? Thank you.

[George Kurian, CEO & Director at NetApp]

We support a broad range of hypervisors, you know, and, we will continue to support as many hypervisors as our customers want. Right? And so those could be on prem hypervisors like the ones that you mentioned that we will work to support if we don't already support, as well as cloud hypervisors where people are using the cloud provider, the hyperscalers own tools. And so there's a wide range idea we can we're happy to, you know, share more of that with you. Our general view of the world is we believe to operate with as many of them as clients want.

[Asiya Merchant, Technology Equity Research at Citigroup Global Markets Inc.]

Okay. Look forward to hearing about that at your insight. Thank you.

[George Kurian, CEO & Director at NetApp]

Thank you.

[Kris Newton, Vice President, Investor Relations at NetApp]

All right. Well, you, Assia. I'm going to pass it over to George for some final remarks.

[George Kurian, CEO & Director at NetApp]

Thank you, Chris. We delivered a strong start to fiscal year twenty twenty six building on a position of strength. We've taken the number one position in the all flash market by help of helping customers modernize with cutting edge data infrastructure and industry leading cyber resilience for storage. Our highly differentiated cloud services enable hybrid and multi cloud transformations, and we are well positioned and growing in the emerging area of enterprise AI. Thank you for joining us today, and I hope to see you at NetApp Insight in October.

[Operator]

Thank you again for joining us today. This does conclude today's presentation. You may now disconnect.

Participants

Executives

• Kris Newton, Vice President, Investor Relations
• George Kurian, CEO & Director
• Wissam Jabre, EVP & CFO

Analysts

• Krish Sankar, Managing Director at TD Cowen
• Mehdi Hosseini, Senior Equity Research Analyst at Susquehanna International Group
• Erik Woodring, MD - Equity Research at Morgan Stanley
• Samik Chatterjee, MD & Equity Research Analyst at J.P. Morgan
• Wamsi Mohan, Senior Equity Research Analyst at Bank of America Merrill Lynch
• Tim long, Managing Director at Barclays
• Simon Leopold, Managing Director at Raymond James Financial
• Ari Terjanian, Partner at Cleveland Research Company
• David Vogt, Managing Director at UBS Group
• Ananda Baruah, Director - Research & Senior Equity Analyst - Equity research at Loop Capital Markets LLC
• Asiya Merchant, Technology Equity Research at Citigroup Global Markets Inc.